Turning a blind eye to the balance of payments crisis

By the Economist

A dose of optimism is perhaps just what the doctor ordered to sustain economic activities at a satisfactory momentum. The economy is being battered, on the one side by continuous rises in oil prices, and on the other, by the war and a deteriorating security situation.

The Central Bank statement on the current situation as well as the Monetary Board's decision not to raise interest rates, were no doubt prompted by such considerations. The optimistic statement of the current economic situation we hope inspires confidence.

A soldier walks to a camp in Mutur above.The economy is being battered, on the one side by continuous rises in oil prices, and on the other, by the war and a deteriorating security situation.

A swift end to the war would however inspire a stronger confidence. The Central Bank's statement was in stark contrast to the assessment of the country's economy and finances, and especially of the balance of payments, that this column portrayed last week. In short, the Central Bank expects a continuation of economic growth; even when it appears better than that of the first half of this year. We wish such an expectation would materialise. The scepticism of the Central Bank assessment lies in the fact that some indicators are misinterpreted, a simple projection of the earlier months to the rest of the year is unrealistic as conditions are changing and the emerging scenario is not at all conducive for the economy's performance.

First, let us look at some of the interpretations. The deceleration of the pace of inflation from 17.7 per cent in the twelve-month period from July 2005 to June 2006 to 14.7 per cent in the twelve months ending in July 2006 is looked as a sign of improvement in the inflationary situation. One has to be reminded that seasonal factors are involved in this calculation and that the current state of price increases is not adequately captured by this figure. More important is the fact that a double-digit rate of inflation is a heavy burden on the people; especially as the price increases are of basic items. The fuel price increase is likely to up the rate of inflation rather than abate it.

Whether a tight money policy could contain an import induced inflation is arguable. Besides in the current business context an increase in interest rates that such a policy invariably results in could dampen investment.

The Central Bank perspective of inflation does not place an adequate assessment of the inflationary situation, but merely hides the emerging problem in a statistic that is marginally favourable. Containing inflation in the current situation is the unenviable task of the Central Bank, when government spending sees no reduction. It is well known that monetary policy solutions to an imprudent fiscal policy and inadequate macroeconomic solutions are generally counter productive.

An interesting stance of the Central Bank statement is that it speaks of the rise in imports in the same vein as the rise in exports. "International trade is expanding on both the export and import fronts", the Central Bank says.

To speak of the increase in imports as if it was a favourable development like an increase in exports is a serious flaw as one of the impending problems facing the country is the uncontrollable increase in import expenditure.

The rise in cumulative exports by 8.8 percent put side by side with an import growth of 20 per cent poses a serious problem for the trade balance and ultimately for the balance of payments. It should be noted that the 20 percent increase in imports is more serious than at first glance.

The import increase is on a continuing higher value of imports than exports. This is why the gap between exports and imports has widened further every month during this year. Besides this sharp increase in import values is due to the higher values of petroleum and transport equipment.

The Central Bank takes satisfaction in the fact that there is still a balance of payment surplus owing to increased remittances and financial inflows to the government. We are not aware of how much of the latter are commercial borrowings.

The balance of payments surplus of US$ 164 million at the end of July is likely to dwindle if the trade gap continues to widen further and further each month.

There is some hope not from the out turn in the balance of payment, but the bottom line in the statement. In spite of the tone of achievement on the trade and balance of payments front, the "Monetary Board (of the Central Bank) has expressed concern over the continuing rise in international oil prices exerting pressures on the country's balance of payments." It is a lack of concern for the emerging crisis that is the most serious, as policy imperatives are not being taken due to this lack of concern, misinterpretation of emerging conditions and the tendency to sweep pressing problems under the carpet. Once again we urge the authorities to view the emerging economic and financial problems objectively and to take corrective measures swiftly.