Pakistan is likely to enter into an Extended Fund Facility (EFF) programme – which is different from a standby arrangement (SBA) programme since, in addition to targeting macroeconomic stabilisation, including improving balance of payments situation, it also focuses on economic growth prospects – in the next few weeks.
The centre-staging of austerity in overall economic policy has resulted in more than required sacrifice of economic growth to attain macroeconomic stability on one hand, since inflation in developing countries like Pakistan is influenced by both demand-, and supply-side policy emphasis, and therefore, over-emphasis of aggregate demand squeeze, or fiscal consolidation, or austerity policies, and that too in a procyclical way have over-squeezed aggregate demand.
On the other hand, lack of supply-side emphasis in terms of governance, and incentive structures in an overall effort to improve economic institutional quality and, in turn, underlying organizations and markets has also not allowed putting macroeconomic stability on any strong footing.
Macroeconomic stability also remains on thin ice due to firstly the country’s economic growth depending on imported materials in a significant traditionally, including the country being a net importer of oil, but also given global economy overall strongly challenged by existential threats – climate change, and related highly likely ‘Pandemicene’ phenomenon – and a tough geopolitical conflict situation, increasing economic vulnerability of the country in terms of exposing it to high likelihood of economic shocks, for instance, in terms of rise in oil prices, or an overall aggregate supply shock, like the one faced during the Covid pandemic.
Austerity-oriented economic policy in or outside of the IMF programme, therefore, leaves open the door of macroeconomic instability and a resulting low economic growth situation by not appropriately insulating it from global economic shocks by building economic resilience through investing towards import substitution by enhancing exports, and by shifting towards green economy, in turn putting dependence on fossil fuel on a diminishing path.
Moreover, over-emphasis on monetary, and fiscal austerity policies unnecessarily reduce fiscal space by creating more than needed burden of debt repayments, and by weakening domestic resource mobilization effort at the back of lesser revenues generated through lower economic growth. In addition, lack of welfare, and overall development spending does not allow improving economic resilience, including lack of removal of supply-side bottlenecks, all contributing to macroeconomic instability.
It is, therefore, important that the next IMF programme shifts away from over-emphasis on austerity policies because any stable footing of economic growth and macroeconomic stability needs a much-improved economic resilience level against existential threats in the shape of climate change, and likely ‘Pandemicene’ phenomenon.
Already lack of focus on dealing with climate change crisis has affected global economic growth prospects, while continuation of a similar lackluster policy approach globally is estimated to incur a lot of economic cost, and a lot more than previously estimated earlier.
This is pointed out by a May 2024 published working paper in National Bureau of Economic Research (NBER) working paper series, whereby it indicated the following: ‘In this paper, we… demonstrate that the macroeconomic impacts of climate change are six times larger than previously documented. …We find that a 1°C rise in global temperature lowers world GDP by 12% at peak. …We [also] find that climate change leads to a present value welfare loss of 31% and a Social Cost of Carbon (SCC) of $1,056 per ton of carbon dioxide (tCO2).’
Hence, any loss to the global economy in the first instance likely includes loss to Pakistan’s economy simply as being part of the aggregate but in the second instance, would mean a second-round impact on global economy in terms of lack of aggregate global demand, and supply shocks on Pakistan’s domestic economy. So, it is very important to not have over-emphasized austerity policy to avoiding its resulting negative impact in terms of build-up of economic resilience.
This economic loss is in addition to the hardship on life as a result of lack of shifting to renewable sources of energy, so that there is lesser impact in terms of carbon footprint. For the last number of years, global average temperature is on the rise overall.
A December 29, 2023, Financial Policy (FP) published article ‘2023 was another record year for climate change’ pointed out in this regard: ’This year, as global carbon dioxide emissions from fossil fuels reached a new high, the world fell further behind on its emissions targets.
As 2023 drew to a close, the U.S. National Oceanic and Atmospheric Administration announced that it was set to be the world’s hottest year on record. A report by the Intergovernmental Panel on Climate Change in March found that the world may breach a critical threshold for warming – 1.5 degrees Celsius (or 2.7 degrees Fahrenheit) above temperatures in preindustrial times – by the early 2030s. As United Nations Secretary-General António Guterres said, holding warming to 1.5 degrees will require a “quantum leap in climate action.”.’
The pace of shift towards renewable energy is not enough as pointed out by a June 4, Financial Times (FT) published article ‘World falling short on renewable energy goal for 2030, IEA warns’ as follows: ‘The world’s clean energy plans still fall almost a third short of what is needed to reach a renewable energy goal for 2030 agreed at UN climate talks last year the International Energy Agency [IEA] warned, as delegates from almost 200 countries meet again in Bonn this week.’
Moreover, there is a serious lack of multilateral spirit, whereby not only a commitment, made back in 2009, to provide annual climate finance to the tune of $100 billion to developing countries, was finally met in 2022 as per OECD, there is also no coming through of policy – although there has been a lot of advocacy going on for some time now – for provision of climate- related special drawing rights (SDRs) allocation to highly climate change challenged countries – which includes Pakistan – by IMF on an annual basis for a number of years going forwards.
On the contrary, IMF programmes unjustifiably continue to preach the message of austerity policies, and that too in a procyclical. Surely, with years of backlash for this policy, IMF should reflect in favour of shifting away from this policy approach as it celebrates its 80th birthday.
The extent of weak level of climate finance could be gauged from the existence of a yawning gap between what is being allocated in this regard globally, and what is needed to keep global average annual temperature below 1.5°C, as pointed out by a June 3, FP published article ‘Who pays for climate action?’ as follows: ’If average global temperature rises are to be limited to 1.5 degrees Celsius above preindustrial levels (in line with the 2015 Paris Agreement), climate finance globally will need to increase to about $9 trillion a year globally by 2030, up from just under $1.3 trillion in 2021-22.
According to the International Energy Agency, 30 percent of climate finance globally needed – around $2.7 trillion – will have to come from the public sector, with the remaining 70 percent coming from the private sector.
This is the scale of the world’s climate finance needs. However, when viewed in the context of governments’ other spending priorities, $2.7 trillion in public money is achievable. Indeed, in 2022 governments spent $7 trillion on fossil fuel subsidies alone.’
Copyright Business Recorder, 2024
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7
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