‘…Nelson Mandela once said: “I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb.”
This feels like the story of the past three years— climbing one “great hill” after another, only to discover there are many more to come. First was COVID-19, then Russia’s invasion of Ukraine, inflation and a cost-of-living crisis that hit everyone. So far, we have proven to be resilient climbers. But the path ahead— and especially the path back to robust growth— is rough and foggy, and the ropes that hold us together may be weaker now than they were just a few years ago.’ – An excerpt from a recently delivered address by managing director of International Monetary Fund (IMF), Kristalina Georgieva
Austerity policies were adopted after the 2007-08 Global Financial Crisis in the eurozone area overall, but it did not bring macroeconomic stability, and also created hardship. Not learning many lessons from this, austerity policies have again been pushed upon countries both by domestic policymakers— for instance, the US Federal Reserve has significantly increased policy rate by around 475 basis points, over a year, while inflation being significantly determined by supply shock as well has not come under much control— and by both domestic policymakers and IMF, especially in developing countries under an IMF programme— for instance, in Pakistan for severe austerity policies have been adopted since the later part of 2021, and particularly since around a year, whereby CPI inflation since then increased from around 13 percent to 35 percent, and policy rate from around 12 percent to 21 percent currently.
Former acting governor of State Bank of Pakistan (SBP), Murtaza Syed, in a recently published article ‘Politicians and the IMF are failing Pakistan’s most vulnerable, laments Murtaza Syed’ with The Economist, pointed out in this regard ‘The country’s economic crisis has brought it to the brink of default. Pakistan’s politicians and the IMF are failing people… It did not have to be this way. Scarcely 18 months ago, Pakistan was doing relatively well. It handled covid-19 successfully, keeping casualties and economic fallout to a minimum. The pandemic saw public debt soar across the world, but it fell in Pakistan as a result of commendable fiscal discipline. Foreign-exchange reserves rose to all-time highs of over $20bn.’
In a report ‘Expanding opportunities: toward inclusive growth’ recently released by World Bank, it was pointed out ‘For example, the State Bank of Pakistan has increased its policy rate more than other central banks in South Asia, from 7 to 20 percent, but the currency has still depreciated by 27 percent since June 2020. …The largest downward adjustment (1.6 percent) is projected for Maldives and Pakistan. The latter is now expected to grow at a mere 0.4 percent in the current fiscal year, implying negative per-capita GDP growth.’ Hence, it is quite clearly evident that overall, more creative fiscal policy, non-neoliberal economic institutional reform, greater debt relief, and adequate provision of special drawing rights (SDRs) by IMF, is needed instead of relying heavily on austerity policies, and that too in a procyclical way, to properly tackle macroeconomic issues originating from the supply side, which has an even bigger role in determining inflation in developing countries, like Pakistan, than developed countries.
The world is in the grips of two existential threats— fast-unfolding climate change crisis, and as one of the main consequences of this in the shape of a likely Pandemicene crisis. Both of these challenges need counter-cyclical, non-austerity policies, in an overall non-neoliberal policy environment. Hence, both finances, and efficient economic institutions, are needed for a resilient, inclusive, green, and sustainable economic growth, and economies.
Global commodity supply shock, as a consequence of weakening of supply chains due to continued entrenchment of market fundamentalism, and in turn diminishing regulations, and greater outsourcing in public sector weakening its capacity, under the overall neoliberal order taking deep roots over the last many decades, seriously adding to this economic challenge; not to mention the war in Ukraine further exacerbating the supply chain crisis.
On the contrary, lack of movement towards this ‘new-normal’ as was quite vociferously talked about by both domestic policymakers, and by multilateral institutions in the heyday of the pandemic, has resulted in a very challenging economic outlook. Global commodity supply shock, as a consequence of weakening of supply chains due to continued entrenchment of market fundamentalism, and in turn diminishing regulations, and greater outsourcing in public sector weakening its capacity, under the overall neoliberal order taking deep roots over the last many decades, seriously adding to this economic challenge; not to mention the war in Ukraine further exacerbating the supply chain crisis.
Kristalina Georgieva, in her same address, pointed out in this regard ‘Let me start with the economic landscape. After a strong recovery in 2021 came the severe shock of Russia’s war in Ukraine and its wide-ranging consequences— global growth in 2022 dropped by almost half, from 6.1 to 3.4 percent. The slowdown has continued this year. …About 90 percent of advanced economies are projected to see a decline in their growth rate this year. For low-income countries, higher borrowing costs come at a time of weakening demand for their exports. And we see their per-capita income growth staying below that of emerging economies. That is a severe blow, making it even harder for low-income nations to catch up. Poverty and hunger could further increase, a dangerous trend that was started by the Covid crisis.’
