Managing the Balance of Payments The results of the historical analysis of exports in the balance of payments are as follows: • 1 percent growth in the volume of world trade leads to a 0.66 percent growth in the volume of exports. • 1 percent increase in the relative price of exports increases export volume by 1.22 percent. These elasticities highlight the type and magnitude of policy instruments to be used. These are as follows: Nominal Exchange Rate: The exchange rate plays a dual role in restricting imports and promoting exports. The policy will be to keep a flexible exchange rate and ensure that the trade deficit remains thereby at the target level. It is estimated that the real effective exchange rate will need to change by 3 percent to 5 percent in 2021-22 due to the big jump in imports. Thereafter, the exchange rate adjustment is expected to be smaller. Interest Rates: The policy will be to link the policy rate of the SBP to the extent possible to the‘core’ rate of inflation in the economy. As such it could rise somewhat by up to 2 percent in 2021-22 and thereafter show a decline. The export promotion strategy has been described in Chapter 9. The primary elements of the strategy are exchange rate adjustment, cash payment against indirect taxes for‘zero rating’ of exports, export refinancing by SBP at a concessionary rate and a discount on the prevailing electricity and gas tariffs. 18.4. Projection of The Current Account The projection of the current account and the balance of payments is already presented in Table 1.8 of Chapter 1. Given the implementation of measures for export promotion, there is the expectation of some export-led growth in the economy. Exports are projected to grow annually by 8 percent from 2021-22 onwards. There has been an upsurge in imports in 2020-21, due particularly to the peak in agricultural imports. A growth of almost 23 percent has taken place during the year. The year 2021-22, is likely to witness a growth rate of 12 percent due to the rise in international commodity prices. The conduct of effective import policies should limit the annual growth rate thereafter to 6 percent. The saving grace for the economy in 2020-21 is the spectacular growth rate in remittances of close to 30 percent. This has led to a situation where for the first time since 2010-11 the current account has been in surplus in the first ten months of 2020-21. However, a small deficit emerged by the end of the year of$1.8 billion. Beyond 2020-21, the growth rate in remittances is expected to be a modest 5 percent only. 179