A similar balance should be struck in the case of developing countries like Pakistan for it is critical to dealing with the imported/supply-driven/cost push inflation through macroeconomic/supply-sided/governance interventions, and with relatively much lesser monetary tightening, which should be well below the double digit mark because unlike the developed countries, inflation has been mainly a supply-side during the pandemic in developing countries in general.

Reducing policy rate – where reportedly one percentage decrease reduces interest payments by around Rs200 billion — will also create a lot of fiscal space, which can be used to subsidize food, fuel, and energy prices. Counter-cyclical policies once again will put the country back on growth track, which has been put off-track, given the recent strong pro-cyclical measures.

Here, it needs to be pointed out that the impact of pro-cyclical policies and political instability seem to have been included in GEP’s projection for economic growth for FY2021-22, which are well below at 4.3 percent unlike the provisional data up till March, reportedly indicating growth for the current fiscal year to be close to 6 percent; unlike the 5.6 percent which it indicates for the FY2020-21, when rather counter-cyclical policies were followed. This downward projection of economic growth over and above the growth number released by national sources on data up till March, may also have to do with the impact of a tight monetary policy (since September policy rate has increased by 6.75 percent to 13.75 percent, finally feeding into economic growth numbers).

At the same time, there has been little impact of such increase in policy rate on inflation, which has also risen since September from 9 percent to 13.8 percent in May, at the back of rising cost push inflation. Here, a recent Bloomberg article ‘Pakistan inflation rate hits 13.8% in May on costlier food, fuel’ pointed out: ‘Consumer prices rose 13.8% this month from a year earlier, according to data released by the government Wednesday. That’s slower than the median estimate for a 14.4% gain in a Bloomberg survey of economists and compares with a 13.4% acceleration in April.’

Global economy at a delicate crossroad – I

Reducing policy rate will not only increase fiscal space but the growth and exports this will help generate. It will likely boost revenues, and foreign exchange reserves, which will help appreciate rupee against the dollar and, in turn, reduce the impact of imported inflation, on one hand, and improve, on the other, positively impact the credit default swaps (CDS) risk rating, and with the possibility of greater borrowing through commercial loans/bonds.

Indeed, the quick way in which five-year CDS has jumped on two occasions — around end of February and then in the beginning of May — mainly at the back of political uncertainty and delayed economic decision-making by policymakers, the same way it can fall rather quickly as economy starts to improve, and with it the likelihood of Moody’s once again improving Pakistan’s outlook rating.

Moreover, as things improve on the economic front, with greater confidence shown by bilaterals/multilaterals, and translated into more funding/financing provided, every effort should be made to leave the Neoliberal, pro-cyclical IMF programme at the earliest possible, so that the benefits from this counter-cyclical policy stance need not suffer any pro-cyclical setback in the IMF programme.

At the same time, rather than curtailing the import bill through higher policy rate, given the cost is too high in terms of loss of economic output, among others, it should be curtailed through direct measures to ban purely luxury items, and significantly raising duties on relatively less elastic non-essential items. Currently, the import cover is around 1.5 months, half of where it should be at 3 months in the light of minimum level under international best practices.

Reducing interest rate to increase exports, and reserves, while also curtailing import bill through direct measures, will apply the double boost in raising import cover, and once again will also likely help reduce CDS risk, and in improving economic outlook. Hence, like developed countries, developing countries, including Pakistan, are facing a delicate situation because the usual Neoliberal, pro-cyclical stance from the IMF or otherwise will push the countries into likely stagflationary situations.

Here, it needs to be pointed that while a recent FT article ‘Pakistan’s economy is on the brink’ by Yousuf Nazar indicated that ‘International commercial debt markets are practically shut for Pakistan. Its five-year sovereign bonds are trading near 13 per cent, which is among the highest in the emerging markets’ every effort should be made on the front of improving economy through counter-cyclical policies, greater diplomacy to unlock more debt relief, SDR relocation, and climate finance, on one hand, and securing commercial loan even in the current negative Moody’s outlook.

Given a highly difficult debt, inequality, poverty, and political instability situation in many developing countries, including Pakistan, the policies that have not worked as such for the last four decades or so should be replaced with non-neoliberal, counter-cyclical type as far as possible, given their success in terms of both growth and stability, over the years in many parts of the world (more recently in the case of Pakistan) even if it means obtaining commercial loans at high interest rates, which is still better than the deep economic downsides of an IMF programme.

Here, it needs to be indicated that counter-cyclical policy on tax side means reducing tax burden on the already taxed by moving towards more direct and progressive taxation on one hand, including applying for instance in the case of Pakistan, a temporary-natured ‘windfall tax’ on sectors that have had windfall gains in profits during the pandemic like pharmaceutical sector, and a meaningful wealth tax and broadening tax base on the other hand. Also, better regulation of markets needs to take place for better price recovery and much-needed rationalized extent of profiteering so that there is overall less burden on the purchasing power of people and reduced costs of production.

The same FT article while rightly indicating that ‘It is time for Pakistan’s rich to start paying their proper share of taxes. The IMF should not allow itself to be seen as bailing out the wealthy, which it seems to be doing by ignoring Pakistan’s repeated slippages in meeting the programme targets’ is taking a rather one-sided view of the IMF programme, which by not properly allocating SDRs, and in a rather delayed manner in August 202, around one-and-a-half year into the pandemic, where Pakistan only received $2.75 billion out of $650 billion, most of which went to rich, advanced countries.

On the contrary, the IMF continues to push programme countries towards pro-cyclical policies instead of providing needed financing, not charging surcharges, and in making a bigger effort with other multilaterals for greater debt moratorium/relief, continues to push already stressed developing countries in terms of balance of payments, debt, and fiscal space for providing needed stimulus during the pandemic. Imagine if an appropriate level of financing had reached developing countries, including Pakistan, there would have been less political instability that a number of them seeing, and which has also been a significant source in enhancing credit risk, and downgrading economic outlook in Pakistan for instance.

Moreover, countries have already exhausted a lot of their capital in terms of macroeconomic policy instruments usage, and the IMF still presses on for greater austerity/pro-cyclical measures, especially given a global supply shock, accentuated by the war in Ukraine by Russia, requiring governments in developing countries to provide greater stimulus and subsidies, given unlike the global North where more than $13 trillion have been provided in stimulus, a miniscule amount has been provided by developing countries.

None of this has been indicated in the article, something which also remains out of focus in a number of policymakers’ reflections on issues facing developing countries, and their possible solution, in addition to what IMF should do differently than its usual bread and butter approach of pursing usually one-size-fits-all kind of Neoliberal/pro-cyclical policy stance with programme countries.

(Concluded)

Copyright Business Recorder, 2022