The first thing perhaps that the PM needs to understand is that the over-board monetary austerity – over-emphasis on policy rate to control inflation – is more a cause than a cure of not just inflation, but also puts downward pressure on build-up of foreign exchange reserves, but also reduces the capacity to repay debt by hurting economic growth due to the underlying high cost of capital hurting investment, and consumption expenditure.
In addition, exorbitantly high level of interest payments leaves virtually nothing with the federal government for other expenditure, may that be current, or development. Hence, this situation enhances needs of deficit financing and, in turn, generates greater indebtedness.
Not only that, in addition to creating debt servicing obligations, loan, for instance from the International Monetary Fund (IMF) comes with policy conditionalities that need to be met for release of funds, which are pro-cyclical – increasing tax, and reducing expenditure when growth is at a low level, as is the case currently, even when what is required is counter-cyclical policies, whereby direct tax rate is not increased, where possible decreased, indirect tax or tax on consumption is deeply decreased, and the revenue gap is better rationalized through tax broadening, and by improving expenditure’s productive, and allocative efficiency.
Moreover, another important policy conditionality for these loans is employing aggregate demand squeeze policies for reducing inflation, and managing imports, and for which policy rate is relied a lot more upon than creating a healthy balance between using both policy rate, and supply-side, governance-, and incentive structures-based policies.
This over-board monetary austerity policy not only creates over-sacrifice of economic growth, and that too for limited natured macroeconomic stability – given lack of better economic institutional quality, and ineffective regulation of markets on the supply-side, not to mention traditionally low level of financialization of the economy resulting in lesser impact on expenditure decisions of increase in policy rate – it also creates upward pressure on inflation through strengthening the channels of cost-push, and imported inflationary channels.
On top of that, this line of thought process is being sold to the PM apparently – just like in the past it strongly appears – under the pretext that IMF conditionalities need to be met. What needs to be brought home first of all is that IMF is concerned about broad economic aggregates, and secondly, no matter how little a margin given the underlying weak economic situation and, in turn, bargaining power a particular country, nonetheless IMF programme is a result of negotiations.
Instead of PM being told that following a pro-cyclical and over-board austerity programme is necessary for securing an IMF loan, a wholesome economic plan that allows reaching the twin deficit targets – that is reaching a sustainable level of fiscal, and current account deficit –by adopting a non-austerity, and counter-cyclical policy.
Hence, such a plan rationalizes tax, and expenditure decision through radically broad-basing, and shifting from consumption to income tax, given the acute level of debt distress, inflation, and climate change related resilience, and overall welfare needs.
On the other hand, the plan needs to effectively address plugging leakages in the economy by bringing forth a mission-oriented and a purpose-driven reform plan for the energy and SOE sectors. This will not only lead to sustainably lowering inflation, building up reserves, and meaningfully enhancing growth and with it fiscal space but also getting on a sustainable debt burden-, poverty-, and income inequality reduction trajectory.
Better results on economic growth, and fiscal space fronts will also allow better managing the burden of pensions, and that is, without hurting the purchasing power of pensioners. Moreover, prolonged lower, and sustainable level of inflation will not only keep in check upward revision needs of pension funds, but will also put less burden on overall expenditure needs of the public sector.
For the PM to have this kind of advice, he needs to improve the diversity of counsel with regard to not only economy, but in better understanding the links between economy, ecology, epidemiology, and democracy, among others. Hence, there has to be a better mix of orthodox, and heterodox economic, political and other technocratic minds.
What’s more, the whole neoliberal notion vociferously, and rather sadly carried so dearly by the apparently ‘Chicago boys’-styled policymakers, which otherwise appear to be in strong majority when it comes to the voices that surround the PM, and who virtually see ‘government as the problem’ with regard to the size of the public sector, and wrongly try to over-glorify the fruits of market fundamentalism, and overall lesser regulation, need to be rationalized by a fresh, much needed, breath of fresh air in terms of policymakers entering the policy circles surrounding the PM.
This will help bring better understanding over the serious, and rather dangerous misgivings of over-board austerity, pro-cyclical, and neoliberal policy over the last four decades or so, but especially in the wake of Global Financial Crisis of 2007/08, and even more so in the wake of the Covid pandemic, which highlighted the need of strong governments, and regulation, may that be in the case of financial sector, for instance banking, and in the real sector, in the shape of rather fragile nature of supply chains.
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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