Pakistan, and international global financial order: Revisiting macroeconomic policy

In the recently released report ‘Regional Economic Outlook: Middle East and Central Asia’ by International Monetary Fund (IMF), one of its comments on Pakistan’s economy was ‘For… Pakistan, policy interest rates stood at levels below model-based estimates of natural rates, suggesting that monetary policy stances were still loose at the end of 2022.’

It is indeed very strange to say the least as to how the IMF can think of monetary policy to be ‘still loose at the end of 2022’ even when interest rates increased many percentage points during that year; which was unjustified, given strong supply-side determination of inflation in the wake of pandemic, and war in Ukraine.

In fact, the Report itself should have pushed the IMF to realize the futility of its reportedly monetary austerity emphasis in view of the fact that even after so much monetary tightening, inflation has continued to increase, while economic growth, as per the Report itself, plummeted.

According to it, for example, ‘Pakistan’s growth rate is expected to slow materially from 6.0 percent in 2022 to 0.5 percent this year, reflecting challenging macroeconomic conditions, including damage from widespread flooding, broad-based inflationary pressures, and tighter monetary and financial conditions.’

Instead, Pakistan’s economy needs a much more balanced monetary and fiscal policy emphasis, and hence away from its pro-cyclical, austerity over inclination. This is important given both the significant supply-determined nature of inflation, and the drastic fall in economic growth require a counter-cyclical, non-austerity approach.

Hence, contrary to what the pathway Pakistan’s policymakers have taken since the heyday of the pandemic – when fiscal spending increased somewhat meaningfully, producing in turn two years of rising economic growth to 5 percentage plus, and which could have been managed by more strategic current account management– fiscal austerity, both because the ‘Chicago boys’ mentality of policymakers, and also because of IMF’s wrong programme conditionality pushing for primary budget surplus, has resulted in stagflation in the country – rising inflation, and economic stagnation.

Also, managing the fiscal account, therefore, should not involve fiscal austerity, but rather increasing expenditure efficiency through better checks/controls and prioritization, belt-tightening in the matter of current (non-developmental) expenditures, much improved subsidy targeting (but keeping a meaningful subsidy for energy sector since it significantly feeds into cost-pushing inflationary channel, including running a meaningful cash-transfer programme as an important social safety net step), and implementing a meaningful progressive, and broad-based taxation regime, with particular taxation focus on the very rich, and meaningfully taxing windfall profits.

This situation, in turn, has not allowed, on one hand, reversal of otherwise likely increase in poverty during the recession-causing pandemic in its early first-year phase overall, and on other hand, fiscal and monetary austerity has most probably perpetuated greater elite capture of policy to the benefit of their short-term moneyed interests, and likely caused increase in already high level of inequality with damaging outcome on the quality of democracy, in the shape of reduced political voice of much more economically weak demos.

To fix the supply side nature of inflation, and that is on the domestic side, the important thing is to use ‘strategic price control’ rather than over-emphasizing monetary- and fiscal austerity to squeeze aggregate demand; given inflation, while traditionally in developing countries like Pakistan remains at least equally a fiscal phenomenon anyways, and which has been even more significant a determinant in the wake of global supply shock during the pandemic, and due to war in Ukraine.

In a March 13, 2023 Project Syndicated (PS) published article ‘A new economic policy playbook’ by noted economist, Isabella M. Weber, with regard to both highlighting the importance of controlling prices in a strategically, well-planned manner by governments over the years, and possible use of ‘input-output analysis’.

It was pointed out: ‘The history of price stabilization goes back centuries, from the mists of classical China…to the major crises of the past century: World War II, the Korean War, and the stagflation of the 1970s in the United States.

In each case, price-stabilization policies served as emergency measures aimed not just at “fighting inflation,” but at doing so in a fair and socially stabilizing manner.

Their primary purpose was to attack profiteering (from wars, famines, and disasters) head-on. …they have been massively popular – especially when weighed against the alternative of austerity. …A new stabilization paradigm is urgently needed. …Policymakers need to be prepared to react before price shocks ripple through the whole system again, leaving inflation and widespread social and economic harm in their wake.

Such efforts must focus on the sectors that matter most. As my co-authors and I show, an input-output analysis can be used to identify systemically significant prices, thereby helping policymakers prepare for future emergencies.’

Reducing inflation, therefore, also requires dealing with ‘greedflation’, whereby over-profiteering needs to be reduced using a combination of macroeconomic- and governance policy which, in other words, means both better implementation of price list administratively, but before that to improve pricing through implementing strategic price controls.

A recent ‘The Wall Street Journal’ published article ‘Why is inflation so sticky? It could be corporate profits’ pointed out in this regard: ‘Inflation has proved more stubborn than central banks bargained for when prices started surging two years ago.

Now some economists think they know why: Businesses are using a rare opportunity to boost their profit margins. …there are signs that companies are doing more than covering their costs. According to economists at the ECB [European Central Bank], businesses have been padding their profits. That, they said, was a bigger factor in fuelling inflation during the second half of last year than rising wages were.’

Similarly, discussing over-profiteering, a recent ‘Business Insider’ published article ‘Why does everything cost so much? Because businesses are hiding behind inflation to jack up prices’ pointed out that while reasons behind global inflation like global ‘supply chains, have returned to normal’ – although war in Ukraine is still creating disruptions – and in America ‘Wages and salaries in the Employment Cost Index, a broader measure of employee compensation, have been on a downward march for roughly a year.

The index rose just 1.2% from December 2022 to March 2023, barely above pre-pandemic levels and well below the pandemic peak from late 2021’ it was basically over-profiteering that was keeping alive the high burning flame of inflation.

