IMF's flagship economic surveys and Pakistan

Recently, two flagship surveys were released by the International Monetary Fund (IMF). Firstly, the World Economic Outlook (WEO) which usually appears in April and September/October. It presents IMF staff economists' analyses of global economic developments during the near and medium-term. WEO's October 2019 issue has pointed out that the downside risks to the global economy have increased, which meant above anything else that the forecast for growth in world output for 2019 and 2020 has been reduced from IMF's July 2019 WEO update by 0.2% and 0.1%, respectively, to 3% for 2019 and 3.4% for 2020.

The same sluggish trend is indicated for almost all regions, whereby a) for advanced economies overall, the growth projection reduces by 0.2% to a paltry 1.7% for 2019. Exactly same is the reduction for emerging markets and developing economies where growth projection for 2019 stood at only 3.9%, mainly at the back of weak outlook for the two main growth engines - China and India - both of which also see reduced growth projections for 2019 at 6.1% each; while a slowdown in Russia, Brazil and Mexico also added to this overall reduction in growth projection here.

While the slowdown occurred at the back of macroeconomic and financial sector issues in the emerging markets, yet specific contributing factors in this regard included: a) sharp reduction in the sales and production of cars, mainly driven by wait-and-see attitude by customers with regard to changing emission standards and technology; and b) built-up of trade tension between the US and China, and the loss of business confidence that it produced, especially in the manufacturing sector becoming more risk-averse in terms of not investing much in long-term business ventures.

The IMF clearly pointed out in its half yearly Report for October that the effects of rising protectionism globally had negatively impacted trade, and the global economy was at this weakest point since the Global Financial Crisis (GFC) of 2007-08. With regard to the role of central banks in battling protectionism, Gita Gopinath, IMF's chief economist, indicated that interest rates would have to be lowered, without which the growth prospects globally for 2019 and 2020 could fall by as much as 0.5%. In line with this thought process, European Central Bank (ECB) recently announced stimulus plans whereby interest rate cuts, and injections to the tune of US$22 billion into the financial markets have been planned.

Both the IMF and the ECB point towards diminishing capacity of central banks in supplying the needed stimulus. Not only is the US Federal Reserve injecting significant amounts of money into the financial markets recently, but the ECB has also asked governments in the eurozone to reduce taxes and boost public spending in an effort to reboot growth.

At the same time, while the Report surveys the global economy, there is a lack of fresh thinking to analyze the root causes that led to the GFC with the result that these causes have not been tackled properly as yet and also perhaps why heterodox policy in general has not received a significant hearing by authorities in both developed and developing countries. That is why perhaps the global economy is at its weakest position since GFC, as is the case according to the report. With regard to this approach of global policymaking, Mervyn King, former governor of the Bank of England, while lecturing at the IMF's annual meetings for this year said 'another economic and financial crisis would be devastating to the legitimacy of a democratic market system... [and]... by sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe, we are sleepwalking towards that crisis... [where]... following the Great Inflation, the Great Stability and the Great Recession, we have entered the Great Stagnation'.

The same thought process needs to penetrate the IMF programme and policy, otherwise by national authorities in Pakistan (and elsewhere), a country which looks to build confidence and capacity among exporters and domestic investors, to become competitive, as it helps to find new market access for them in an environment of weak world economic growth projections. It is true that Pakistan is not immune to the global situation; it is also true that the country is facing the daunting challenge of twin deficits. The report projects lower real GDP growth - from 3.3% in 2019 to 2.4% in 2020 - for Pakistan. This must constitute a cause for concern for the government because a lower growth will add to the challenge of employment generation, public expenditure and tax revenue targets.

Similarly, projections for consumer prices (annual averages) also see a sharp increase from 7.3% in 2019 to 13% in 2020. Narrowing of current account deficit is seen to be continuing from deficit at 4.6% of GDP in 2019, and reducing to 2.6% of GDP in 2020. Once again, sluggish growth prospects would mean, and as the report indicates, higher projections for unemployment rate )from 6.1% in 2019 to 6.2% in 2020), which points to the fact that the government will have to involve greater role of fiscal policy in controlling inflation (given monetary policy's tight stance has been overused with limited consequences in terms of sustainably reducing inflation), and enhancing growth prospects, and with it employment.

The other IMF flagship publication titled "Regional Economic Outlook (REO) Update for 2019" for all global regions. As usual, Pakistan was analyzed in REO report for the region of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP). It identified possibility of tensions with India as one of the main geopolitical risks on the external front. It also identified Pakistan as a country where internally 'social tensions are rising in the context of lower growth and reform fatigue, threatening macroeconomic stability'.

The report says that the 'region [MENAP] is projected to remain relatively modest, constrained by persistent structural rigidities. Elevated public debt in many countries limits the fiscal space needed for critical social and infrastructure spending and leaves economies vulnerable to less favourable financial conditions. The outlook remains clouded by mounting global trade tensions and financial market uncertainty. Social tensions are rising in many countries as unemployment remains high and socioeconomic conditions worsen. Continued growth-friendly fiscal consolidation is needed to rebuild buffers and enhance resilience, along with intensified structural and governance reforms to improve competitiveness, boost private investment, and generate jobs. Increased regional integration will also help support medium-term growth'.

The main takeaways of the Report with regard to Pakistan include, firstly, regional aggregate growth was being pulled down by Pakistan, at the back of 'large macroeconomic imbalances and ongoing policy adjustment challenges expected to slow Pakistan's growth from 5.2 percent in 2018 to 2.9 percent in 2019' which is lower, in turn, from the projections of WEO at 3.3%, indicated above. Secondly, the impact of a weaker external environment and global trade tensions have been seen in the report as reasons (among others) for a downward revision in growth projections of Pakistan; especially due to the exposure the country has in terms of large exports share to China, the US and the European Union.

Thirdly, the report associates possible downside risks to medium-term outlook for Pakistan, among other countries. According to it, 'regional uncertainty (Afghanistan, Jordan, Lebanon, Somalia and Syria), security concerns, weaker-than-anticipated public investment, and large external imbalances (Lebanon, Pakistan and Sudan) are expected to weigh on the medium-term growth outlook'. Fourthly, it is also highlighted that Pakistan's reliance on remittances could also be negatively affected by the overall global downturn affecting elsewhere in the region, whereby 'there is a downside risk of a slowdown in remittance-originating countries, most of which are in Europe or the Gulf Cooperation Council'.

With regard to enhancing social spending and fiscal consolidation in the case of Pakistan, the report suggested: a) replacing subsidies with targeted social transfers; b) restructuring of state-owned enterprises; c) elimination of distortionary exemptions; d) reducing the size of informal sector; e) broadening of the tax-base; and e) 'taxing the richer segments of the population, such as by introducing property and wealth taxes'.

Note: A matter of clarification/correction with regard to this writer's last article appeared in these columns last week. Nepal (at 108th) in terms of Global Competitiveness Index (GCI) was the second worst performer not the 'worst performers' in Asia in terms of competitiveness in the report.

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund). He tweets @omerjaved7