IMF’s 2024 Article IV report, and the debate on inflation–II

This, in turn, not only delays bringing inflation under control, but also requires a lot of aggregate demand squeeze, and ultimately a lot of economic growth sacrifice has to be paid to reduce inflation – as has been the case time and again in developing countries in particular, including Pakistan –but also ushers in a boom-bust cycle in a frequent way because of only carrying out structural adjustment policies, and not addressing more broad-based economic institutional reforms on the aggregate supply-side, including seeing a limited role of government in regulating, creating markets, and better running the organization (underlying the economic institutions).

In a developing country, therefore, it does not make sense to follow a rule- based regime, given the significant role of aggregate supply-side determinants, and also the meaningful role of exogenous shocks – like oil price shocks internationally – not to mention the fast-rising role of climate change related shocks both domestically – as being seen in the agriculture, and the service industry, especially the tourism-related sectors – and globally that come as exogenous shocks, like recession causing pandemic, or the shortage of gas, and agricultural products that came both due to the pandemic, climate change incidents, and conflict.

Moreover, not only no one policy instrument needs to be relied on – whether monetary aggregates, or interest rate – but also fiscal policy needs to be employed in a more creative and extensive way, given the overall world of polycrisis that is fast-unfolding, not to mention becoming more mindful of the ground realities of developing countries, which traditionally do not have a deep financial sector because of which there is significant issue of lack of pace, and even volatility of velocity of money, not to mention greater propensity to consume than invest due to deep market imperfections, high transaction costs, and lack of adequate governance, and incentive structures.

As a corollary, it is why inflation targeting regime also continues to remain unsuitable for developing countries like Pakistan, where poverty is a big issue, and presence of weak political voice both call for greater discretionary use of overall macroeconomic – both monetary and fiscal – policies while approaching the overall sustainability question is a more multidisciplinary, non-neoliberal, and non-austerity way, seeing, in turn, significant role of economic institutions, and government in overall taking along the private sector in a way that is more productive and allocative efficient.

IMF’s 2024 Article IV report, and debate on inflation—I

Moreover, while monetary targeting and interest rate both have a meaningful role in influencing inflation, not utilizing these policy instruments in firstly a reined-in manner; secondly, not complementing monetary policy with fiscal policy, and thirdly, not balancing, aggregate demand and supply-side focus, play a significant role in creating both a positive relation between interest rate, and inflation, and also end up taking a lot of unnecessary economic growth sacrifice and increase the frequency, and even intensity of boom-bust cycles due to the practice of policy in this way, especially in the wake of domestic and international level shocks that are fast-increasing in the wake of fast-unfolding climate change crisis.

Also, seen over the long-run, and in short-term periods, the above conclusion holds, not only in Pakistan and other in developing countries in general, but all the more in developed countries as seen in a growing number of studies over the decades in the wake of the neoliberal assault, especially in the wake of Global Financial Crisis (GFC) 2007-08, and the negative outcome of practice of austerity policies in the euro-zone area, not to mention a large number of IMF programme countries, becoming prolonged users of IMF resources, including Pakistan, as monetarist/austerity/neoliberal bent of mind has increased the boom-bust cycles by following the narrow, and counter-productive aggregate demand squeeze policy to control inflation, especially in the wake of the fast-unfolding climate change crisis, and seeing ‘government as the problem’ to unnecessarily curtail its role.–Concluded

Copyright Business Recorder, 2025