The new government that comes into office will have its work sharply cut out as far as the economic challenges are concerned. Coming at the back of fast-unfolding climate change crisis – one-third of the country saw catastrophic flooding in 2022, a country also home to the third largest glacier cover globally feeling tremors of global warming – and Covid pandemic that pushed millions into poverty with little fiscal capacity of government to provide anywhere near close to what was needed in stimulus/welfare spending during the pandemic, or afterwards.
Then there is acute debt distress, and seriously high inflation at the back of global aggregate supply shock, and accentuated by a world of rising conflicts, mainly in Ukraine, and the Middle East.
This has resulted in the country stuck in low economic growth situation, where double- digit policy rate for the last few years – including 22 percent policy rate for a number of months straight now – has diminished capacity to increase domestic production, and exports, in turn, negatively impacting domestic resource mobilization – also dented by lack of tax base enhancing reforms – and foreign exchange reserves.
Low domestic production also did not allow unclogging the supply chain, which together with high policy rate, and strongly depreciated currency due to high gross financing needs, all have contributed to inflation through over-board austerity policies, and deepening of cost-push and imported inflationary channels.
Added to all of this is the lack of multilateral spirit. No International Monetary Fund (IMF) enhanced special drawing rights (SDRs) allocation made after August 2021 – where too out of $650 billion allocation globally, most went to already rich countries, while Pakistan, an otherwise highly climate change challenged country only received around $2.7 billion, mainly due to allocation being made on the usual quota basis, whereby allocations were made according to contributions to pool of IMF resources – even though repeated calls internationally were made for a repeat of such allocation (and with non-quota, needs-based, allocation criterion), along with strong suggestion for provision of annual climate related SDR allocation to highly climate vulnerable countries for a number of years, given lack of provision of stimulus by developing countries during the pandemic, and needs generated by more frequent, and intense climate catastrophes in recent years. In addition, no meaningful debt relief/moratorium was provided to countries, while there was a strong link of pandemic and climate change crisis, necessitating such multilateral support as climate compensation by rich countries with strong, long-term carbon footprint.
Hence, in the absence of multilateral support, weak political voice in many of these developing countries not putting enough pressures on their governments to go for tax base enhancing reforms, and in doing away with subsidies for the elites, in turn, pushing governments away from the policy playing the ‘nanny state’ to big-moneyed and elitist interest, while socializing risk, and high austerity burden for low-income groups.
Having said that, in the absence of such domestic reforms, and meaningful multilateral support, the country has been pushed towards strong austerity policies that has kept the country in a severely sub-optimal equilibrium of low economic growth, production, exports, revenues, and foreign exchange reserves, which has in turn strongly contributed towards high cost of living and doing business, unsustainable twin deficits, dwindling capacity to repay debt, along with reducing future needs of raising debt, and putting inflation on downward trajectory in any sustained way.
Given this background, options while on one hand are limited, but on the other, are quite clear. Among first order of economic business, should be the government’s priority to meaningfully activate monetary and fiscal coordination platform, and rein in overboard monetary austerity by reaching a balanced policy package of aggregate demand squeeze initiatives, and supply-side interventions, with State Bank of Pakistan (SBP).
A short interval-, heavy- loaded policy rate cut plan needs to be put in place at one end, while on the other, through primarily a ‘market governance plan’, including rationalizing over-profiteering tendencies, putting in place administrative controls to prioritize imports, and building a well spread-out network of storage areas to work against hoarding practices. Falling policy rate on one hand, and better governance will usher in a positive boost to supply side, and in turn, in lowering inflation, and boosting economic growth.
Secondly, the new government should prioritize formation of a ‘price control commission’ which will highlight – on the lines done by China during the 1980s in particular, under its ‘dual-price’ policy plan – primary economic sectors for domestic production, exports, and essential commodities affecting cost of daily living, that needs price support subsidy to keep it at low, stable levels for positive outcomes for the economy overall.
The financing plan should be brought in parallel by a rationalized subsidy plan, a revenue enhancing plan – both on the lines indicated above – and by coming up with an expenditure plan; whereby rationalizing non-development spending, and better prioritizing and expanding development/welfare spending. Hence, fiscal space created by a tax base enhancing policy package, doing away with subsidies for the rich, and by lowering of policy rate, along with inflation reducing policies on the lines indicated above reducing expenditure needs.
Thirdly, as another step to create fiscal space for climate change, subsidy, stimulus, and welfare needs, the new government should make a ‘trilateral ministerial commission’ of finance, foreign affairs, and economic affairs, to come up with a plan with two interlinked branches – with one leg of the task at hand being formulating a non-austerity, counter-cyclical economic plan to negotiate with the IMF as a longer-natured, ‘augmented’ extended fund facility (EFF) programme, which comes into effect as the current standby arrangement (SBA) comes to a close next month, and the other to negotiate a plan, with both IMF, and other development partners, for reaching much greater climate change needed multilateral support.
Under the augmented EFF programme, IMF should be provided with a policy package rationalising revenues, subsidies, institutional and organisational reform all contributing towards greater fiscal space, and asking IMF to move away from its usual pro-cyclical, austerity-based programme, and in turn, to agree to a non-austerity plan – primarily reined in monetary - and fiscal austerity policies, and adopting counter-cyclical policies; whereby, for instance, allowing for primary deficit, higher subsidy for not only provision of greater social safety nets, but also for overall lowering cost of living, and doing business. Moreover, through provision of a meaningfully deep financing plan, an augmented IMF programme reached should also allow for implementing ‘dual-price’ plan.
To unlock enough multilateral support to allow for non-austerity, counter-cyclical policies – as a second leg to the responsibility for the proposed ‘trilateral ministerial commission’ – requires of the commission in turn, to negotiate with development partners towards external debt reprofiling/restructuring effort, as climate compensation.
Hence, development partners are negotiated with to provide financing – for instance, annual allocation of SDRs for a highly climate change vulnerable country like Pakistan, overall greater support under ‘loss and damage’ fund, and IMF cancelling its junk fee it otherwise levies in the shape of its ‘surcharge’ policy.
Negotiations should also be actively held for reaching deep debt moratorium, given high gross financing needs the country is faced with on one hand, and large climate resilient and welfare spending needs.
Both relevant bilateral and multilateral development partners, including IMF, are engaged in this regard. Already, studies have indicated that developing countries in general have to divert significant level of fiscal resources towards debt servicing, which could otherwise be spent in dealing with climate change crisis, ‘Pandemicene’ phenomenon, and in making greater stimulus/welfare expenditure.
Copyright Business Recorder, 2024