IMF's warning

In its latest World Economic Outlook released on 27th September, the IMF has warned that emerging market and developing economies which had witnessed uninterrupted growth and shallower downturns than their developed counterparts over the past decade should now brace against looming risks from Europe and the US. The impact of better policies and less frequent shocks which had contributed to their record-setting performances in the past are likely to be overwhelmed soon by certain adverse developments in the developed countries.
According to the Outlook, "there is a significant risk that advanced economies could experience another significant downturn, as continuing sovereign and banking tensions in Europe and the so-called fiscal cliff in the US threaten to put the brakes on growth". In addition, the IMF cautioned about the risks of external shocks, such as a decline in commodity prices and sudden stops in capital inflows and, domestically, from credit booms. "To guard against such risks, these (developing/emerging) economies will need to rebuild their buffers to ensure that they have adequate policy space." Incidentally, many of these economies had adopted inflation-targeting and flexible exchange rates and made their fiscal and monetary policies more countercyclical, allowing them to stimulate and cool growth as necessary. However, if the external situation worsens, "these economies will likely end up 'recoupling' with advanced economies."
We feel that the IMF in keeping with its tradition has read the overall situation very well and such a warning was necessary due to the growing belief in certain emerging economies of their 'decoupling' from the woes of advanced economies. Such a mindset needed to be challenged due to further spikes in global uncertainty which, contrary to the past, could also jolt the prospects of developing economies. It was generally believed that the worst was over but a debt-strapped Europe continues to remain the biggest risk to the global economy and the US fiscal cliff - automatic tax increases and spending cuts at year-end - are expected to sharply slow down already tepid growth in the world's largest economy. Also, foreign investment which had played a crucial role in the development of emerging economies is likely to decline substantially due to growing risk aversion in the developed world. In fact, the crisis in Europe and the US has already slowed growth in the major market economies, notably China, India and Brazil. So far as policy space in various developing economies is concerned, it depends on individual economies but, in general, some of the developing countries had more room for manoeuvring, especially in monetary policy area. However, whether such a room was enough to withstand the pressure emanating from the developed countries would depend mainly on the intensity of crisis and the institutional strength of the developing countries to cope with the emerging difficult situation.
Authorities in Pakistan, in our view, need to take note of the IMF's warning very seriously. Already in a serious quandary and going downhill very fast, the economy of the country cannot afford further shocks. We don't want to go into the details but those who are aware of the situation know that, unlike certain emerging economies like China's, the country has hardly any space left for policy manoeuvres or building buffers to successfully weather the expected storm caused by the deteriorating trends in the global economy. In a situation like this, the authorities at the helm need to devise an appropriate policy framework at the earliest to ensure stabilisation and solvency of the economy as well as an action plan to minimise the negative impact of external shocks on the lives of ordinary people, particularly the poor. We know that such a task is very difficult at this particular juncture but overlooking the IMF's prognosis and hope that it is wrong could only compound the woes of Pakistan's economy.