Controlling inflation and financing deficits — I

In April 2020, International Monetary Fund (IMF) managing director (MD) had reportedly called the Covid pandemic a ‘crisis like no other’, and a Guardian article ‘We are living through the first economic crisis of the Anthropocene’ published in May 2020 indicated that this was so because the entire world suffered from its consequences — rich, advanced countries and developing countries alike.

Yet, such a unique crisis had little impact on multilateral institutions like the IMF in terms of revisiting their neoliberal philosophical underpinnings. So, with very little margin, for a very short time, the IMF allowed some kind of stimulus/counter-cyclical policy stance for programme countries, but overall, as per Oxfam, during the last two years they pushed for procyclical/austerity policies in 87 per cent of their programmes. Barring for a very short period, I think, when the pandemic was at its peak, such insistence by the IMF was also seen in the case of its current programme with Pakistan during the pandemic.

And this is in addition to firstly delayed release of financial support by the IMF during the pandemic – in last August, while the pandemic was declared in early 2020 – in the shape of release of enhanced special drawing rights (SDRs) allocation where too the lion’s share of this allocation landed in rich, advanced countries, since the usual distribution mechanism of distributing as per a particular country’s contribution to the pool of IMF resources, and the relocation of those SDRs to where they were needed most, the developing countries, is yet to take place in any significant way. Therefore, it is about time those SDRs got relocated at the earliest possible, where the Resilience and Sustainability Trust (SRT) window created by the IMF in the shape of facilitating SDR relocation, should be actively made use of by rich, advanced countries.

While the IMF, on one hand, remained quite oblivious to the needs of programme countries to make stimulus spending, and would has also seen that little debt moratorium/relief was provided by rich, advanced countries, along with realizing that UNCTAD had put the financing needs of developing countries at $2-$3 trillion that they needed to receive before end of 2021 (which would have increased in view of the fact that it is now May 2022), and before that a bill in the US Congress for raising the ceiling of enhanced SDR allocation to around $3 trillion — while IMF needed that legislation to go beyond its limits of $650 billion in enhanced SDR allocation, which it allocated in last August, although it inappropriately allocated the majority share to rich, advanced countries — could only be passed by the House of Representatives, while it is yet to be passed by US Senate.

It was therefore important that the IMF allow for stimulus/counter-cyclical policies in the wake of higher level of prices after the initial few months of the pandemic, when they fell sharply and to quite low levels, global commodity supply shock, and which was sharply accentuated by the war in Ukraine by Russia.

So, while the IMF continues to make the mistake and not understand that deficits — current account and fiscal — are not a result of programme countries, like Pakistan remaining irresponsible in terms of being too lose in relation to its monetary and fiscal policy stance, or had provided more than requires stimulus — while the case in time had been the opposite — but because they are becoming difficult to manage, along with debt situation, given the recession-causing pandemic, little debt moratorium/relief, lack of provision of enhanced SDR allocation, and climate finance, high level of imported, supply-driven, cost-push inflation.

Hence, the solution as the IMF suggests, and as a number of local policymakers point towards in the shape of tightening monetary and fiscal policy stance, and calling those as the ‘hard or harsh decisions’ that the country should adopt, while these are not ‘hard or harsh’ but ‘wrong’ policy choices.

Both of them should understand that the highly unusual landscape of pandemic, supply-shock, and war had already pushed developing countries to the limits of monetary and fiscal policy instruments in managing and balancing the needs for both macroeconomic stability and by providing a reasonable level of hedging for them badly affected lower-income groups in the shape of growth/stimulus – given Pakistan had already given a lot of growth sacrifice by following pro-cyclical policies in the IMF programme during 2019.

Pro-cyclical policies, as suggested by the IMF and a number of local policymakers in Pakistan, for instance, are basically to significantly reduce subsidy, including that on oil. It is important to note that price of oil causes significant inflationary consequence for virtually the entire economy, and it is very difficult, with likely high surveillance costs involved for government, to provide targeted subsidy on oil for only lower income groups, especially in terms of providing cheaper oil for motorcyclists, for instance.

