Since about mid-2021, around the time the impact of global supply shock– including the rise in oil prices globally starting in the 2020s also feeding into inflationary pressures, after a deep dip in the initial months of the pandemic in early 2020– started to be significantly felt on inflation in Pakistan, like many other developing- and developed countries, while in the case of the latter, rising inflation also reflected a strong determination of significant level of stimulus provided during the pandemic.
In response, ‘Chicago boys’ styled policymakers, and given Pakistan was under an International Monetary Fund (IMF) programme, it having strong neoliberal, and procyclical inclinations– where the procyclical programme conditionalities were only somewhat relaxed during the heyday of the pandemic– overall meant that on one hand, policy rate started to be raised quite regularly since then, and on the other hand, lack of meaningful tax base enhancement reforms, and little progressive taxation, along with few taxation measures taken to tax the very rich, not to mention lack of any meaningful external debt relief/moratorium provided by creditors, while the IMF also provided little special drawing rights (SDRs) allocation, all meant development expenditures were cut quite regularly and deeply, given both diminishing fiscal space due to both rising domestic debt needs, and primary surplus-related IMF programme conditionalities.
In addition, lack of governance in terms of checking otherwise highly likely over-profiteering, and on the contrary inflation continued to increase even as interest rates were being raised– not to mention the cost-push channel enhancing impact of interest rates in the first place– meant that economic growth also severely slowed down during the last one year or so. Hence, in April 2022 policy rate was at 12.25 percent, while CPI inflation was at 12.75 percent, and the provisional growth number released around that time showed that for the second consecutive fiscal year, five percent-plus growth rate was taking place.
In one year since April 2022, even a lot more severe austerity policies – different from current (non-developmental) expenditure efficiency or belt-tightening, which should indeed be adopted– in terms of both fiscal and monetary austerity policies, have resulted in the nose-diving of economic growth as projected by IMF, World Bank, and Asian Development Bank (ADB) all putting the number at less than one percent for the current fiscal year. At the same time, CPI inflation has galloped to 36.4 percent, while the policy rate has also seen a significant increase to 21 percent.
Better management of the energy sector could lead to decrease in energy tariffs, and lesser circular debt, and lower losses by SOEs, could lead to both greater fiscal space, and in terms of reducing impact on inflation. Moreover, greater provision of SDRs by the IMF, and more meaningful debt relief/moratorium will indeed go a long way in allowing the government to move away from procyclical-, and austerity policies.
Hence, procyclical, and austerity, policies have driven the country into serious stagflation, that is growth has been stagnating, and inflation has also not come down, in fact, increased. While the PTI (Pakistan Tehreek-e-Insaf) government takes pride, and rightly so, in indicating that its policies led to growth above five percent during the last two years of its government, yet the growth could have been even more, and without causing any extra burden on the current account, if counter-cyclical policies had continued even beyond mid-2021, and if there had been both a better import compression policy, and less reliance placed on using monetary policy to lure otherwise highly volatile foreign portfolio investment (FPI) or ‘hot money’.
Absence of any meaningful non-neoliberal economic institutional, organizational, and market reforms, at the same time by the PTI government, also meant the growth rate could not have been sustained for a longer period of time, as the situation of twin deficits would have resurfaced, and in unsustainable manifestation. Having said that, both the current government, and IMF did not learn from this experience of why procyclical, austerity policies were not working both nationally, and also overall on the global scale, and even went harder in this direction of these wrong policies, as the highly unsustainable macroeconomic situation, especially in terms of inflation, low foreign exchange reserves, and high debt distress.
There is clearly, therefore, a need for reversal of these policies– the policy rate should be reduced drastically, and quickly, given also that the inbuilt time-taking monetary transmission mechanism will likely keep retarding economic growth for the next one to two years, while a progressive taxation policy is introduced, along with tighter controls/checks placed on current expenditure, and subsidy targeting done more efficiently, to have much greater fiscal space for enhancing development expenditures, and in also providing meaningful energy subsidy, since it has a strong bearing on cost-push inflationary channel of overall inflation.
The upcoming Budget should reflect this change, while the government should also come up with a meaningful non-neoliberal reform strategy especially for energy, and state-owned enterprises (SOEs) sectors, at the earliest possible, to stem huge fiscal losses on each account. Here, for instance, better management of the energy sector could lead to decrease in energy tariffs, and lesser circular debt, and lower losses by SOEs, could lead to both greater fiscal space, and in terms of reducing impact on inflation. Moreover, greater provision of SDRs by the IMF, and more meaningful debt relief/moratorium will indeed go a long way in allowing the government to move away from procyclical, and austerity policies.
