Misplaced optimism about economy

Given elections are scheduled for early February, a few months into 2024 spring will bring into public life a new government, but the question whether or not it will continue with the same neoliberal, austerity-based mind-set has no easy answer, given it has been years with the Covid pandemic and debt default stresses, in between, that macroeconomic stability continues to remains elusive, while economic growth sacrifice is the general undertone.

With lack of economic institutional reforms, primarily in terms of non-neoliberal, and non-austerity-based governance and incentive structures, any number of slogans – from increasing foreign direct investment, and exports, to greater domestic resource mobilization – have not meant much without laying these reform basis. Two important factors for inclusive, and sustained growth, coupled with low and stable inflation, and which are productive players of the game – public service, and private sector – and ample finance have been lacking.

Austerity, or aggregate demand squeeze policies, on one hand, and lack of multilateral support, especially in terms of more frequent, and better allocated International Monetary Fund’s (IMF’s) special drawing rights (SDRs) has allowed neither macroeconomic stability, nor any meaningful and sustained economic growth. Major hurdles for stabilization has been following the policy of monetary austerity, which has continued to generate acutely high debt repayment needs.

Such policy is even counter-productive in a number of ways. As indicated above it enhances interest payments on debt. Secondly, it increases the competition for foreign portfolio investment between developed and developing countries.

Thirdly, given inflation in developing countries in particular is at least equally a supply-side phenomenon and hence high policy rate being kept both domestically – latest monetary policy decision continued with 22 percent policy rate – and internationally – in general by major central banks globally where, for instance, US Federal Reserve continued with highest policy rate in 22 years in its latest monetary policy announcement in this regard –contributed to imported-, and cost-push inflation.

Fourthly, higher external debt distress, in the shape of greater interest payments, puts pressure on foreign exchange reserves and, in turn, the strength of currency also comes under stress, ushering in rounds of greater imported inflation.

A December 13, Guardian published article ‘World Bank warns record debt levels could put developing countries in crisis’ pointed towards the concerns being raised by a recently released ‘International Debt Report 2023’ by World Bank Group with regard to increasing debt repayment needs of developing countries likely culminate in a debt crisis, while higher payments continued to take resources away from development-, and climate change-related spending.

The article highlighted: ‘The Washington-based multilateral body said the escalating cost of servicing past borrowing caused by rising interest rates was siphoning money away from spending on health, education and tackling the climate crisis.

The Bank sounded the alarm in its latest International Debt Report, which showed the sharpest rise in global borrowing costs in four decades had pushed payments on the external debts of all developing countries to $443.5bn in 2022.

“Record debt levels and high interest rates have set many countries on a path to crisis,” said Indermit Gill, the World Bank Group’s chief economist and senior vice-president.’ In the case of Pakistan, the Report highlighted as of 2022, external servicing stood at an alarming 42 percent of exports, which shows country’s’ serious weakness in terms of paying its external debt from its own earned foreign currency.

Although a no-brainer that austerity policies will not allow breaking the vicious cycle of diverting country’s own resources from increasing aggregate supply – both for domestic production and exports – and in paying for debt, and hence any default evading measures through taking IMF loan, need to be quickly coupled with strong economic institutional reforms so that maximum efficiency could be attained from remaining fiscal space utilized as development expenditure, and in turn, generates some meaningful sense of optimism for macroeconomic stability and economic growth in any sustained way.

That is why greater and better allocation of SDR allocation and better debt relief provided multilaterally will go a long way in allowing developing countries to make necessary spending to boost economic growth, and in a much-needed climate change transitioning way.

In a Project Syndicate published article ‘SDRs are the great untapped source of climate finance’ on December 12, noted economist Jayati Ghosh indicated in this regard: ‘A new issuance of SDRs would offer immediate relief to countries facing balance-of-payments constraints, particularly those grappling with both debt and climate challenges.

Moreover, regular, periodic SDR issuances, in line with global GDP growth, could provide developing countries with the fiscal and foreign-exchange flexibility they need to invest in development- and climate-related initiatives. But first, we must change the way SDRs are allocated. …the IMF could introduce targeted allocations, with eligibility criteria focusing on exposure to climate change, terms-of-trade shocks, interest-rate fluctuations, capital-flow volatility, and other external forces beyond the control of affected countries.

Admittedly, this would require amending the IMF’s Articles of Agreement. But that is not an insurmountable obstacle, particularly if the organization’s major shareholders, such as the G7 countries, endorse such a change.’

As it stands, developing countries are under immense debt distress, which is most unfortunate, given many of them are highly climate change vulnerable countries, and should be making a lot of climate spending. Pointing towards this debt stress, a December 13 Bloomberg published article ‘The world’s poorest countries buckle under $3.5 trillion in debt’ highlighted the grave debt distress concerns in particular for ‘frontier markets’ and how they are being made worse by monetary tightening policies – while similar could be said for a group just a little above in terms of economic performance ‘emerging markets’ – whereby it indicated: ‘A debt crisis is brewing across the developing world as a decade of borrowing catches up with the world’s poorest countries.

In 2024 these nations, known to rich-world investors as “frontier markets,” will have to repay about $200 billion in bonds and other loans. The bonds issued by Bolivia, Ethiopia, Tunisia and a dozen other countries are either already in default or are trading at levels that suggest investors are bracing for them to miss payments.

The situation is especially grave, because these nations have small domestic markets and must turn to global lenders for cash to spend for hospitals, roads, schools and other vital services.

As the Federal Reserve vows to keep US interest rates higher for longer, a once-ebullient market for debt from those countries is drying up, cutting them off from more borrowing and adding to the many rate-related risks of 2024.’

Through an elected leadership, economic policy must challenge conventional paths of neoliberal and austerity policies, and must engage far better in terms economic diplomacy calling, for instance, for quota reform at IMF, and in adequate and timely allocation of SDRs.

Copyright Business Recorder, 2023