‘The pandemic triggered a dramatic increase in public debt in developing economies, from 54 to 65 per cent of GDP between 2019 and 2021. At least 25 developing economies devote more than 20 per cent of government revenues to meet external public debt service and, according to the IMF, 38 developing economies are at high risk or already in debt distress. Equally important, the burden of adjustment continues to be carried by debtors with enforced austerity and structural reforms.’ Excerpt from a June 13 published letter to Financial Times (FT) sent by Rebeca Grynspan, UNCTAD’s secretary general
During the pandemic-caused recession, Pakistan reduced policy rate, and provided only a miniscule level of stimulus when compared to the underlying needs to do the opposite. This is because a lot of growth sacrifice was paid through adopting rather strong pro-cyclical policies – especially in terms of high policy rate — before the outbreak of pandemic when the country was going through a stabilization period under the negotiated International Monetary Fund (IMF) programme.
Having said that, even though a pro-cyclical policy stance was adopted before the pandemic, by keep policy rate high for instance, and only a slight stimulus was provided during the pandemic, and some subsidy for a few months to keep oil prices low to safeguard some momentum in growth, yet the June 13 press release indicating that a staff-level agreement between authorities in Pakistan and the IMF pointed out: ‘Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.’
Was it Pakistan’s fault that a global supply shock and even before tightly managed and low-capacity oil sector had overall fed into causing a huge supply shock, increased prices of commodities to decades high levels, and that supply shock stands accentuated in the wake of war in Ukraine by Russia? Did Pakistan see many years of inclusive economic growth, and that too because the import bill saw a big jump in import quantity, for boosting exports to a very high level, or was it because the import bill got jacked up by expensive imports, and with modest increase in exports? Pakistan, like many other developing countries, faced an external supply-shock, which required it to significantly provide a counter-cyclical response, yet like many developing countries it could not in any significant way, and the reason was a lack of external support.
Only $2.75 billion was provided as enhanced SDR allocation in last August. Most of the $650 billion allocation, however; went to rich, advanced countries. If a meaningful support from the IMF in this regard would have come at that time, Pakistan would not have to adopt severe tightening of monetary policy since last September, where policy rate up till now has more than doubled to 15 percent. If the country had ‘over-heated’ so much, as the IMF press release indicated, and before that State Bank of Pakistan had highlighted the same while raising policy rate, then why this stagflationary consequence feeding in the country for a number of months now with a strong build-up of recessionary pressure in the economy? The reason being that a country with a high population growth rate and big young population bulge just grew at some reasonable pace, and only just started to recover from growth sacrifice before the pandemic, pandemic-caused recession, and an onslaught of vaccine inequality.
Moreover, there was little debt moratorium/relief provided by development partners, including the IMF, which did not even indicate that it will stop charging its notorious ‘surcharges’. At the same time, the IMF is trying to corner Pakistan that it has not taken enough measures on the fiscal and external deficit fronts. Agreed, the rich should pay more tax, and greater tax-broadening measures should be taken by the government, and theft in the power sector needs to be reduced, yet it does not mean that a country already suffering from high cost-push and overall inflation should be forced to adopt serious pro-cyclical measures like upward rationalization of power tariffs, and incurring of strong fiscal consolidation just because the IMF could not provide well-rationalized SDR allocation, provide proactive facilitation on SDR relocation under its Resilience and Sustainability Trust (RST) window, and that while US could provide trillions in stimulus in its own country, it could not pass a bill to increase the SDR envelope with the IMF of $650 billion to around $3 trillion, as was the financing need up till last December of developing countries indicated by UNCTAD, for instance. Shouldn’t the government be cornering the IMF on this? Yet virtually complete silence, from this and previous government.
Imagine, a proper provision of SDRs to developing countries could have perhaps saved political and economic meltdown in Sri Lanka, for instance, not given momentum to political instability and ultimately economic instability in Pakistan, not to mention scores of countries facing debt, inflation and current account challenges from Chile to Turkey to Ghana to Tunisia to Pakistan to Sri Lanka. Instead, all of them have been reportedly either negotiating an IMF programme, or seeking/reaching extension, as has been indicated in the press release for Pakistan, whereby the current programme would be extended to end-June of next year, and an increase of roughly $1 billion in the programme financing.
Hence, while it is important to underline that domestic economic policies had a say in the economic problems of countries, yet significantly, it is the lack of external support, may that be vaccines, debt relief, or proper SDR allocation, not to mention over-board stimulus in rich, advanced countries causing higher monetary tightening need in those countries, creating strong capital flight headwinds and debt repayment distress for developing countries, which has led to serious economic and political instability in many developing countries.
Rather than acknowledging this, the IMF, World Bank and World Trade Organization continue with their neoliberal, pro-cyclical policy stance, and are significantly wrong in their evaluation of reasons underlying the economic challenges facing developing countries. On the other hand, rather than approaching difficult capital markets, developing countries like Pakistan continue with these wrong neoliberal, procyclical policies, that cause a lot more economic misery than the benefits of those few billion dollars. Government after government in Pakistan has toed this neoliberal mindset line, and virtually complete silence on the real issues challenging our economy. As global experience has brought forth over the years, and as economic logic would indicate, neoliberal/pro-cyclical policies keep countries away from sustained macroeconomic stability and growth. Yet, it is alarming that IMF programmes continue to push these through and Pakistan, for instance, also continues to subscribe to them.Dr Omer Javed, "A cruel IMF programme," Business recorder. 2022-07-15.
Keywords: Economics , Monetary fund , Oil prices , Economic growth , State Bank , Economic policies , Pakistan , Ukraine , Russia , Sri Lanka , Turkey , NCTAD , IMF , RST , SDR , GDP , US