What was needed was ample and quick delivery of vaccines, for health and economic recovery reasons, practice of counter-cyclical policies, and appropriately provided level of stimulus in developing countries. All that was done in the rich, advanced countries where reportedly the IMF even supported stimulus spending, which is indicative of its double standards — along with provision of debt moratorium/relief, and proper financing, which is yet to come in any significant way. Rather than this happening, developing countries, and in particular programme countries, are being pushed towards the wrong policy decision, by the IMF and a number of local policymakers, albeit naively, to follow pro-cyclical, neoliberal-styled policy framework that as history indicates of the past forty years leads to greater poverty and inequality, no sustained growth even after a lot of its sacrifice for stability. Such insanity should stop especially when people have already suffered a lot during the pandemic. Such economic instability has already led to a lot of political instability.

So, rather than providing financing through channels indicated above, it is being said that the countries, including Pakistan, facing difficult debt and balance of payments situation on one hand, and high level of inflation on the other, have no choice but to follow austerity/pro-cyclical policy, which they should anyways since it is sound economics and because without this the IMF and other multilateral/many bilateral partners will not reportedly provide the needed financing.

Notwithstanding a few cases where neoliberal-styled, over-board austerity and procyclical IMF programmes did bring some level of stability and growth cushion to those programme countries, which was basically because of excessive support in trade and investment agreements provided by multilaterals and rich, advanced countries, to them, in turn allowing for this and not because without such support market fundamentalism provided for this, the history of experience of programme virtually all countries shows that the IMF did not provide any sustained level of macroeconomic stability nor economic growth, and instead perpetuated poverty, inequality, loss of political voice, and polarization.

In fact, the impact of these policies was so deep even in advanced countries, for instance, US itself where real wages have continued to fall. In the case of France, there has been a rising wave of political polarisation.

Secondly, it is not that multilaterals like the World Bank and Asian Development Bank (ADB) will just pack up and leave their development projects if Pakistan does not follow a pro-cyclical policy stance.

Pakistan should make it clear that it has already followed such policies – in or outside the programme in general, over the years for many decades now, given the fact that overall policy mindset has remained neoliberal over the decades — and it was high time in view of pandemic and global commodity supply shock, on one hand, and rising poverty/inequality and consequently political instability on the other, for it to implement significantly counter-cyclical policies, including providing a well-rationalized — but appropriate level of subsidy on oil — since a significant portion of electricity is produced from furnace oil, and therefore increase in oil prices also raises electricity tariffs, and at the same time, not increase taxes in any significant way as all of which add to rising cost of living and doing business.

Both of which are, in turn, exceedingly important to reduce the level of poverty, inequality, and political instability.

Moreover, Pakistan should indicate to development partners that it has already reached quite close to the limits of using policy instruments. In this writer’s opinion, the country, in fact, has gone a lot overboard in terms of monetary tightening, and the solution out it is not more of the same, but active financing and debt relief.

Having established these ground rules, Pakistan should take the following course of action as a minimum to lower inflation and successfully finance deficits so that it can manage both economic instability and political instability. It is high time, local policymakers in general, rich, advanced countries, and multilaterals like IMF should realize that an overboard austerity/pro-cyclical policy stance will not work, and needs to be shifted towards supporting reasonable level of stimulus/counter-cyclical policies, and for which it needs to provide much greater financing and debt relief.

Short of this, there is a risk of a debt pandemic, and the solution of that will not be in more and more developing countries pushed into neoliberal, pro-cyclical IMF programmes. Sri Lanka has already been through default and serious political instability, and many countries, including Pakistan, are fast moving towards similar, if not graver, consequences.

A recent Guardian published article ‘Sri Lanka is the first domino to fall in the face of a global debt crisis’ pointed out in this regard the following: ‘The departure of Sri Lanka’s prime minister, Mahinda Rajapaksa, follows weeks of protest and a deepening crisis.

