The real problems with the Bretton Woods institutions: the disproportionate power of the US, the IMF’s deeply procyclical approach, and G7 economies’ unwillingness to enable multilateral bodies to address global problems.’ – Excerpt from the Project Syndicate (PS) published article ‘The real rot at the IMF’ by Jayati Ghosh.
Pakistan is a net importer of oil, along with certain important agricultural commodities, and in the wake of supply chain crisis and restricted supply-led high prices of oil by OPEC+ countries has put great burdens on the country, in terms of high imported inflation, and in effectively managing a balance of payments issue.
This is on top of the Covid-caused recessionary trends due to which economic growth overall was badly affected, not to mention the global vaccine inequality towards developing countries slowing down economic recovery as well.
Hence, at a time, when after almost two years of economic hardship caused by the pandemic, and even before due to strict aggregate demand management policies that were followed since Pakistan entered the IMF programme, the time has indeed been more than ripe for greater stimulus policies to be followed.
And yet, IMF has reportedly continued to push the government towards greater austerity policies, which have not only added to greater economic misery, but indirectly is eroding the popularity of the current government among masses that are suffering from a sharp rise in oil, and electricity prices, some of the decade-high commodity prices of important agricultural and other products.
This is indeed beyond logic as far as IMF programmes are concerned, to push for procyclical policies, and in turn, expect Pakistan to push for greater taxes, and also to reduce subsidies at a time when oil prices have crossed $80 a barrel for Brent crude – from $20 a barrel in April 2020 – and there is a global supply chain crisis, all leading to high imported inflation in the country.
With regard to how much oil revenues have increased, could be gauged from a Bloomberg article ‘Saudi Arabia’s oil revenue surges ahead of OPEC+ meeting: chart’ as ‘The kingdom is earning more money from oil exports than at any time since 2018, as the global economic recovery and OPEC+ production cuts boost prices.’
Having said, the forecast for oil made by a Financial Times (FT) published an article ‘Oil likely to hit $100 a barrel, say top commodity traders’ back in June 2021, if materializes, will add to already high inflationary pressures, where the article pointed out in this regard: ‘The world’s top commodity traders have forecast a return to $100-a-barrel oil, as investment in new supplies slows down before demand has peaked and before green alternatives can take up the slack. Executives from Vitol, Glencore and Trafigura and Goldman Sachs said on Tuesday that $100 crude was a real possibility, with prices already reaching their highest level in two years this week as Brent crude moved above $73 a barrel.’
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It is therefore important that in the domestic sense, the State Bank of Pakistan (SBP) should interfere, at least during the current imported inflationary onslaught, and rather aggressively to keep the dollar on the lower side and stable, and try harder to avoid it from appreciating the way it did more recently. At the same time, the government will need to move away from an otherwise economic policy orthodoxy position, whereby it gives a lot of independence to SBP.
Rather, the deep impact of exchange rate in the wake of commodity price rise and overall supply chain crisis, in terms of both likely stagflationary and poverty consequences, not to mention, the strong potential this impact is showing in terms of political instability consequences, calls for greater role of government in monetary policy decisions regarding exchange rate determination, through the platform of monetary and fiscal policy coordination board.
These are indeed extraordinary times for the economy, and the usual independence that central banks generally enjoy cannot be extended, as happens in economies, in general, facing such extraordinary times.
In the international sense, the major treasuries of developed countries and multilateral institutions like IMF will need to understand that the longevity of the pandemic causing recession and the way vaccine inequality has exacerbated it, the high commodity prices, and the overall supply chain crisis, has already tested the limits of developing countries like Pakistan, in terms of monetary and fiscal policy, to manage both the needs of stimulus spending and macroeconomic stabilization, and therefore, greater financial assistance needs to be provided.
In that sense, the IMF, for instance, faces a dilemma, and that is to provide a greater allocation of SDRs now or risk seeing more countries falling into a balance of payments crisis or defaulting on its debt obligations, and apply for a programme with IMF.
