Economic recovery with high risks

‘This edition of Global Economic Prospects makes clear, policymakers face formidable challenges – in public health, debt management, budget policies, central banking and structural reforms – as they try to ensure that this still-fragile global recovery gains traction and sets a foundation for robust growth and development in the longer run.’ – Comments by David Malpass, President, World Bank Group, in ‘January 2021 Global Economic Prospects [GEP]’ report

The latest edition of the flagship report of World Bank Group comes at a critical juncture as the Covid vaccine starts to roll out, but in a very unequal ways, with most purchase and administration in rich, advanced countries though. While being an upbeat moment for a world mostly hit by deep recession, and public health emergency last year, yet reported inequality in the vaccine rollout has taken a lot of shine away from an otherwise quick discovery of vaccine. It is, therefore, important to note that most of global south may not start receiving vaccine on a wide-basis by the middle of next year. The Report overall remained upbeat for global economic growth recovery, whereby while being estimated to be at negative 4.3 per cent in 2020, it expects it to rebound to 4 per cent and 3.8 per cent, in 2021 and 2022, respectively.

The Report rightly relates the extent of availability of vaccine, and that too in a timely manner, to global economic growth prospects. It links vaccine, among other important factors, to growth outlook, where for South Asia [SAR] it highlights the following in that regard: ‘The growth outlook is highly uncertain and one way to reflect this uncertainty is through scenario analysis. In the downside scenario, growth prospects are undermined by a sharper upsurge of the virus globally, delayed rollout of vaccines, a deterioration in global financing conditions, weaker business and consumer confidence, and lower oil prices.’ Even beyond the likelihood of these downside risks happening, according to the Report, ‘the pandemic is expected to leave lasting scars on the region. Recent estimates suggest that potential growth will be more than 1 percentage point lower, on average, during 2020-25 compared to a no-COVID counterfactual.’

While it expects that in the worst-case scenario, economic growth currently projected for 2021 at around 1.5 per cent, yet if these downside risks/factors play a significant role, then the growth in SAR ‘would be 1.8 percentage points lower than projected’; in which situation ‘Afghanistan, Maldives, and Pakistan are likely to see the largest downgrades.’ In the case of Pakistan, GEP report projects real GDP growth rate for 2019-20 at negative 1.5 percent, while it forecast it for 2020-21 at 0.5 per cent. Yet given the downside risks are quite likely since reportedly it will be among those countries where vaccines will be widely available not before early 2022, and while debt continues to build up at a burgeoning pace, it is highly probable that the country could even continue to remain in recession during 2020-21.

The Report should raise alarm bells in other ways as well for net oil-importing countries, especially those having an active pass-through channel of oil prices in terms of imported inflation, since the Report points out first of all that ‘Surges in food prices tend to depress incomes and consumption, and increase food insecurity, with the most severe impact felt by the poor. Economies with high food inflation rates tend to have a larger share of the global poor and higher rates of poverty.’ Secondly, given the Report expects oil prices to rise by 8.1 per cent in 2021, and 13.6 per cent in 2022, these increases will likely have an adverse impact both in terms of domestic inflation, and also on balance of payments situation.

Here, it needs to be underlined though that in case inflation rises at the back of, for instance, rising oil prices, or for other reasons for that matter, policymakers in Pakistan should not adopt stringent aggregate-demand-squeeze policies, as they traditionally have led to a disproportionately high growth sacrifice for short-term macroeconomic stability, and mostly in build-up of reserves through highly volatile/speculative-natured portfolio investment. Rather a balanced approach should be adopted to keep interest rates low, both for keeping debt repayment levels in check, and also for assisting the banking sector in its massive drive for supporting the ambitious mortgage plans of ‘Naya (new) Pakistan Housing Programme’ stay afloat, and not end up leading to a situation in Pakistan, similar to the one that the world witnessed in the shape of financial crisis 2007/08; especially because unlike rich, advanced countries, the government will not have fiscal space to bail out the financial sector.

Moreover, Pakistan, like many other countries, needs to provide large amount of fiscal stimulus for both economic growth enhancement, and also for protecting the poor against the ravages of the pandemic and the associated recession, for which once again it would be important to keep interest rates low, as inflation, especially food inflation, starts to rise, as economic activity picks up along with rise in oil prices. Already, Saudi Arabia has reportedly indicated a significant reduction in oil supply to enhance oil prices in an effort, according to the kingdom, to support the economies of OPEC [Organization of the Petroleum Exporting Countries].

Having said that, the Report only hints at the limited response of creditor countries in supporting debtor countries in terms of debt relief/moratorium, as it indicated, for instance, that ‘External vulnerabilities have been some-what mitigated by the uptake of the Debt Service Suspension Initiative in Afghanistan, Maldives, Nepal, and Pakistan (G20 2020; [among other countries]). Further policy intervention, however, is needed to minimize the risk of crisis, including greater debt transparency’. Yet the Report elaborates little in terms of possible steps to help avoid a probable global debt crisis, like issuance of significant amounts of SDRs (special drawing rights). Where the Report does call for greater support in this regard, is only for very poor countries like those in Sub-Saharan Africa.

Oil dependency reduction, being more than a strategic decision to bring more sustainability to economic fundamentals of net oil importing countries, is also important to meaningfully check the fast-approaching climate change crisis, with its devastating effects not only on economy, but overall life as we know it. The Report also, therefore, stresses the need to move towards green growth. In this regard, David Malpass pointed out in the Report: ‘As countries formulate policies for recovery, they have a chance to embark on a greener, smarter, and more equitable development path. Investing in green infrastructure projects, phasing out fossil fuel subsidies, and offering incentives for environmentally sustainable technologies can buttress long-term growth, lower carbon output, create jobs, and help adapt to the effects of climate change.’

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021