There is no bankruptcy system for states but if there was then the south Asian country – down to its last $50m (£40m) of reserves – would be first in line to use it. A team from the International Monetary Fund (IMF) this week started work with officials in Colombo over a bailout that will include a tough package of reforms as well as financial support.

But as the IMF and its sister organisation, the World Bank, know full well, this is about more than the mismanagement of an individual country. They fear Sri Lanka is the canary in the coalmine. Across the world, low- and middle-income countries are struggling with a three-pronged crisis: the pandemic, the rising cost of their debt, and the increase in food and fuel prices caused by Russia’s invasion of neighbouring Ukraine.’

So, one of the main steps policymakers should take is to strongly activate the economic diplomacy channel and seek unlocking of climate finance as much as possible as per the commitment of rich, advanced countries to annually provide $100 billion annually to developing countries in view of the fact that greater urgency is needed in relation to cases such as in Pakistan as these are significantly under the impact of climate change and global warming.

Secondly, they should seek enhanced allocation of SDRs and faster relocation of SDRs allocated last August. Here, the government should ask the IMF to stop charging surcharges on its loans to programme countries during the pandemic.

For instance, US House of Representatives member, Jesus G. “Chuy” Garcia recently pointed out in this regard that ‘The IMF imposes additional surcharges on countries that already have high levels of debt, or are behind on their payments. Ukraine is one of those countries. So, while it fights a war against Russia, Ukraine also owes an estimated [$]14 million in surcharges to the IMF each month.’

Thirdly, they should seek invoking of London- and Paris Clubs for debt moratorium/relief, and should also ask for inclusion of private creditors — since in the case of Pakistan, and other developing countries in general, the share of commercial/private sector credit in overall external debt has increased significantly in the overall debt portfolio — at a much earlier stage.

Fourthly, Pakistan, should ally with likeminded countries and negotiate with OPEC+ group of countries for increasing supply of oil, at least take it to pre-pandemic levels, and even more, so that oil prices come down.

Also, it should discuss for oil payments on deferred payments with Saudi Arabia more actively, indicating to them the urgent need for such concessions for macroeconomic stability in the country, and also make a more convincing case — in the light of argument, the writer provides, among others — as to why it is not possible to follow a procyclical IMF programme as it currently stands in case they link such deferred payments with following IMF’s related conditionalities on oil subsidies as is being reportedly indicated in media that such demands have been made by Saudi Arabia.

On the macroeconomic reform front, as better inflow situation unfolds Pakistan should look to depreciate US dollar against the Rupee to at least bring it down as per the real effective exchange since, reportedly, the exchange rate stands overvalued.

Fourthly, the list of imports is reviewed while the negative list is expanded for purely luxury (highly elastic) items (for instance, luxury cars and expensive smartphones), and larger disincentive tax structure imposed on items that are less elastic luxury items (for example, cigarettes, dairy items, and cereals with cheaper local alternatives of reasonably good quality) with revenue consequence as well, in addition to producing lesser import bill.

These measures on the external economic front, and with greater build-up of reserves will likely lead to significantly reduce external debt burden and imported inflationary consequences. Fifthly, since it is significantly imported/supply-drive/cost-push inflation, policy rate is brought to single digit and almost halved in the next few months, and its negative consequences in terms of dollarization are managed with stricter conditions on obtaining dollars.

This will allow creating a meaningful level of much-needed fiscal space, and would significantly assist in provision of oil and other subsidies, along with reducing the burden of debt, and in helping produce positive consequences for growth and jobs.

Here, Pakistan should actively pursue the channel of economic diplomacy, take the above-mentioned macroeconomic measures, along with suggested institutional reforms/governance related steps (discussed later), and look to raise finances from commercial sources and through floating bonds to overall control inflation meaningfully and sustainable, and finance deficits, where such sources of financing, although more expensive than borrowing from the IMF, especially in the wake of rising inflation globally, and with it interest rates, but is still a far better option in terms of stability, growth, poverty, inequality, and political voice and overall democratic consequences, than following a neoliberal/over-board austerity, pro-cyclical IMF programme.

(To be continued on Tuesday)

Copyright Business Recorder, 2022