Having said, the recent allocation of the enhanced SDR allocation by IMF to the tune of $650 billion, and the usual distribution way of quota-system, has not allowed developing countries to receive any significant amount. It is therefore crucial that a greater allocation of SDRs is made to developing countries so that a much-needed cushion is provided to bring down the impact of imported inflation through a much lower value of dollar against the rupee, reached at the back of a greater supply of dollars.
Reportedly, a significant piece of legislation lying for approval may allow much greater release of SDRs, as pointed out by a Centre for Economic and Policy Research (CEPR) published article ‘As IMF allocates $650 billion worth of special drawing rights, economists say more will be needed’ as follows: ‘The US House of Representatives recently passed legislation supporting an additional issuance of 1.54 trillion SDRs (worth 2.2 trillion dollars), and similar legislation is pending in the US Senate. Major humanitarian, labour, human rights, and faith-based groups… have called on the IMF to allocate a total of $3 trillion worth of SDRs.’
Moreover, in another CEPR published article, ‘Republicans are blocking desperately needed pandemic relief for the world’s poor’ it was pointed out with regard to greater release of SDRs ‘the House passed legislation last year to have the U.S. government approve “at least 2 trillion SDRs” – worth $2.8 trillion – at the Fund. But Republicans blocked the legislation in the Senate. When Biden took office, the new Treasury department agreed, at the IMF, to about as much as they could approve without a vote of Congress.
This was the $650 billion that the IMF issued last month. But this $650 billion issuance was not nearly enough to meet the needs that most of the world is facing, in order to save the lives of people who can be saved. So members of Congress have come back, with legislation in both the House and Senate, to get the rest of what the House approved last year. It has passed the House again this year, but Republican leadership is still blocking it in the Senate.’ Hopefully, greater SDR allocation is released, which is indeed very important for developing countries like Pakistan.
At the same time, it may indeed be very pertinent for the government to revisit the very decision of continuing with the IMF programme, which is pushing for procyclical policies – reduce subsidies, enhance taxes, increase policy rate during a period when the country needs stimulus spending, and cushion against imported inflation through both an active subsidy programme, reduction in taxes, and greater intervention in exchange rate determination to overall keep the dollar on some lower and stable level.
In fact, the writer would even suggest to the government to leave the IMF programme, since remaining in the IMF programme is causing more damage in terms of lack of economic growth, stimulus spending, and even greater political instability.
At the same time, the usual discussion that remaining in the IMF programme lends greater credibility to the government in terms of obtaining greater FDI and other bilateral and multilateral financial support at the back of macroeconomic stability certificate that being in an IMF programme provides is indeed unwarranted.
This is because, firstly, leaving the IMF programme does not mean leaving the IMF, and since Pakistan will remain a member, it will continue to remain under IMF’s surveillance role, whereby like for every other member, it produces a regular Article-IV report on the economy, which is a deep reference point for gauging the macroeconomic and overall economic situation of the country.
Moreover, in this information technology/internet age of greater data availability, and in quite a readily available sense through greater media presence, the economic situation of any country, let alone Pakistan remains visible, with data readily available.
At the same time, the loss of possible tranches from coming out of the IMF programme can be made available through floating bonds and also can be covered if greater SDR allocation goes through globally.
Yet, remaining in the programme will most probably also likely to increase debt repayments, in case the IMF pushes for an increase in the policy rate, which it usually does as inflation increases, not realizing that inflation in countries like Pakistan, with lesser financialization, is at least equally a supply-side phenomenon, and all the more given the current supply chain crisis globally.
It is, therefore, quite essential that Pakistan should leave the IMF programme. At the same time, the government should look to adopt greater autark- ist policies and also make a surgical analysis of commodities being imported currently, to reduce reliance on international markets, and also shed any that are not that important for the economy and human life.
Dr. Omer Javed is an institutional political economist, who previously worked at the International Monetary Fund, and holds PhD in Economics from the University of Barcelona. He tweets @omerjaved7
The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.