Debt and austerity: developing world deep in economic crises

In its ‘World Economic Outlook, October 2023’ Report, the International Monetary Fund (IMF) has said that ‘The global recovery from the Covid-19 pandemic and Russia’s invasion of Ukraine remains slow and uneven. Despite economic resilience earlier this year, with a reopening rebound and progress in reducing inflation from last year’s peaks, it is too soon to take comfort.

Economic activity still falls short of its prepandemic path, especially in emerging market and developing economies, and there are widening divergences among region. …Global growth is forecast to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024.

The projections remain below the historical (2000–19) average of 3.8 percent, and the forecast for 2024 is down by 0.1 percentage point from the July 2023 Update to the World Economic Outlook.’ Moreover, the Report pointed out growth projections for Pakistan for fiscal year at 2.5 percent, which is both less than the average growth of oil importing countries at 3.3 percent for 2024 (for 2023 it was 1.8 percent, while for FY2022-23 it was negative 0.5 percent for Pakistan), and average economic growth rate for ‘emerging market and developing economies’ – a group to which Pakistan belongs –for 2023 and 2024 at 4 percent, respectively.

In an October 11, 2023 released report ‘The worst ever global debt crisis’ by Development Finance International (DFI) highlights an exceedingly difficult global debt situation being faced by developing countries in general, whereby it pointed out ‘…citizens of the Global South now face the worst debt crisis since global records began.

Debt service is absorbing an average 38% of budget revenue and 30% of spending across the South, rising to 54% of revenue and 40% of spending in Africa. Spread across all continents, 35 countries are paying more than half of revenue, and 54 over one third. …More crucially, debt is pushing aside key spending to confront social and environmental crises.

Debt service equals combined total spending on education, health, social protection and climate, and exceeds it by 50% in Africa. It is 2.5 times education spending, 4 times health spending, and 11 times social protection spending.

Developing countries need another major round of debt cancellation. Yet current debt relief deals are failing to reduce service sharply to free spending room for the SDGs: on average, the most recent debt restructuring deals are leaving debt service at an average 48% of revenue over the next 3-5 years.’

This is indeed a scathing attack – and rightly so – over the lacklustre debt relief effort by major creditor countries, and multilateral institutions, especially when the recession-causing Covid pandemic, the war in Ukraine accentuating the already brewing global supply shock, and more recently the geopolitical tensions in the Middle East unfortunately likely to negatively impact oil prices, and overall complicate the difficult inflation problem globally, all required the world dealing these economic crises in a lot stronger multilateral spirit.

The debt situation in Pakistan, as pointed out by the same report painted a similarly difficult position for the country as the global South overall, whereby total debt service at 49 percent of revenues, meant that almost half of the revenues were consumed in servicing debt.

In terms of comparability, Pakistan’s ratio was not only more than the high-income countries (HIC), which stood at 24.4 percent, being an emerging economy itself, it was even more than the average of low-middle-income countries (LMIC) at 44.5 percent, and closer to low-income countries, whose total debt service as a percentage of revenues stood at 57.5 percent.

This means a very difficult fiscal space left with the country to spend anywhere near adequately on sustainable development goals (SDGs), and given Pakistan is one of the top ten climate change vulnerable countries, needs to spend a lot more to improve in terms of both climate resilience, but also in terms of becoming much more resilient in terms of public health sector in view of the likelihood of ‘Pandemicene’ phenomenon globally.

It is, therefore, in this context, that it is important to not only rein in overboard monetary austerity in practice by major central banks, but also by a number of developing countries, including Pakistan. It is important that aggregate demand squeeze (or austerity) policies are reined in, given a significant supply-side nature of inflation.

Having said that, interest rates are being indicated globally to remain ‘higher for longer’; something (wrongly) supported by the IMF as well, both in terms of an important global economic voice in general, but also pushed in its programmes with countries, including Pakistan.

Hence, instead of asking countries to adopt monetary and fiscal austerity, which fuels both imported and cost-push inflation in developing countries in general – due a relatively much less deep financial sector than in developed countries – and also leaves little for much-needed development and welfare spending.

To give an example of Pakistan, the IMF programme is pushing the country to produce primary surpluses, which means that the country will have to reduce development spending, given raising tax base and tax progressivity take longer because of weak democratic environment not allowing demos to throw weight on public policy quickly, and strongly enough to shake an otherwise stronghold of elite capture.

Hence, in its recently released ‘Fiscal Monitor’ IMF estimated primary surpluses for Pakistan for 2024 at 0.4 percent, for 2025 and 2026 at 0.5 percent respectively, and for 2027 and 2028 at 0.4 percent respectively, which, in line with the thinking above will most likely be achieved by cutting development expenditures, and in turn, will likely be counter-productive outcomes for pushing the country out of stagflationary headwinds, and to make it more climate, and likely future pandemic resistant.

What makes more sense, and is needed in the short- to medium-term at least is both a strong debt relief for developing countries, and also to provide meaningful level of IMF’s enhanced special drawing rights (SDRs).

This is of course not to say that countries should continue with their efforts on the domestic resource mobilization side, and also in bringing greater productive and allocative expenditure efficiencies, especially of the nature of non-development expenditures.

Moreover, on the lines suggested under the ‘Bridgetown Initiative’ an annual climate related SDR allocation should be made by the IMF to highly climate-vulnerable countries, including Pakistan. A fresh allocation of SDRs to the tune of $650 billion should be made by the IMF, for which the US government should urgently give a nod for, and for which a US Congressional approval is not required.

A recently written letter to the US President in this regard, as reported in an article by ‘Axios’, needs to be highlighted.

In its October 4 article ‘Exclusive: The congressional push to create $650 billion’, it was pointed out in this regard that ‘The International Monetary Fund should, once again, create $650 billion in Special Drawing Rights (SDRs) – just as it did in 2021.

That’s the view of a broad range of civil society institutions. It’s also the view of 59 Democratic members of Congress, including six senators, who co-signed a letter to President Biden and Treasury Secretary Janet Yellen first obtained by Axios. …The SDR issuance has the potential to be transformative, not just for the domestic economies of low- and middle-income countries that are struggling with high debts, but also for the global climate, the letter argues.’

The Letter itself pointed out ‘A new issuance of SDRs can be seen as an insurance policy for the U.S. as well as the rest of the world, and your administration can take effective action on its own by supporting a new issuance of SDRs at the IMF.

Leading your administration now to support a new issuance of at least $650 billion in SDRs is a simple, cost-free, and effective way of saving many export-related jobs – includingmanufacturing and union jobs – in the U.S., while saving many lives in developing countries and mitigating the effects of a global slowdown. SDRs are a readily available and effective tool in your economic policy toolbox – we urge you to use it.’

Copyright Business Recorder, 2023