Moreover, the article pointed out: ‘So while there’s no doubt that the economy has been through the ringer over the past three years, costs are finally coming down — and yet profit margins are still high. …The idea that companies are taking advantage of disruptions to push price increases on consumers has many names — greedflation, excuseflation, price gouging, corporate profiteering — but the gist is the same.

Large corporations use the guise of disruptions to raise prices beyond what their costs would suggest is necessary or what economic theory would suggest is prudent, squeezing higher profits out of cash-strapped customers.’

More than the warranted increase in inflation, over-profiteering is also alive and kicking in Pakistan, with CPI inflation (year-on-year) for April reached 36.4 percent; while inflation of more essential items, and measured by SPI stood at 42.1 percent for the same month.

Hence, in Pakistan, there is both need for non-austerity policies, and strategic price controls to both reduce inflation, and to boost economic growth; and that too in an inclusive and greener way. Specifically, a broad-based ‘price commission’ – covering pricing in both the real and financial sectors – should also be formulated to complement the policy of price controls, and in efforts to improve pricing mechanisms.

Given prices are also a provincial subject, the commission should be set up under the umbrella of Council of Common Interests, and through joint workings of federal and provincial finance ministry/departments, State Bank of Pakistan, Securities and Exchange Commission of Pakistan, Competition Commission of Pakistan, and representative consumer rights protection organizations/platforms.

Moreover, given a net importer of oil, and also because Pakistan has traditionally been more of a consumer-oriented society – and has not had much producing depth and breadth – which has kept the import bill high, imported inflationary component became all the more meaningful as international prices of energy and food prices soared during the last few years.

Here too, instead of over-board import compression policy, or the wrong policy of keeping Rupee artificially over-valued in a significant way against the US dollar as an effort – a policy which also has remained quite futile traditionally, due to domestic economic institutional, organizational, and market weaknesses, and rather low export demand elasticities, given rising regional competition in the area of main exports of textiles, and especially as monetary tightening globally overall has reduced production – what is needed as a much more important complimentary step to import compression is non-neoliberal reform policy.

In addition, to allow the country to move towards much needed counter-cyclical, non-austerity policy – especially as the government prepares the upcoming Budget – to dent inflation and also not hurt growth, and to move towards greater inclusivity and greener growth, there is need for firstly, much bigger debt relief/moratorium by bilateral, and multilateral partners than has been provided up till now.

Secondly, the same non-neoliberal macroeconomic understanding, both in terms of curtailing inflation, and in allowing for meaningful economic growth, especially as countries need to be far more resilient in the wake of the fast-unfolding climate change crisis, and as the likelihood of Pandemicene phenomenon increases (as a consequence, primarily in the shape of increasing climate change crisis), is needed to be reflected in an otherwise high neoliberal IMF programmes. Such revision in thought process will strengthen the domestic resolve to shape both the upcoming Budget, and macroeconomic policy more broadly in a non-neoliberal way.

A recent statement reportedly by the President of Ireland, further augments the need to shift away from both neoliberal policy emphasis, and also over-fixation on growth, and less on its composition.

An April 28, 2023 ‘The Irish Times’ published article ‘President condemns “obsession” with economic growth’ pointed out these comments as follows: ‘President Michael D Higgins has condemned the “obsession” with achieving economic growth in a speech on Friday that was implicitly critical of the economic policies pursued by successive governments. …the President delivered a typically wide-ranging speech that featured a strong critique of economic policy that seeks to prioritise growth, a condemnation of “neoliberalism” and an evaluation of the shortcomings of the teaching of economics at universities.

He also urged those present to “envisage our future utopia”, suggesting the Ireland must “rebalance economy, ecology and ethics”.’

Similarly, the Prime Minister of Barbados, Mia Amor Mottley, in her April 7, 2023 published article ‘How to Revitalize the World Bank, the IMF, and the Development Finance System’ in ‘Foreign Affairs’ magazine, which she co-authored with Rajiv J. Shah, also called for reform of the IMF, and World Bank.

The article pointed out in this regard: ‘Wealthier countries have neglected to honor previous commitments, including pledges to spend at least 0.7 percent of their GDPs on foreign aid and to mobilize $100 billion a year for climate action in developing countries. And the World Bank and IMF have struggled to tailor their instruments to support countries in this moment of profound need’.

Thirdly, IMF should provide much greater allocation of special drawing rights (SDRs), and with an allocation formula that is not based on the routine quota-sharing basis – as was wrongly adopted when it made the $650 billion SDR allocations in August 2021, when most of the allocations went to already rich countries – but rather emphasizes the most the needs-based aspect among countries for SDRs. Also, the IMF should immediately do away with its rather cruel ‘surcharge policy’, whereby countries are fined for late repayments on their IMF loans.

Last but not the least, major central banks, like the US Federal Reserve, and the European Central Bank, for instance, should adopt a more cautious monetary tightening approach, given the significant supply-side nature of inflation.

In addition to causing cost of living crisis, and enhanced burden for instance in the shape of student loans and mortgage rates – and not to mention the disgruntlement it has created on the political front, whereby fringe extreme parties, practicing rather politics of hate and xenophobia have mainstreamed, and have strengthened more dictatorial threads in leaderships among a number of developing countries –excessive and undue monetary tightening has also caused major hardship for developing countries, mainly through follow-up monetary tightening (although wrongly) in many of these countries, with difficult inflationary consequences, and also a lot of capital flight, and increasing external and domestic debt burdens.

This has also taken away crucial fiscal space from these countries, and together with push for greater fiscal austerity as well, especially in countries under IMF programmes, has exacerbated economic misery, and also fed into political instability.

Copyright Business Recorder, 2023