Achieving the right balance between austerity and countercyclical policies – Opinion


First, it was the vaccine apartheid practiced by many rich and advanced countries, which contributed significantly to an uneven global recovery. This, added to the huge amounts that rich and advanced countries were able to inject, allowed them to recover much faster than many developing countries.

Then it was the global commodity supply shock, both due to the pandemic but also due to Russia’s war in Ukraine, as well as high oil prices following the resumption of demand following the recovery, but also significantly due to the supply constraints applied by the OPEC+ group of countries as a whole, has become a major driver of inflationary pressures globally. Here in wealthy and advanced countries in general, inflation has apparently been caused by increased aggregate demand following large stimulus spending and rising oil and food prices.

On the other hand, in developing countries, especially in net oil-importing countries, like Pakistan, which also import commodities like wheat and fertilizers, among others, have experienced a significant increase in inflationary pressures , mainly due to the increased component of imported inflation.

The policy response must therefore be a good mix of austerity policies and counter-cyclical economic policies where, on the one hand, it is important to reduce current expenditure and postpone less important development expenditure and, on the other hand, the impact of oil prices, for example, is reduced by providing a rational subsidy, reducing taxes as much as possible, and also rationalizing other components of its price composition.

Oil is perhaps the main causal factor in net oil-importing developing countries, fueling the prices of a wide range of goods and services; it is therefore important to reduce its price for domestic consumers. A sharp drop in its price is also necessary for the production of electricity.

The pandemic and inflationary pressures have had very difficult consequences on growth, poverty and inequality for developing countries, including Pakistan, as there has been no significant moratorium/tariff relief provision. debt, very little allocation of special drawing rights (SDRs) reinforced by the International Monetary Bank. (IMF) and less than satisfactory provision of climate finance. All of this has contributed significantly to the difficulties of developing countries in terms of keeping public finances, the current account and debt at sustainable levels.

It will be logical for the current government to actively pursue economic diplomacy with creditor countries and multilateral institutions, so that the external debt burden, which represents approximately 31% of GDP (and together with internal debt, represents approximately 95% of GDP ) can be reduced through much greater debt relief/moratorium.

Here, the government is also expected to negotiate with the US Federal Reserve and the IMF – as the newly appointed finance minister travels to Washington to hold meetings with the IMF – for an additional release of SDRs, on top of the 2.75 billion of dollars that were released as Covid related assistance last August. This can be done by IMF officials advocating for rich countries to move some of their enhanced SDR allocation from last August.

Moreover, the recent rise in interest rates globally is a pretty clear indication that the world as a whole has failed to realize that current inflationary pressures have a very strong influence in the form of cost inflation. , not by demand-driven inflation, and the tightening of the monetary policy stance will likely add up to significant growth sacrifices, and hence job losses, for very limited macroeconomic stability.

Therefore, given that inflation strongly appears to be primarily cost-pushing in nature, it will therefore make sense that the policy rate could be revised down to single digits. Currently, the real interest rate is close to zero, but given the predominantly supply-driven nature of inflation, it would make sense for the State Bank of Pakistan (SBP) to lower its key rate.

Lowering the interest rate is important both to curb interest payments on the domestic debt (which currently stands at around 62% of GDP) as much as possible and also to make the momentum of economic growth more sustainable. which was reached last year, since the higher cost of capital will probably reduce investment. Fiscal space is also needed in turn to provide subsidies on oil, energy and essential items, which contribute significantly to overall inflation in the country and cause a lot of hardship for the poor, especially the poor. the aftermath of the pandemic.

The tightening stance of monetary policy adopted by developed countries must also be less than aggressive, given that inflation everywhere is strongly supply driven, and also because rising interest rates in developing countries rich and advanced is already causing capital flight. foreign portfolio investment from developing countries. This will add significantly to the consequences of the depreciation on the local currencies of developing countries, in turn adding to the imported component of inflation and contributing significantly to their already high debt pressures.

The current government, which is negotiating with the IMF over the current program, needs to bring these issues to light and mitigate the IMF’s austerity and pro-cyclical focus in light of these and other arguments.

The growth momentum was achieved after many growth sacrifices from the initial phase of the program and also due to the pandemic that caused the recession, and it is important to continue with a streamlined level of subsidies, stimulus and a much less restrictive monetary policy. political stance. The IMF’s understanding of these lines is also important because economic instability has already contributed significantly to political instability; for example in the case of Sri Lanka, and a little less in Pakistan.

(The author holds a doctorate in economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He [email protected]

Copyright Business Recorder, 2022


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