The pandemic has seen international commodity prices, especially food prices, sky rocket; while oil prices also cross $80 a barrel a few days ago, which is the highest level of oil prices in three years. This is in addition to high import prices, the burden of which is especially high for developing countries in view of the fact that the vaccine provision at low cost from the World Health Organization (WHO) led COVAX initiative has performed well-below the indicated targets of vaccine supply to developing countries.
Moreover, debt sustainability was already under stress before the pandemic started in many developing countries and the composition too has changed over the years with a major proportion of lending from private sources that are more rigid in their lending and repayment terms. There was hope that the International Monetary Fund’s (IMF’s) special drawing rights (SDRs) will come to much rescue, especially in terms of supporting countries in public-health expenditures and Covid-caused recession needs during the pandemic; more so when serious vaccine inequality has led to many Covid-rebounds, and even in the shape of stronger Covid-variants each time. Yet the much-truncated SDR amount released to member countries, especially after passing through the usual quota regime — whereby more was received by large contributors to SDR pool, which are rich, advanced countries, having little need from such allocation, and with hope remaining that more of it will be reallocated to poor, developing countries — was far less than a much-needed more appropriate amount that is reportedly pending approval in the US Senate currently.
On top of that, climate change has already started to cause a lot of damage to many parts of the world, mainly through floods and wildfires, putting in turn more fiscal stress, especially in developing countries which on the other hand, have little to contribute towards causing and deepening this global existential threat, and which have also yet to receive any adequate level of climate finance from rich, developed countries.
The rising worry is that the health-pandemic could be followed by a ‘debt pandemic’ where many developing countries in particular will be facing either default on debts, or a very difficult foreign reserves and, in turn, difficult current account situations. Pakistan is already battling a strong headwind to sustain macroeconomic stability. Although the economy picked up and high imported inflation component kicked in, the country is witnessing a rather sharp currency depreciation in recent months, followed by a strong current account deficit build-up, not to mention strong food inflation and greater unemployment numbers — especially among college graduates — signaling, in turn, a quick move towards perpetuation of stagflationary consequences.
Pakistan has already been in an IMF programme for the last few years and has given a lot of growth sacrifice during that period to achieve some semblance of macroeconomic stability; it was building upon that in terms of some momentum in economic growth numbers around announcement of annual budget a few months ago. Yet, the onslaught of all factors primarily discussed above and their prolonged presence as the pandemic continues quite actively has meant that the country has reached quite a limiting space in terms of usage and innovativeness of macroeconomic policy instruments. And this is coming out to be more than a norm than an exception for developing countries in general, including many of the programme countries, which were hoping to graduate from current account stability to stronger and more sustainable growth momentum.
This situation leaves the IMF in a dilemma: whether to provide SDRs as lending as more countries face the need for such support with growth-hurting conditionalities, or to provide a much greater number of SDRs now and in doing so possibly reduce both prolonged use of IMF resources by current programme countries and discourage the need for more countries to approach the IMF in coming months by augmenting countries’ macroeconomic tools-usage space. Moreover, a much-enhanced allocation of SDRs now would allow the countries to allow for provision of greater level of stimulus and faster economic recovery.
Hence, the IMF can continue with a policy of active aggregate demand management towards programme countries to primarily curtail inflation, especially in those countries where inflation is more a supply-shock phenomenon, and rein in current account deficits; but in doing so the IMF policy option can severely hurt growth and exports of countries and, in turn, cause a strong upward pressure on current account deficits. This may not solve the macroeconomic stability issue of programme countries, including Pakistan’s, but may instead build up in them more appetite for IMF lending, and in doing so programme countries may end up with greater poverty and lower growth, leaving for them lesser space to make much-needed higher level of public health expenditures and stimulus spending. In addition, lack of SDRs’ provision would mean that more countries may apply for IMF programmes in coming months, finding it difficult to balance the needs of achieving macroeconomic stability and stimulus/growth concerns, as continuation of vaccine inequality slows down recovery from Covid-caused recession, and high international commodity prices continue to dwindle current account stability in many developing countries.
Programme countries, including Pakistan, and developing countries overall, also face a dilemma, which has been sharply amplified in the wake of the pandemic, whereby how long they can continue to pend or go slow on institutional, organizational, and market reform, and that too in a non-neoliberal way because in doing so over the years, they have allowed themselves to be too dependent on international market situations, and policies of bilateral and multilateral development partners overall, especially the Bretton Woods institutions, which have continued to prescribe one-size-fits-all kind of Neoliberal/Washington Consensus styled policies and not practiced as yet active financial support of programme/developing countries during the long growth-curtailing pandemic; not to mention the misery caused up till now by the practice of vaccine apartheid, and not even temporarily waiving off intellectual property rights (IPRs) on Covid vaccines.
Having said that, the dilemma facing programme countries in particular, and developing countries more generally, is of a medium-term nature as institutional reforms take somewhat longer periods of time. Hence, the direction the IMF, and more broadly rich, advanced countries, are required to take is to provide significantly more financial support now to developing countries so that they can better deal with a fast-developing macroeconomic stability crisis, meet at the same time much-needed higher level of fiscal stimulus needs and make an appropriate level of public health expenditures. In that sense, the dilemma facing the IMF— and rich, advanced countries requires a solution in the very short-term.
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)
He tweets@omerjaved7
Copyright Business Recorder, 2021