While the world economies are maintaining a robust growth momentum, there are strong indicators pointing towards an acceleration. However, persistent inflation remains a big threat. There is a clear divide between the policymakers of the US, Eurozone and others nations. Some of them are of the view that inflation is transitory and will soon ease off while others are of view that it will continue to linger on for a longer period of time.
Global inflation is soaring because of surging petrol prices in the US and high import cost for net oil importing countries. Conditions are difficult in Europe, too, because of higher gas prices. A surge in global food prices is further adding to their woes. In the US, the annual CPI rate is 6.2%, while it reached 5.2% in Germany, 4.9% in the Eurozone and 3.8% in the UK.
Some of the advanced nations have decided to taper inflation with a minor rate hike, yet they may be averse to an aggressive hike or something beyond 2%. ECB (European Central Bank) despite higher inflation has announced that it has no plans to hike interest rates in 2022. Therefore, it is most likely that they may continue with an easy/loose and accommodative monetary policy stance.
Hence, those formulating policies may not ignore that Omicron variant is a real threat, which, if not checked, could potentially once again unsettle the on-going growth trajectory and upset all economic estimates. Full global recovery and return to normal life will not be possible until the pandemic ends.
While commodity prices are not only troubling the advanced economies, these are suppressing debt ridden emerging and under developed economies. Though downward correction was witnessed in the last quarter of 2021, there is still a big risk that in the new calendar year the prices could sharply bounce back due to demand.
The embarrassing secret is that central banks and the governments all over the world have played a key role in fueling this inflation and are not willing to admit their mistake. It is a proven fact (doubling of balance sheets) that despite severe economic conditions caused by them, advanced or so-called rich economies, easily escape the financial misery by printing money (quantitative easing) and by opting for ultra-low and negative interest rates.
They can do it because all major global trades such as oil and gold are priced in US dollar (USD), which is the major dominant FX Reserves currency. European currency Euro, too, has a major global share because Euro is the official currency of 19 member states out of 27 that come under the Eurozone. This is why the composition of foreign exchange reserves in USD is about 60 percent, Euro is nearly 20 percent and others are Chinese Yuan, CA$, GBP and AUD.
Another big advantage that the developed economies have, despite severe crises, is the fact that they always get favorable support from each other and the credit rating agencies. They have the privilege to print any amount of money, maintain a negative interest rate and arrange funding as per their needs, which is why the size of their balance sheet has almost doubled in a short span of time.
The trick is to manage the surplus funds made available in the banking system. Advance nations through cheap lending stimulate their domestic economies at a much faster speed through business investments and consumer spending. They produce more goods and services, build dams to secure water supply and influence the economy, construct roads and housing businesses that create jobs and increase tax collection.
Emerging markets (EMs) and underdeveloped economies cannot afford such luxury of printing and lending any amount of money. They are mostly liquidity trapped nations. With outdated technology there is no motivation, which is also a cause of low productivity. This is why money printing doesn’t work as domestic production remains at a very low level and they have to ultimately depreciate the currency that makes imported goods more expensive. It is the elite/chosen class that squeezes all the wealth and evades taxes.
PAKISTAN
GROWTH
The positive news is that the vaccination rate has significantly gotten better and the percentage rate is accelerating. The threat of Omicron persists as the variant is spreading globally, which can potentially still shift the economic outlook.
Although the headline growth looks set to do moderately well in 2022, the growth may not be able to maintain the same pace seen last year, as tapering and interest rate hike will slow down the global growth tempo. It means investments in EM countries and demand for products from emerging markets for goods could be reduced. Pakistan is part of Frontier Markets and its maturity level for foreign investments has shrunk.
INFLATION/POLICY RATE
With the SBP (State Bank of Pakistan) stance of maintaining mildly positive real interest rates in line with surging inflation there is enough room for more rate hikes in the policy rates, which will help revive the stalled IMF (International Monetary Fund) funding plan.
December inflation at 12.3% has already rung alarm bells, confirming a move towards double digit inflation before the end of FY22. In the first two quarters of FY23 or by the end of calendar year 2022 (12-months), inflation could average around or above 10.75%.
Indications are that despite the threat of variant spilling all over the globe, the IMF would not be inclined to give waivers. Petrol prices have already been jacked up on the first day of 2022, electricity hike is next and with more action in the pipeline (mini-budget), inflation will sharply creep up, which could stifle growth.
The State Bank preemptively started hiking rates from September 2021 onwards in the hope of resumption of talks for 6th review with the IMF that began in October. Earlier, the IMF board did 2nd, 3rd, 4th and 5threviews of Extended Fund Facility (EFF) in March and a small amount of SDR 350 million ($ 500 million) was disbursed. But later, little success was achieved as the government did not adjust its economic policies as per the agreed terms. It has got nothing to do with $ 2.75 billion financial assistance given under Covid related rapid arrangement, the pandemic package was part of $ 650 billion global program to support Covid-19 hit low income countries.
T/BILLS-BONDS
After a surprise policy rate hike in September, T/bills and bond yields started surging sharply. The move was not unexpected after SBP announced that it plans to maintain mildly positive real interest rates. December inflation number of 12.3% confirms that banks did not manipulate and have justified their demand for return by reading the market correctly.
(To be continued)
(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)
He tweets @asadcmka
Copyright Business Recorder, 2022