Elusive macroeconomic stability

In a recent statement reportedly, interim finance minister Dr Shamshad Akhtar indicated that there were signs of economic recovery, whereby she pointed out: ‘There are some initial signs of economic recovery, though some of them are just beginning. …The Consumer Price Index (CPI) had shown a decline from May figures, down from 38 per cent to 27.3 percent which is an important indicator that we have started to come out of difficulty and there would be price stability going forward.’

Similarly, a few days governor of State Bank of Pakistan (SBP) also showed hope for a sharp fall in inflation over the next two years. He reportedly indicated in this regard ‘We are very confident that in the coming two years, the SBP would be able to lower inflation to the 5-7% range.’

To say that such optimism is unwarranted, from both the interim finance minister and the SBP governor, would be an understatement. The optimism about returning macroeconomic stability is still early to say.

Firstly, because oil prices are likely to rise - already above $90 per barrel of crude brent, and expected to reach $100 per barrel at the back of sharp and deep supply cuts by OPEC+ group of countries, and rising oil demand in China, especially at the back of significant stimulus provided by government recently.

A September 17, 2023 Guardian article ‘Global inflation fears as oil price rises towards $100 a barrel’ pointed out in this regard: ‘Oil prices are on track to reach $100 a barrel this month for the first time in 2023 after surging by almost 30% since June, after Russian and Saudi Arabian production cuts and rising demand from China.

Brent crude, the oil price benchmark, rose to a 10-month high last week of almost $94 a barrel, up from $72 a barrel at its lowest point in June – heading for its biggest quarterly increase since Russia’s invasion of Ukraine. …Opec announced that the market was facing a deficit of more than 3m bpd [that is, 3 million barrels per day] in the upcoming quarter, potentially resulting in the most substantial supply shortage in more than a decade.’

Secondly, fiscal and monetary austerity will continue stagflationary headwinds. Reaching primary surplus targets will mean that development spending will need to be curtailed, which is otherwise needed to bring much-need boost to low economic growth situation in the country. Moreover, high policy rate under over-board practice of monetary austerity to continue to add to cost-push inflation; where both high petroleum products and electricity prices will also continue to add to upward pressures on inflation.

Highlighting the aggressiveness of tight monetary stance, a September 14, Bloomberg article ‘Pakistan unexpectedly holds rates ahead of IMF [International Monetary Fund]loan review’ pointed out: ‘Monetary policymakers raised rates by a cumulative 600 basis points since January... Pakistan’s inflation pace slowed to 27.38% in August but it’s expected to pick up due to increase in energy prices and a drop in the rupee, according to Ankur Shukla, South Asia economist at Bloomberg Economics.

The caretaker government is pushing through with power and gas tariff increases as part of the IMF program, though this is raising living costs and has triggering protests. Shukla expects inflation to average 30% in the last four months of this year.’

Also, Asian Development Bank (ADB), for instance, in its recently released flagship report ‘Asian Development Outlook’ pointed out: ‘In Pakistan, growth is estimated to have slowed to 0.3% in FY2023 (ended 30 June 2023)… In Pakistan, growth is forecast at 1.9% in FY2024, slightly below the April projection… Average inflation in Pakistan will soar from 12.2% in FY2022 to 29.2% on higher food prices caused by supply shortages, continued currency depreciation, import restrictions, and fiscal stimulus for post-pandemic recovery.

Normalized food supplies and lower inflation expectations, albeit tempered by higher power and gas tariffs and likely currency depreciation, could ease inflation somewhat in FY2024, but Pakistan’s inflation rate is now expected to remain at 25.0% in FY2024, substantially higher than forecast in April.’

Thirdly, indication by US Federal Reserve, and the European Central Bank (ECB), among other major central banks of continuing with tight monetary policy stance well up into the coming months, where while rates may increase only likely increase once this year in the case of US Federal Reserve, there is no indication as to when policy rate could likely start to come down.

An August 29, Guardian article ‘Central banks will push economies into recession, says Hunt adviser’ indicated in this regard ‘Jerome Powell, the chairman of the US Federal Reserve, Christine Lagarde, the president of the European Central Bank, and Ben Broadbent, one of the Bank of England’s deputy governors, all told the Jackson Hole event that it was too soon to say whether interest rates had peaked.’

More recently, a Bloomberg article ‘Fed signals higher-for-longer rates with hikes almost finished’ on September 21, pointed out: ‘Federal Reserve Chair Jerome Powell made clear Wednesday the central bank is close to done raising interest rates, but his colleagues delivered the message that resonated: Borrowing costs must remain higher for longer amid renewed strength in the economy. After a series of rapid rate hikes over the past 18 months, the Fed can now “proceed carefully,” Powell said...’

This tight monetary policy stance already has, and will likely continue to put further pressure on domestic currencies, especially of developing countries, in terms of higher competition of attracting foreign portfolio investments. In addition, weaker domestic currencies will also mean greater oil import prices, contributing, in turn, to difficult inflationary consequences for net oil importing developing countries like Pakistan.

Moreover, higher interest rates globally will slow the process of undoing global aggregate supply shocks, and will further add to imported inflation for developing countries with high import reliance in terms of consumption, and capital goods.

Hence, given inflation is a significant supply-side phenomenon everywhere, and also because tight monetary policy works with a lag, it is important that major central banks revisit their tight monetary austerity stance, and start cutting policy rates.

Plus, reaching macroeconomic stability will also depend on quick reforms in energy and state-owned enterprises (SOEs) sectors, among other institutional, organizational, and market reforms, and which are non-neoliberal in nature.

Copyright Business Recorder, 2023