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The first important policy question facing policymakers is how much role aggregate demand plays in determining inflation? This needs a clear presentation of analysis by policymakers, since the way inflation is being mainly dealt in Pakistan – like many developing countries under neoliberal-, austerity-based policy, both in and outside of International Monetary Fund (IMF) programmes – is through over-board monetary, and fiscal austerity policies.

The other reason why interest rate is raised, under monetary austerity policy, is to compete for foreign portfolio investment (FPI).

On both these counts there has been no success story as such for Pakistan other than some short-term, insignificant drop in inflation, but at a significant cost of meaningful economic growth sacrifice, and shallow build-up of foreign exchange reserves at the back of inflow of otherwise highly volatile FPI or ‘hot money’, while high levels of policy rates adding to heavy debt burden, and overall contributing to cost-push inflation. So, it is important that policymakers make a rethink on following austerity policies.

Over-board monetary austerity policies, for instance, since during the heyday of the Covid pandemic due to global aggregate supply shock, have resulted in ballooning in debt distress – and even debt defaults in certain cases – in developing countries overall. In this regard, a December 14, Project Syndicate (PS) published article ‘Developing countries’ never-ending debt crisis’ pointed out: ‘The number of economies in debt distress had already risen sharply between the global financial crisis in 2008-09 and the eve of the Covid-19 pandemic, as judged by countries receiving an unfavorable grade of B3 or lower from the credit-rating agency Moody’s. …The G20 countries tabled a Debt Service Suspension Initiative [DSSI], which temporarily relieved troubled countries’ governments of the need to repay. But once the DSSI expired at the end of 2021, the number of distressed sovereigns began rising again, in part because higher global interest rates made it still harder to service debts. The number of countries in debt distress, as measured by Moody’s, currently exceeds 40.’

Here, developing countries like Pakistan need to realise from years of experience that monetary austerity causes cost-push inflation, pushes towards stagflation, and takes away money from development expenditure to important development/climate expenditure; solutions, therefore, should involve reining in inflation through a balanced approach of somewhat increase in policy rate when needed, but at least equally through improvement in governance, and incentive structures of markets, improving supply-side bottlenecks so that production could increase for domestic consumption, and for enhancing exports.

At the same time, resolving the issues of inflation, balance of payments crisis, and debt distress through monetary austerity, should also not be the overly emphasized-upon policy recommendation/programme conditionality by IMF. Hence, the same policy question faces IMF, and a number of other multilateral institutions that over-emphasize recourse to overboard monetary austerity policies to control inflation.

Regarding the failings of the economic paradigm of the Bretton Woods institutions, a December 16, New York Times (NYT) published article ‘The debt problem is enormous. Experts say the system for fixing it is broken’ indicated: ‘The IMF and World Bank have aroused complaints from the left and right ever since they were created.

But the latest critiques pose a more profound question: Does the economic framework devised eight decades ago fit the economy that exists today, when new geopolitical conflicts collide with established economic relationships and climate change poses an imminent threat?…

The once vaunted “Washington Consensus” has fallen into disrepute, with a greater recognition of how inequality and bias against women hamper growth, as well as the need for collective action on the climate. …Emerging nations need enormous amounts of money to invest in public health, education, transport and climate resilience.

But they are saddled with high borrowing costs because of the market’s often exaggerated perception of the risk they pose as borrowers.

And because they are usually compelled to borrow in dollars or euros, their payments soar if the Federal Reserve and other central banks raise interest rates to combat inflation as they did in the 1980s and after the Covid pandemic.’

Instead, IMF should increase the financial support of developing countries so that developing countries become less pushed towards adopting austerity policies, something which they should do both by designing programmes that do not see inflation as mainly an aggregate demand side phenomenon, and also by making enhanced allocation of special drawing rights (SDRs), and in a better allocated manner than following the quota-sharing formula.

