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EDITORIAL: That the International Monetary Fund (IMF) has once again cut its global growth outlook for 2022, to 3.2 percent from its April forecast of 3.6 percent, shows how deeply high inflation and the fallout of the Ukraine war are biting into the international economy.

It turns out that world’s GDP actually contracted in the second quarter due to downturns in China and Russia, making another global recession a very real prospect not long down the road. Yet high inflation pretty much across the world mandates a very hawkish monetary environment all around, which is clearly going to continue into next year. That’s why the Fund has revised its growth projection for 2023 as well, from 3.6 percent in April to 2.9 percent now.

This means that “the world may soon be teetering on the edge of a global recession only two years after the last one,” in the words of IMF’s chief economist, Pierre-Olivier Gourinchas. And a select group of economists, known for its proximity to the US Federal Reserve that is playing down the likelihood of such a scenario, or the impact of a recession if one indeed comes, might have missed a few very important points.

There’s no doubt that growth has softened significantly over the last few months, but it hasn’t brought about the kind of dip in commodity prices, especially energy, that was expected with such destruction of demand; especially if you consider the interest rate cycle. That’s why there’s perhaps more weight in the point of view of a contrarian group of economists who suggest that demographically today we no longer have demand-pull inflation. There is, in fact, ample proof of this just in the way the commodity super cycle is continuing despite all the central bank-driven squeeze on demand.

That means that even if there is a very mild recession, prices will still most likely remain high enough to give it a rather dark colour of stagflation. And that is very bad news for countries like Pakistan, which are already suffering from compromised growth and runaway inflation; with the latter feeding into the former and turning the whole thing into a very vicious, unending cycle.

Worryingly, IMF’s warning also cited a “plausible” alternate scenario, where complete suspension of Russian gas to Europe by year-end and another 30 percent dip in Russian oil exports could push global growth down to 2.6 percent in 2022 and 2 percent next year; with no growth at all in the US and mainland Europe. That’s even worse news for Pakistan because the bulk of our meagre export earnings comes from these two continents. And it’s no rocket science that when their economies contract, so does our export revenue.

The last thing we need as we walk a tightrope between political instability and threat of outright default is the international economy tanking and giving our balance of payments another exogenous, perhaps even fatal, hit.

We have a mountain of debt to retire this fiscal year and given the circumstances, with IMF’s bailout money nowhere in sight despite the staff-level agreement, another recession that increases joblessness while prices are still sky high will indeed be very, very bad for the economy. There’s also the very obvious and rather painful fact that the government, monetary and fiscal sectors alike, is unable to do anything even as this storm builds right in front of its eyes. And that’s because it has no reserves and therefore no elbow room, which makes it impossible to have a fallback plan.

It can only hope that IMF’s bailout money comes before the situation becomes much worse, and greenlights debt and loans from other institutions and sovereigns as well.

Copyright Business Recorder, 2022


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