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Inadequate provision of International Monetary Fund’s (IMF’s) special drawing rights (SDRs) to Pakistan, like in many developing countries, after an initial allocation from $650 billion released in August 2021 – with most of the allocation going to already rich countries on account of underlying quota system used for this allocation even during the pandemic – on one hand, and lack of progressive taxation, and expenditure efficiency, among other wanting creative fiscal policy measures, on the other, has not allowed the country to increase its exports or economic growth in any sustainable way since it is unable to provide much-needed counter-cyclical, non-austerity policies.

Resultantly, external debt burden and imports, especially in proportion to foreign exchange reserves, have nosedived to alarmingly low levels.

At the same time, substantial increases in policy rate since September 2021 – around which time the global commodity supply shock had significantly started to disturb macroeconomic fundamentals such as rising import bills and build-up in imported inflation channel, especial for net oil-importing countries like Pakistan – not only continue to give impetus to cost-push inflation, they have also increased the domestic debt burden.

While it was important that government increased development expenditure and kept cost of doing business in check for both domestic producers and exporters to give sustainability to increasing growth rate during fiscal years 2020-21 and 2021-22, and augment it with meaningful economic institutional reforms, on the contrary, focus remained on adopting pro-cyclical, austerity policies – policy rate was increased significantly, and development expenditures also continue to be reduced.

In a recent Economist article ‘Politicians and the IMF are failing Pakistan’s most vulnerable, laments Murtaza Syed’ former acting governor of State Bank of Pakistan (SBP), Murtaza Syed pointed out in this regard: ‘The country’s economic crisis has brought it to the brink of default. Pakistan’s politicians and the IMF are failing people… .It did not have to be this way. Scarcely 18 months ago, Pakistan was doing relatively well. It handled Covid-19 successfully, keeping casualties and economic fallout to a minimum. The pandemic saw public debt soar across the world, but it fell in Pakistan as a result of commendable fiscal discipline. Foreign-exchange reserves rose to all-time highs of over $20bn.’

Notwithstanding the traditionally weak underlying macroeconomic and economic institutional quality of Pakistan, global commodity supply shock, lack of adequate provision of SDRs, overly-tight monetary policy stance by developed countries like the US and overall eurozone, insignificant debt relief, and lack of counter-cyclical, non-austerity policy, remained significant factors behind pushing CPI inflation from around 13 percent a year ago to over 35 percent currently, while policy rate increased acutely from around 12 percent a year ago to 21 percent currently.

A recently released World Bank report ‘Expanding opportunities: toward inclusive growth’ highlighted the extent of austerity policies in the shape of sharp and deep increase in policy rate over a relatively short period of time, and its impact on economic growth as follows: ‘For example, the State Bank of Pakistan has increased its policy rate more than other central banks in South Asia, from 7 to 20 percent, but the currency has still depreciated by 27 percent since June 2020. …The largest downward adjustment (1.6 percent) is projected for Maldives and Pakistan. The latter is now expected to grow at a mere 0.4 percent in the current fiscal year, implying negative per-capita GDP growth.’

Clearly, policy both under IMF influence and also through domestic policymakers’ mindset strongly appears to have entered a rather incessant cat-and-mouse chase as one looks at the way inflation and policy rate have increased.

Common sense calls for an urgent revisit towards counter-cyclical, non-austerity, more creative fiscal policies along with urgently needed impetus needed in the shape of well over-due allocation of SDRs.

Having said that, recent increase in oil prices, reportedly at the back of probable decrease in oil supplies, will likely further increase inflationary pressures on net-oil importers like Pakistan, putting further pressures on their import bills.

A recent Financial Times article ‘Crude prices jump after Opec+ announces oil production cut’ indicated with regard to rising oil prices as: ‘Oil prices jumped on Monday and Goldman Sachs raised its year-end forecast for Brent crude after Opec+ nations announced unexpected production cuts of more than 1mn barrels a day in the face of weaker demand.

International oil benchmark Brent crude was up 6.4 per cent to $84.99 a barrel – having been up more than 8 per cent in overnight trade – its biggest one-day gain in a year. US marker West Texas Intermediate was up 6.3 per cent to $80.42 a barrel. Elevated oil prices may muddy the picture for investors who had pencilled in cooling inflation and a more dovish path for the US Federal Reserve.’

On one hand, not only are austerity measures exacerbating the macroeconomic- and economic growth crises, they are also brewing a possible banking crisis. With high interest rates and dwindling capacity to payback loans, banking crisis may unfortunately appear on the horizon if policy revision away from austerity policies – and that too implemented in a pro-cyclical way – is not adopted quickly.

Already, a number of banks have defaulted in rich, advanced countries due to over-reliance on austerity policies, and due to low regulation regime in place at the back of decades of practice of neoliberal policies overall.

In addition to developing countries, including Pakistan, adopting non-neoliberal, counter-cyclical, non-austerity policies, there is a need for reinvigorating the spirit of multilateralism. Hence, not only is greater SDR support by IMF provided, multilateral banks like World Bank will have to be more proactive in providing a lot more and greener funding.

Underlining the importance for quickly fixing otherwise weak multilateralism, renowned economist, Prof Jayati Ghosh, while delivering an address titled ‘Ghosh: multilateralism in a fragmented world’ argued: ‘This means, for example, the multilateral development banks, not just the World Bank and the regional development banks, but all of the different multilateral banks and financial institutions, have to be redesigned to respond to these challenges… to meet the Sustainable Development Goals, which are not on track at the moment and which are definitely not going to be met, especially in the poorer countries and the bottom half of the global population.

We have to repurpose the IMF, which has unfortunately not been able to deal with the essential challenges for which it was actually created, which is to provide and enable countercyclical lending when it is required to deal with episodes of debt distress; to prevent the kind of cycles of terrible debt crises and damage done to economies because of their inability to pay; to enable debt restructuring and debt relief wherever required; to provide liquidity to all countries, and particularly to those countries who are short of it…’

Copyright Business Recorder, 2023

Dr Omer Javed

The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7

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KU Apr 08, 2023 07:41pm
IMF has, on many occasions, asked the government for a comprehensive and effective road map for the revival of the country, but it seems that our minister et al., are hiding these facts from the people and presenting the conditions as unpractical. Since the characters in government are in the habit of arm-twisting and head-butting with whom they disagree, they believe these tactics will work somehow. We can understand our depressing plight, especially when the government and caretakers believe in, ''to the victor belong the spoils''.
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