What sustainable macroeconomic stability?

The fall in inflation (to be precise CPI inflation) to single-digit in August –stood at 9.6 percent – meant that it was almost after three years that inflation had come back to single-digit.

Hence, it was in October 2021, when CPI inflation was 9.2 percent, while in November 2021 it had jumped to 11.5 percent.

Since then, CPI even went above 30 percent during this time. The policy rate also continued to rise, and when it was increased to 22 percent in March 2023, CPI inflation stood at 35.4 percent.

There strongly appears a lack of effectiveness of mainly tackling inflation through the tool of policy rate, whereby while policy emphasis continued to remain primarily on controlling inflation through aggregate demand squeeze policies – increasing policy rate (or monetary austerity) and moving towards primary surplus (or fiscal austerity) – it took around one-and-a-half years for inflation to come down to single digit, and only when positive real interest of close to 10 percent is still in place.

To substantiate, policy rate currently stands at 19.5 percent, while inflation not only has gone down to 9.6 percent, it was already 11.8 percent in May, around what time the first cut in policy rate of 22 percent was made in early June by 1.5 percent, and then another reduction was announced around end-of-July, when a further cut of 1.0 percent took it to the level of 19.5 percent where it currently stands.

The question is that while the global aggregate supply shock had caused inflation to continue to rise in the wake of the pandemic, while aggregate demand had mostly been hurt during the pandemic due to lockdowns, and without any meaningful provision of stimulus to the economy, then it makes no sense that the main policy emphasis remained on over-board austerity policy – both in and outside of the IMF programme during this time – to further reduce aggregate demand. Import demand of non-essential items could have come through administrative controls on imports, but pursuing the overall over-board austerity policy meant reduction in domestic production and exports, which most likely gave impetus to inflation through cost-push, and imported inflationary channels, and brought no sustainable gains for either economic growth, balance of payments situation.

The supply-related bottlenecks in the economy – mainly poor economic institutional quality, highly sub-optimal level of price discovery in markets due to high information asymmetries, high cost of electricity, and significant proportion of indirect (or regressive) taxes – still largely remain, which is sad to say the least because these should have been fixed quickly, so that so much growth-sacrificing, stabilization policies need not be adopted to bring down inflation, which in itself is a non-starter approach because any macroeconomic stability achieved through over-board demand squeeze policies bring limited and unsustainable macroeconomic stability.

Ever since the late 1980s when the neoliberal model started to be imposed on the country – both in and outside of the IMF programme – the same policy approach has produced the same unsustainable macroeconomic stability consequences, and sadly we have repeated history, while economic growth also remained unsustainable as a consequence.

Moreover, any betterment in risk situation of the country, as reflected in upgrading of economy’s risk rating by agencies, for instance by ‘Moody’s’, or ‘Standards & Poor’s, correspondingly only remains limited.

This is because, as economic growth is pursued, after giving ample growth sacrifice, the same weak supply-side economic fundamentals mean lower productivity, higher inflation, and weaker built-up of both foreign exchange reserves, and capacity to effectively deal with debt distress; not to mention the adverse impact of lack of growth due to issues in supply-side on boosting revenues, and exports, pushing the country towards high level of fiscal-, and current account deficits, and greater demands for taking on more debt.

What then is the government reportedly lauding itself for when it took so long to bring down inflation, and after such a high cost in terms of cost of capital and high level of prices that such long period of high level of inflation rate has taken them too, not to mention the impact of monetary transmission that remains in the system for the coming months in the wake of over-board policy of monetary austerity, the high level of indirect taxes, very high level of electricity tariff, and significant bailout needs in terms of subsidy provision demands in the electricity, and SOE sectors, all putting upward pressure on inflation, fiscal deficit and debt distress?

Moreover, the same over-board monetary austerity policy at the international level by a number of major central banks, including the US Federal Reserve, and a lack of meaningful provision of special drawing rights (SDRs) by IMF has put greater burdens on the macroeconomic stability of developing countries like Pakistan, by boosting the cost of capital internationally, both in terms of borrowing costs and debt servicing costs; for instance, SDR rate increased sharply during the last few years from around 1 percent to around 4 percent. This has put all the more burden on policymakers to deter from employing otherwise much-needed counter-cyclical policies.

Hence, it is imperative for the government to only enter in an IMF programme that does not push it to adopt the same pro-cyclical, over-board austerity, and overall neoliberal policies that neither allow any meaningfully sustainable macroeconomic stability, even after a lot of economic growth sacrifice is paid, and does not allow the build-up of ample revenues for needed investments into economic resilience, especially given the country is among the top-ten most challenged countries in terms of climate change crisis, and also has significant health sector related vulnerability, in particular at a time of high prevalence of ‘Pandemicene’ phenomenon; not to mention when IMF has not cancelled its ‘surcharge policy’, and not provided climate change related SDR provision.

Copyright Business Recorder, 2024