Foreign reserves are climbing up, trade deficit is falling on yearly basis and remittances are at an all time high. But to what good! Our imports cover, which increased to 18-month high of 5.7 months in May, slid back to 4.4 months in July.
Our monthly imports are up 40 percent from $1.9 billion in February to $2.7 billion in July. And adding to the agony, virtually all capital account inflows are debt laden, courtesy the IMF, while our FDI are dwindling - down 41 percent year-on-year to $200 million in July.
These facts simply point to the management of money supply in our balance-of-payment constrained macroeconomic model prescribed by the IMF, where in the absence of export growth (down 20% in July, YoY), the focus is to curb import demand. The only tool used to arrest imports is to put reigns on money supply growth, which is already declining (down 1.47% in FY10 to date) with no credit routed to private sector.
But our lender (IMF) is all set to safeguard its interests, which may or may not be aligned to our long-term strategic requirements. Our fiscal slippages in the last quarter of FY09 implied more borrowing requirement by government to plug its fiscal gap. This, coupled with the task to squeeze import demand is going to dominate the next monetary policy review in September. Meanwhile, with manufacturing sector output declining by 8.18 percent in FY09, what is in the offing to fuel domestic industry is perhaps the biggest worry faced by small and large scale businessmen alike?