The world economy is stuck in a polycrisis – climate change crisis, the Pandemicene phenomenon, and the war in Ukraine– have all contributed to already high debt levels, especially in the global South, and in terms of high inflation. Hence, for instance, while it is exceedingly important to have ample climate finance, and an adequate level of fiscal space, especially in developing countries, and in particular those that are highly climate vulnerable among them, a weak spirit of multilateralism, including in provision of climate finance, has meant that countries are unable to shift towards resilient, inclusive, green economies in any significant way.
A recent Guardian-published article ‘Rich countries ‘trap’ poor nations into relying on fossil fuels’ indicated this dilemma being faced by developing countries as follows: ‘Richer countries and private lenders are trapping heavily indebted countries into reliance on fossil fuels, according to a new report. The pressure to repay debts is forcing poor nations to continue investing in fossil fuel projects to make their repayments on what are usually loans from richer nations and financial institutions, according to new analysis from the anti-debt campaigners Debt Justice and partners in affected countries. The group is calling for creditors to cancel all debts for countries facing crisis – and especially those linked to fossil fuel projects.’
The Report being referred to in the article has been produced by ‘Debt Justice’ and is titled ‘The debt-fossil fuel trap’, and pointed for instance ‘Global south governments will not be able to phase out fossil fuel production unless we address harmful debt levels and vulnerabilities and inequalities embedded within the existing debt and financial systems.’ Moreover, highlighting the particular case of Pakistan, the Report indicated ‘The financial assistance offered to Pakistan after the devastating floods that hit the country in 2022 was not only woefully inadequate (reaching $10 billion so far while the total damage is estimated at over $40 billion), but will mostly come in the form of loans.’
In addition, the Report was also critical of the emphasis of certain tax policies by the International Monetary Fund (IMF) programme that made it all the more difficult for Pakistan to spend with regard to moving towards a green economy. It pointed out in this regard ‘The IMF has recently forced a series of tax reforms on Pakistan as part of its programme under the Extended Finance Facility which are likely to significantly undermine “Pakistan’s nascent renewables energy market, threatening the country’s ability to meet its environmental goals and international climate obligations.” This includes a 20% tax on solar and wind, and a 12% increase in sales tax for imported electric vehicles…’
Overall, while on one hand there is a weak spirit of multilateralism, and inadequate level of debt relief provided to developing countries, on the other hand, austerity policies have created strong headwinds in developing countries overall, while developed countries in general have also had difficulty in managing for making a soft landing in this regard. Reflecting on a difficult economic situation globally, renowned economist Mohamed A. El-Erian in his recent Project Syndicate (PS)-published article ‘Simplifying a complicated global economy’ pointed out ‘The global economy this year is full of puzzling surprises. Japan’s GDP growth is currently surpassing that of China, and July retail sales in the United States were double the consensus forecast, despite the US Federal Reserve pursuing one of the most concentrated rate-hiking cycles in decades. … ‘These oddities are just a few of many, and adding to the complexity are the uncertain implications of significant structural shifts on the horizon. These include the necessary transition to zero-carbon energy, the artificial-intelligence revolution, and various other innovation-driven changes. Add in geopolitical tensions and the retreat from economic and financial globalization, and a wide range of potential scenarios opens up.’
To effectively deal with these macroeconomic challenges, therefore, requires a very concerted effort by policymakers to boost foreign direct investment (FDI), and export inflows in the country, among other important steps needed to steer the country out of the stagflationary situation it currently finds itself in.
Reportedly oil demand is rising, while there is also indication by OPEC+ of curtailment of oil supply, at least in the short-term, both of which taken together means all the more pressure on balance of payments of net oil importing developing countries like Pakistan in the coming months. A recent Bloomberg-published article ‘Global oil demand hits record and prices may climb, IEA says’ pointed out ‘Global oil demand has surged to a record amid robust consumption in China and elsewhere, threatening to push prices higher, the International Energy Agency said. World fuel use averaged 103 million barrels a day for the first time in June and may soar even higher in August, the agency said in a report. As Saudi Arabia and its partners constrict supplies, oil markets are tightening significantly.’
A rise in oil prices can further increase already high inflation in the country– while year-on year CPI inflation in July had come down from the high in May of 38 percent to 28.3 percent, but is still quite high, and food inflation for July was all the more-high at 40.2 percent– through the channels of higher imported-, and cost-push inflation. Higher fuel prices may likely create pressure on an already difficult balance of payments, and worsen the exchange rate situation. A recent Bloomberg article ‘Pakistan Rupee slumps to record low on growing headwinds’ pointed out ‘Pakistan’s rupee declined to a new low on growing headwinds from a stronger greenback and deteriorating external finances.
To effectively deal with these macroeconomic challenges, therefore, requires a very concerted effort by policymakers to boost foreign direct investment (FDI), and export inflows in the country, among other important steps needed to steer the country out of the stagflationary situation it currently finds itself in.
