IMF’s risk assessment: eyes half shut

The first coronavirus outbreak – SARS – in the shape of epidemic happened around the beginning of this century. The second coronavirus epidemic – MERS – struck around the close of the first decade. A decade later, coronavirus hit in the shape of shape of Covid pandemic.

Two things that should have happened in parallel but didn’t due to the practice of ‘market fundamentalism’ under the overall umbrella of Neoliberalism were firstly, the lack of research for a coronavirus vaccine in all those years, because under minimally regulated markets it was a lot more profitable to follow ‘price signals’ of the nature that favoured quick profits, and those pointed towards, for instance, developing skin care creams.

Hence, it was only when the Covid virus was on the rampage around the start of the current decade, falling on mankind like a Tsunami of physical pain, economic lockdowns, a global recession, and built-up of significant debt distress – and accentuated by weak multilateral spirit –that there was race for a vaccine for Covid.

Secondly, since under the neoliberal assault, and as US President Ronald Regan in early 1980s remarked that ‘government is the problem’, whereby government should be as far away from the economy as possible and only acting as a facilitator to private sector – something which the current finance minister of the country strongly advocates – and only adopt a very restrained approach to regulating markets, given the strong neoliberal assumption that markets will self-clear/correct – as government only limits itself to fixing as and when any market failure arises - when Covid pandemic hit, and as intensity and frequency of climate change-related natural disasters increase, exposing in turn the lack of preparedness of economic resilience as a consequence of years of governments taking a backseat with regard to influencing market signals.

Resultantly, in the wake of such shocks, for instance, supply chains globally were found significantly lacking in their capacity to respond to external shocks, like the one caused by Covid pandemic. Yet, the policy mindset of many individual countries, and as reflected in the policy prescription of multilateral institutions like International Monetary Fund (IMF), favour the same the neoliberal policy pathway, even as the fast-unfolding of existential threats – mainly in the shape of climate change crisis, and a likely ‘Pandemicene’ phenomena – continues.

Hence, for instance as Pakistan embarks on the extended fund facility (EFF) programme, IMF continue to emphasize government taking a backseat with regard to markets, private sector, and overall economy, even when it has been amply emphasized, especially since the Global Financial Crisis (GFC) of 2007/08 that enhancing economic resilience, reducing inequality and poverty require a much greater role for government.

So, for instance, in the latest country report released by IMF recently in October, encompassing ‘2024 Article IV consultation and request for an extended arrangement under the extended fund facility’ the risk assessment – as indicated in ‘Annex 1’ of the report – strongly suggests continuation of an ‘eyes half shut’ approach, more so in terms of ‘policy response’ than in identification of the issue at hand, where it uses the same lens of Neoliberalism, even as a world of polycrisis, including heightened geo-political risks globally, especially in the Middle East, pose threats in the shape of once again significant pressures on global supply chains.

So while IMF rightly puts the risk of regional conflict at ‘high’, its assessment that it will be short-term is not in sync with the situation on ground – for instance, the conflict in Ukraine has been around for about three years impacting commodity supply chains – in addition to human misery – while the conflict is already more than a year old, and it is expanding.

Combined with the commodity supply shocks due to conflict, once again the IMF’s assessment of risk being short-term is not supported in the light of geo-political risks in general, and when seen in light of recent history. Here, the policy response suggested does not see the elephant in the room, and which is shifting towards greater economic resilience through moving towards alternate energy sources like solar, and wind, and less on oil/petroleum products.

This requires greater spending capacity of the country, and influencing price signals through greater intervention of markets by governments.

Yet, both ‘Chicago boys’ styled policymakers at home – including the finance minister – and similar mindset of IMF policy decrease fiscal space by emphasizing neoliberal policies of market fundamentalism, limited role of government, persistence by prescribing monetary-, and fiscal austerity policies – for instance, banks taking a lenient role with regard to tight monetary stance are asked to show more caution than needed by IMF, and situation of continuing with primary surplus as shown in projected data in the report for the current fiscal year – which exposes the country to much greater risk as a result of possible external shocks than it should if economic resilience is improved with more vigour, than lukewarm impact of procyclical, austerity-based, and neoliberal policy stance.

In addition to direct impact of supply chains disruptions on domestic prices, can likely usher a renewed cycle of rise in policy rate, and cost-push-, and imported inflation, and with it greater sacrifice of already much-sacrificed economic growth rate under the assault of the current policy paradigm.

Not only that, it will likely add to ‘social discontent’, not just from pressures caused by conflict at home, but as the impact of geo-political conflict will not just spill over regionally, but likely also globally. Another wave of rise in policy rate overall globally, especially by US Federal Reserve, due to inflation caused by continued weakness in supply chains at the back of years of under-investment under neoliberal assault globally.

Moreover, rise in policy rate will also increase debt distress, including raising special drawing rights (SDRs) interest rate, putting further pressure on very shaky built-up of foreign exchange reserves given high interest repayment needs – of more than $20 billion annually in general –over the medium-term.

Copyright Business Recorder, 2024