THE State Bank’s recent monetary policy statement, and its attendant action of hiking the key discount rate by a quarter per cent, provides a cleverly nuanced insight into the state of the economy at the present moment. This is the halfway mark of the new government’s first fiscal year, the crucial period when it has to capture the imagination of the public, establish its credibility in the eyes of its creditors and stakeholders in the economy, push through tough decisions and set a direction for economic and institutional reform. This is not an exhaustive list of course, because accompanying the list of expectations on the economic front, the government also has to set the tone in the political space and build its relationship with the other tiers of the state. In short, the moment has a big agenda, and given the serious economic pressures that the government inherited, there is also an added sense of urgency to find its footing and get on with the task of running the affairs of state.

So on this halfway point, what does the State Bank tell us about how the economy is faring? It rightly points out that there are “visible signs of deceleration in domestic demand”, the crucial plank upon which the government’s economic policy must be built, given the growing deficits on the fiscal and external accounts. It also rightly points out that this deceleration owes itself to “stabilisation measures implemented during the last twelve months”, meaning if the government inherited an economy drifting towards crisis, it also inherited the policy direction through which it has sought to arrest this drift. It notes that the external deficit is narrowing, but still remains high despite the nearly $4bn worth of support from “friendly countries”, so much remains to be done and victory remains a far-off goal. Beyond this, the fiscal deficit “remains elevated” and core inflation is “persistently high” despite a near doubling of interest rates since January of 2018.

The result is that the economy continues to slow drastically, and the government is financing itself through massive printing of money, where borrowing from the State Bank jumped to Rs3.775tr between July 1 and Jan 18, “which is 4.3 times the amount borrowed during the same period last year”. The fiscal deficit will remain elevated, the State Bank says, and “fiscal policy will have to be proactive” in the remaining months of the fiscal year. Even though the State Bank does not spell this out, it takes only a little common sense to note that this means an emphasis on greater revenue mobilisation, something the government is shying away from. The picture is painted carefully, but it is unmistakable: the economy needs a firmer hand on the tiller, and the drift towards crisis has been temporarily arrested, but not reversed.

Published in Dawn, February 1st, 2019