Although a step in the right direction, whereby as per the December 18 published press release by IMF, its board of directors in the recently concluded ‘16th General Review of Quotas’ meeting approved an increase of IMF members quotas by 50 percent – which for Pakistan meant proposed increase in its quota in US dollar terms increasing from $2.031 billion to $3.046 billion – but it is still quite a lagging step, given, for instance, distinction in quota enhancement was not made for rich, advanced countries, and developing countries. Moreover, the surcharge policy of IMF has neither been cancelled, nor the quota limit after which it gets applied, enhanced.

A recent article ‘Opinion: IMF rules continue to be rigged against the world’s poorest’ published by Devex pointed out in this regard: ‘Given that the 15th review was obstructed in its entirety, the 16th review raised great expectations to deliver on both a redistribution of quotas and an increase in total IMF resources. …However, the final outcomes of the review published this week spectacularly failed on both fronts.

The review increases IMF quotas for all member countries equip proportionally by 50%, but it also reduces reliance on the IMF’s other major sources of funding by the same amount. In other words, nothing has been done to boost the IMF’s overall lending capacity, despite IMF projections of increased financing needs.

With regards to quota redistribution, the IMF’s most powerful members not only broke their repeated promises to consider a new quota formula, but they actually went out of their way to avoid even small adjustments being made that usually result from quota increases, at least since 1983.’

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

Comments

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Rapid Fire Dec 22, 2023 10:53am
In short, you mean Pakistan should be granted debt relief.
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Dr. Omer Javed Dec 22, 2023 12:36pm
@Rapid Fire, thanks for your comment. Developing countries, including Pakistan, have come under a lot of debt distress due to subscription to over-board monetary austerity policies both ay home, and by a number of major central banks globally, while inflation has clearly significant supply side influenced. This policy is even coubter-productive because it increases cost-push inflation, and even adds to imported inflation. That over-emphasis needs to be reined-in, and indicate some of the ways this could be done, including providing enhanced SDR allocation, and in a more appropriate ways.
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Rapid Fire Dec 22, 2023 06:47pm
@Dr. Omer Javed, You mean, Pakistan should be forgiven the debt, right?
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Dr. Omer Javed Dec 22, 2023 08:11pm
@Rapid Fire, while greater debt relief should be provided to developing countries as climate compensation, and also better restructuring framework should be brought in general, undue interest payments generated through over-board monetary austerity should be reined-in.
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Rapid Fire Dec 23, 2023 07:02pm
@Dr. Omer Javed, Dr Javed, you are well meaning; I shall give you that. But here's something about myself - I took ridiculous decisions and risks in the stock market and lost heavily as a result. Should I now say that the "system" should bail me out? But upon this you would say that things are quite different when it comes to a state. But are they really, over a long term? Think about this while keeping aside your economic sophistry. As a kid I used to keep cribbing that kid nextdoor keeps scoring better because these teachers are biased towards him; till one day my mother explained to me that this was just an excuse I had invented to hide my failures. See if this rings some kind of a bell.
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Dr. Omer Javed Dec 24, 2023 12:23am
@Rapid Fire, thanks. Both the IMF and Pakistan should revisit their over-board monetary austerity policy. Nothing sophisticated about it, and there is nothing about bailing out. Also, rich, advanced countries with deep carbon footprint should compensate for the climate change crisis they have contributed to. Also, debt restructuring framework needs fixing. Moreover, this is about countries in general, and not just Pakistan, whereby over-board auterity policies continue to backfire in general in terms of macroeconomic, growth, and even weaken democracy.
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Dr. Omer Javed Dec 24, 2023 06:41am
@Rapid Fire, thanks. There is nothing sophisticated in pointing ouy need yo rein in over-board monetary austerity policies at home and abroad, and in policy prescription of IMF, since it is counter-productive as it unnecessarily enhances intereat payments, and contribute to cost-push, and imported inflation. Plus, rich, advanced countries having deep carbon footprint should provide climate compensation, especially highly climate change vulnerable countries.
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