The recently released update of the International Monetary Fund (IMF)’s World Economic Outlook (WEO) expects world output, which has been estimated to have been contracted in 2020 by 3.5 per cent, to grow by 5.5 percent in 2021– where advanced economies contracted by 4.9 percent in 2020. They are expected to grow by 4.3 per cent in 2021, and emerging market and developing economies (EMDE) to have contracted by 2.4 percent in 2020, to grow by 6.3 per cent in 2021. This optimistic growth recovery expectation appears to have been built on a dangerously high level of optimism, given the deep downside risks at hand.
First, there is the case of strong currents of protectionism being seen in the case of a) vaccine rollout inequality where rich countries have booked most of the production of vaccines for the current year, b) food exports restrictions being placed domestically across many countries under over-heightened spirit of nationalism, and c) similar spirit being carried by OPEC countries in overly caring about the growth prospects of their individual countries, and not considering the burdensome situation slashing of oil supply to reach higher prices, will have in terms of the balance of payments situation of net oil importing countries like Pakistan. Such protectionism will therefore, likely add to the already precarious global debt situation, and higher interest payments that this further ballooning of debt will create, would mean greater downward push for economic growth prospects being envisaged by IMF, among others.
A major basis for growth optimism is built on the hope that vaccine rollout will take in an inclusive sense, while costs for these for developing countries will be significantly shouldered by a strong sense of multilateralism. Sadly, both are missing, given high patent walls, heavy pre-booking by rich countries, and a weak multilateral spirit as evidenced for instance by an issue-laden and weakly financed COVAX programme, mainly led by the WHO (World Health Organization). Unless, something drastic changes with how things stand here, it appears highly unlikely that it will meet the high hopes of IMF in their hopeful growth projections for 2021, if at all even for 2022.
It is therefore, quite safe to say that optimism for global growth stands on quite shaky grounds, unless issues are quickly resolved, under greater multilateral spirit.
That ‘food nationalism’ is taking placed quite actively could be understood from the fact that food prices have significantly increased during recent months. In a recent article in Bloomberg ‘Global food prices at six-year high are set to keep on climbing’ this rise in prices is highlighted as ‘Global food prices reached a six-year high in December and are likely to keep rising into 2021, adding to pressure on household budgets while hunger surges around the world. A United Nations gauge of food prices has jumped 18 percent since May, as adverse weather, government measures to safeguard supplies and robust demand helped fuel rallies across agricultural commodities from grains to palm oil. Prices will likely climb further, the UN’s Food & Agriculture Organization said. The spike threatens to push up broader inflation, making it harder for central banks to provide more stimulus to shore up economies, while stirring memories of food-price crises a decade ago. It’s bad news for consumers whose incomes have been hurt by the Covid-19 crisis, and adds to concerns about global food security that’s being affected by conflicts and weather shocks.’
Moreover, the following quote from an article ‘Return to food protectionism is riling farmers in Argentina’ by Jonathan Gilbert gives an example of how ‘food nationalism’ is taking place, whereby ‘A ban on corn exports in Argentina is fanning fear among farmers and traders that one of the world’s top food suppliers is returning to an era of brutal meddling in crop markets. The measure creates yet another driver for surging global grain futures, given Argentina is the third-largest shipper of corn, and stokes concern of an up-tick in food nationalism around the world as the pandemic disrupts trade’.
At the same time, the farmer strikes in India, building up for many months now, are serving as strong shocks to the global supply chain, which play an important role in determining prices and food shortages. The significance of the food supply chain in the food sector globally could be understood from an article in The Economist, published in May 2020 ‘The world’s food system has so far weathered the challenge of covid-19’ according to which ‘Connectivity is what the world’s agro-industrial complex is all about. Four-fifths of the planet’s eight billion mouths are fed in part by imports; the $1.5 trillion that was paid for them last year was three times 2000’s bill.’
Hence, it could be well understood what the impact could be on global economic prospects in the presence of protectionism and other supply shocks in this sector. Once again, higher food import prices will likely have an adverse effect on the balance of payments situation of many countries, including Pakistan, raising in turn greater need for a more restrictive monetary stance than is needed to provide the needed growth stimulus for providing jobs and meeting overall welfare needs.
‘Oil nationalism’ will also likely produce similar pressures on the balance of payments situation of net oil-importers, along with policy options for reining-in inflationary currents. Here, one thing that developing countries should be mindful of, is not to repeat the same mistake as many of them have made in the past of tackling inflation from not just the monetary channel of instruments, but also fiscal.
Moreover, according to the recently released issue of the IMF’s Fiscal Monitor, the fiscal deficit in many countries is already on quite a high level, whereby it points out ‘average overall deficits as a share of GDP in 2020 are projected at –13.3 percent for advanced economies, –10.3 percent for emerging market and middle-income economies, and –5.7 percent for low-income developing countries.’ Inflationary pressures build-up, as is becoming more likely in the shape of imported inflation mainly, would necessitate increasing the policy rate, which among other things would mean enhancing the interest payments on domestic debt– quite high in many countries including Pakistan, especially after many months of stimulus spending during the pandemic, with little support from the international community in the overall weak multilateral spirit– would add to the already high levels of fiscal deficit.
Given the above, it is therefore, quite safe to say that optimism for global growth stands on quite shaky grounds, unless issues like those mentioned above are quickly resolved, under greater multilateral spirit.
