High inflationary situation should be among the top most priorities of the incoming government. Over-board aggregate demand squeeze policies, among other negative consequences like increasing debt distress – have back-fired in terms of inflating the cost-push channel of inflation by increasing the cost of living and doing business, given high policy rate.

Moreover, over-board austerity policies have led to not only overall high economic growth sacrifice, but before that negatively impacted both domestic production, and exports. This, in turn has meant that the former has not allowed improving the aggregate supply side – at least an equally important determinant of inflation during routine times in developing countries like Pakistan, and most likely even more so in the wake of global supply shock in the wake of the Covid pandemic, and rise in global conflict – once again contributing to cost-push inflation, while the latter has resulted in lower foreign exchange built than in the case of rise in exports, leading to pressure on currency, and higher imported inflation.

Dealing with inflation would require, therefore, adopting counter-cyclical policies. Hence, through taking on board State Bank of Pakistan, and for bringing greater predictability in economy, a schedule of policy rate reductions over a rather short-term time horizon; a couple of months at most, given the long-time duration over which inflation has already remained quite stubborn and high, with little dent from an otherwise high policy rate.

Side by side, the government should immediately form a ‘price commission’, whereby in consultation with provinces a country-wide strategy is devised around steps that thwart hoarding practices, for which for instance, a wide network of stock maintaining warehouses are created.

Secondly, the commission should ensure that over-profiteering is minimized. Thirdly, in consultation with China, a ‘dual-track’ pricing mechanism is adopted to bring rationalization and stability into prices of sectors which are essential both in terms of domestic production, and for export competitiveness, and enhancement.

Then there is the huge problem of energy tariffs, and smooth and green energy supply. Not only circular debt needs huge financial bailouts that diverts from development, stimulus, and resilience related spending, but high cost of energy feeds into cost-push inflationary channel for both households, and business, increases debt distress, and also reduces export volumes, and competitiveness.

Here, once again China needs to be actively engaged in terms of shifting the economy’s energy needs from fossil fuel to alternate energy, especially solar energy, since Pakistan is abundant in needed sunshine levels for significant solar energy production. Such a step should be taken as big-ticket item in terms of investment, given the huge drain energy related issues have for both economy, and environment; especially, Pakistan is among the top-ten climate change challenged countries globally, not to mention that a number of its cities suffer from severe air pollution/smog issues.

Hence, the incoming government should strike a deal with China both in terms of technical expertise, and a large loan facility, with long-term return, and a significantly long grace period. The reason China needs to be engaged is because it is the world leader in solar energy.

A February 15, Financial Times (FT) article ‘World’s biggest solar company warns west not to cut out Chinese suppliers’ emphasized the importance of China in solar energy sector as ‘China dominates solar manufacturing, accounting for more than 80 percent of global production following decades of deep state support, rapid domestic demand growth and intense local competition.’

In addition, Pakistan should also approach multilateral institutions, and bilateral partners for climate finance, and climate compensation, especially those with huge carbon foot print globally, which more recently also includes China, but traditionally includes advanced countries in the global North, in particular United States of America. Domestically, solar energy sector should have least taxation burden as the strong incentive this important sector needs for economy, and environment.

Moreover, Pakistan is to reportedly also engage International Monetary Fund (IMF) for negotiating a climate related financing facility – in addition to approaching the IMF for an extended fund facility (EFF) programme – most likely in April.

Here, the incoming government should also try to bring to table IMF for an annual release of climate change related special drawing rights (SDRs) allocation. Also, to deal with significant energy transmission losses that the country suffers, and to also increase the capacity of transmission infrastructure to take greater loads of energy, the incoming government – in parallel to the efforts to transition to solar energy, as discussed above – should work towards forming a consortium of development partners, for instance, China, the USA, World Bank, and Asian Development, among others, for negotiating a long-term concessional loan, with once again big grace period, and long-term staggered repayments schedule.

In addition to significant damaging impact of usage of fossil fuel in terms of air pollution, and overall climate change related environmental aspects, fossil fuel usage also has a high economic burden in terms of import bill, debt distress, balance of payments concerns, and meaningful impact in terms of influencing cost-push, and imported inflationary channels. Hence, it is important that in addition to shifting to solar energy, the transportation sector should also move towards electricity, including the public transportation. Once again, concessionary financing facilities on the lines indicated above need to be engaged.

More than that, the country should also make a case for climate change related debt relief from countries with high carbon footprint, and from multilateral institutions, like IMF, where the resources of these countries form the pool of loanable funds.

In addition, in the same spirit for approaching for debt relief, the country should seek IMF’s assistance in assisting the country in reaching timely, and meaningful debt restructuring/rescheduling/reprofiling, so that the freed-up resources could be spent for reaching climate change resilience, and also for development, stimulus, and social welfare related spending.

Highlighting this point of significant debt repayments distress are leading to lopsided spending priorities that developing countries are having to follow, a Development Finance Initiative (DFI) led report ‘The worst ever global debt crisis: putting climate adaptation spending out of reach’ pointed out: ‘In the 42 countries of the Global South analysed for this report, debt service represented on average 32.7% of the public budget in 2023, while climate adaptation spending came in at only 2.5%. This means that in 2023, debt service is 12.5 times higher than the amount spent on climate adaptation; and based on 2024 budgets and debt service ratios, this will rise to 13.2 times.’

Here, it needs to be indicated that both globally in general, and in the case of Pakistan, the high cost of these initiatives will likely be outpaced by the savings they bring in from fossil fuel usage, not to mention the urgency that such steps require given the fast-unfolding of climate change crisis, and the related ‘Pandemicene’ phenomenon.

A December 05, IMF published blog article ‘Benefits of Accelerating the Climate Transition Outweigh the Costs’ pointed out in this regard: ‘Ensuring a lower-carbon future is not only necessary but also good for the economy, according to the latest climate scenarios from the Network for Greening the Financial System, a group of 127 central banks and financial supervisors working to manage climate risks and boost green investment. …making an orderly transition to net zero by 2050 could result in global gross domestic product being 7 percent higher than under current policies. …Transitioning to a net-zero economy will require substantial investment in green electricity and energy storage.’

Copyright Business Recorder, 2024

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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