EFF programme, non-inflationary economic growth, and counter-cyclical policy approach

A recent ‘Transcript of Global Financial Stability Report April 2024 press briefing’, carried a rather very pertinent question regarding a possible need to revisit policy focus traditionally to control inflation through mainly reliance on interest rate, pointing out in addition in the question ‘Continuously with that very dosage of that very prescription has kind of hurt the middle income and the lower middle income; but, of course, it has not given the results out there.’

The reply by Tobias Adrian from the International Monetary Fund (IMF) was: ‘You know, Pakistan is in a program. And there are really macro challenges, which include the financial sector and central bank policies but also broader macro and fiscal issues.

And, you know, the adjustments oftentimes take some time to take hold.’ Moreover, replying to the same question, Jason Wu from the IMF indicated: ‘It is, indeed, the case that both the supply and demand side contribute to inflation. So in that sense, policy is needed on both sides. In the case of Pakistan, for example, monetary policy has been tightening over the past two or three years to control inflation.

And inflation is projected to come down, but more work needs to be done. And that includes on the demand side; fiscal consolidation needs to be continued. But also on the supply side, including things like, you know, the reform of the energy sector, state[-]owned enterprises.’

In the coming months, Pakistan is likely going to enter into an extended fund facility (EFF) programme with the IMF, which in addition to focussing on macroeconomic stabilization, also concerns itself with economic growth. Pakistan has had a history of economic growth that leads to inflation, and inflation that rises quite drastically every few years. In both these situations, the country has mainly adopted aggregate-demand-squeeze policies to rein in inflation, mainly through the use of interest rate instrument.

The lack of supply-side and governance-related emphasis has on one hand resulted in over-board sacrifice of economic growth to somewhat rein in inflation, but this in turn has ushered in cost-push, and supply-constrained induced inflationary pressures, including adding to imported inflation at the back of fall in production of exports.

It is, therefore, important that in the upcoming likely EFF programme monetary- and fiscal austerity policies are not over-emphasized, as has been the case traditionally, and instead a more balanced approach is adopted in terms of both demand side and supply side policies. Already, the economic growth has been around the population growth rate for the last two years, and even if the two fiscal years before that are taken out, growth was also very weak.

The April 2024 World Economic Outlook (WEO) report, recently released by the IMF, projected a weak outlook for Pakistan’s economic growth, whereby for July-June 2023-24, real GDP (gross domestic product, or simply national income) growth has been projected at 2 percent, which only slightly improves to 3.5 percent for July-June 2024-25.

Moreover, with regard to inflation, IMF projections are apparently making very strong assumptions while projecting a drop of 12.1 percent in CPI (consumer price index, or simply inflation) during fiscal year 2024-25, given the overlapping emergencies or polycrisis that the world is grappling with, from existential threats, to ongoing difficult geo-political/conflict situation.

Pakistan needs economic growth for climate change, and Pandemicene-related resilience needs, on one hand, and for reversing the perpetuation of more people falling below the poverty line; a phenomenon that has picked up pace since the time of the heydays of the Covid pandemic. In addition, the country needs non-inflationary economic growth, which requires both policy correction in terms of a much more balanced aggregate demand-, and supply side policy emphasis, and also in terms of ushering in non-neoliberal, social democratic styled economic institutional, organizational, and market reforms.

In fact, if the IMF could provide enhanced special drawing rights (SDRs) allocation over the medium term for supporting counter-cyclical policy approach – both for better preparing against climate change, and for reducing otherwise high poverty, and income inequality levels, with positive consequences for political voice, and overall democratic culture – while the domestic resource mobilization efforts come up to the needed level both in terms of expanding tax base, and also meaningfully shifting from consumption-oriented tax emphasis to income taxation.

Such a support from IMF is important, given Pakistan, among the top-ten climate change challenged countries, on one hand, and one of the most populous countries having around half of its population below the poverty line, on the other, and with weak political voice at the back of years of under-investment into educationally, and economically empowering the demos, will likely take longer to have needed level of pressure on public representatives to legislate and better implement policies that enlarge tax base, and re-orient taxation system towards better equity consequences in terms of tax burden.

So, it is hoped that in addition to a likely EFF programme – and that too taking a more balanced approach on tackling inflation, as indicated above– the IMF also provides enhanced SDR allocation on an annual basis, over the medium-term to Pakistan, and developing countries with similar circumstances.

In addition, IMF should cancel its otherwise notorious ‘surcharge’ policy, since no country, especially developing countries with little fiscal space, and substantial spending needs, can ill-afford to pay ‘junk’ fees.

Copyright Business Recorder, 2024