Austerity and SDR allocation

The world is suffering from multiple crises — from strong inflationary headwinds to low growth — at the back of recession-causing and supply chain disruptive pandemic and an overall fast unfolding climate change phenomenon.

According to recently released International Monetary Fund’s (IMF’s) World Economic Outlook (WEO) October edition of the report, while growth forecast for this year has been revised down, it will likely be a lot lesser for 2023.

It pointed out in this regard: ‘Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the Covid-19 pandemic…’

Hence, when primarily cost-push inflation and low growth (at the back of climate change) and the war in Ukraine-related supply shocks, and years of under-investment globally in improving productivity and economic resilience in the face of disaster shocks, especially in public health sector, required injecting greater productive investment, for which developing countries in particular needed increased fiscal space, the usual mantra of austerity is being practiced.

In a recent interview with CNN’s Christian Amanpour, renowned economist Mariana Mazzucato highlighted the serious shortcomings of austerity-underlined policy for an advanced economy like that of United Kingdom (UK), where such austerity policy related shortcomings are all the more relevant for developing countries, including Pakistan which, in addition to suffering debt distress, high inflation, and low growth, also stands deeply challenged by the climate change crisis, even more so as one-third of the country is suffering from catastrophic flooding.

Mariana Mazzucato pointed out in this regard as ‘…they are about to embark on another massive wave of what we’ve called austerity, which we know doesn’t work. Even the World Bank has written articles, and how it was futile after the financial crisis to have ten years of austerity in the United Kingdom.

What does that mean? It means cuts to public education, public health, areas even like public transport, and what’s interesting is that the current Chancellor was actually the minister of health in the UK for a very long time… and he was criticised for at the time by doctors…due to the cuts, the real cuts, that were actually made to the NHS [National Health Service], which of course then when once Covid hit we felt.

You know, just like with climate change, the cost of inaction is much greater than the cost of action. So, if you’re not actually, properly, funding the social fabric of society, and in in this case, you know public health systems globally should be strengthened, not weakened, this austerity that we are about to experience in order to pay also for some of the tax cuts that were going to remain, is a huge problem.’

Pakistan needs productive investment, especially in the wake of floods that have seriously affected lives and livelihoods of around 33 million people, and not austerity or cuts to development expenditure.

Unfortunately, the current programme with the IMF prescribes austerity and overall procyclical policy to rein in inflation and fiscal deficit, when the former has significant feeding from imported- and cost-push inflationary channel, the latter requires raising taxes mainly on ‘excess profits’ of economic sectors that have enjoyed super-normal profits at the back of global supply shock, and speculative/weak regulatory practices.

Fiscal space for developing countries like Pakistan to make the needed spending on flood rehabilitation, climate change preparedness, and investments into public health and education, requires provision of meaningful level of climate finance, debt relief, including adopting less (and unwarranted) hawkish monetary tightening policy by major treasuries globally that have contributed. In addition, and very importantly also, there is a strong case of fresh allocation of enhanced special drawing rights (SDRs) by the IMF.

Instead of moving in this direction, countries, especially developing countries with little fiscal space to start with, and which nonetheless received little enhanced SDR allocation in August 2021 due to usage of ‘quota’ as distribution formula, are being asked to adopt austerity and procyclical policies. Such allocation is all the important since global economic growth forecast is already being revised downward by WEO to 3.2 percent for 2022, while WEO only expected 2.7 percent economic growth globally in 2023.

Having said that, while allocation is overdue for many months now, a recent statement by the US Treasury Secretary, Janet Yellen, dismissed that such allocation would be made anytime soon. This she indicated in an October 14 Reuters published article ‘Yellen says new IMF SDR allocation not appropriate at this time’ as follows: ‘U.S. Treasury Secretary Janet Yellen on Friday said she does not see another allocation of International Monetary Fund emergency reserves to member countries as appropriate at this time, when more existing reserves need to be channeled to poorer countries. Yellen told a news conference that the Treasury has asked the US Congress for permission to lend $21 billion in existing US Special Drawing Rights (SDRs) to IMF trust funds for low- and middle-income countries, and was hoping for approval.’

Given allocation to the maximum limit with IMF at $650 billion requires the nod of approval by the US Treasury, this reported statement comes as a big setback to hopes and advocacy globally that were already raising voice that such allocation was already overdue.

Moreover, this gives further credence to the claim by a report ‘End austerity: a global report on budget cuts and harmful social reforms in 2022-25’ released in September on the likely (but wrong) large scale practice of austerity globally in the short- to medium-term, where the report indicated in this regard: ‘This report alerts of the dangers of a post-pandemic austerity shock, far more premature and severe than the one that followed the global financial crisis.

Instead of harmful austerity measures (or “fiscal consolidation”), governments must urgently identify alternative financing options to support their populations that are coping with multiple and compounding crises - from health, energy, finance and climate shocks to unaffordable living costs.

The report: (i) presents the incidence of budget cuts based on IMF projections in 189 countries until 2025; (ii) reviews the latest 267 IMF country reports to identify the main austerity measures being considered by Ministries of Finance and the IMF in each country; and (iii) presents alternative financing options, ultimately calling on countries to end austerity by creating fiscal space to finance a people’s recovery and progress toward human rights and the Sustainable Development Goals (SDGs). …[Sadly] analysis of IMF expenditure projections shows that the adjustment shock is expected to impact 143 countries in 2023 in terms of GDP or 85% of the world population. Most governments started scaling back public spending in 2021, and the number of countries slashing budgets is expected to rise through 2025.’

Instead of austerity, meaningful international support, and more counter-cyclical policy needs to be put in place. In the case of Pakistan, public expenditure needs have all the more risen in the wake of the pandemic.

A recent Financial Times (FT) published article ‘Pakistan seeks billions in loans for “mega undertakings” after floods’ highlights urgent and deep financial support the country needs to create the fiscal space, especially in the wake of global and domestic economic slowdown, as follows: ‘“We are not asking for any kind of measure [such as] a rescheduling or a moratorium,” Sharif told the Financial Times.

“We are asking for additional funds.” Pakistan’s leader would not be drawn on the exact amount his government was seeking, but repeated the $30bn estimate of the damage caused by the floods, the worst natural disaster in the country’s 75-year history.

“There is a gap — and a very serious gap — which is widening by the day between our demands and what we have received,” Sharif said…However, Sharif said: “We are only asking for climate justice, we are not using the word ‘reparations’ at all.”’

Copyright Business Recorder, 2022