One of the main challenges facing humanity as the world enters 2024, if not the most important challenge, is the existential threat of the climate change crisis. The recently concluded COP28 meetings in Dubai, indicated just how much needs to be done in terms of moving towards green economic growth, and yet one of the most important steps involved, which is phasing out of fossil fuel, could not be adopted. A December 13 Guardian published article ‘Cop28 landmark deal agreed to “transition away” from fossil fuels’ pointed out this comprised situation at the COP28 meetings as follows: ‘Despite the urging of more than 130 countries and scientists and civil society groups, the agreement did not include an explicit commitment to phase out or even phase down fossil fuels. Instead, it reached a compromise that called on countries to contribute to global efforts to transition “away from fossil fuels in energy systems in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science”.’
Secondly, although a step in the right direction, rich countries, with a deep carbon footprint, started providing compensation in terms of climate finance, under the ‘damage and loss fund’, yet the amounts that were committed were peanuts as compared to what is needed.
How the countries, especially developing countries will arrange needed finances to move towards a green economy, especially when a number of them are highly debt distressed. So, going into 2024, a number of countries including Pakistan– which is also a top-ten climate change vulnerable country– will be facing very tight budgets. Highlighting the seriousness of the debt crisis facing developing countries, a Project Syndicate (PS) published article ‘The coming debt crisis’ pointed out ‘In its latest World Economic Outlook, the International Monetary Fund reported that a rising share of countries– 56% of low-income countries and 25% of emerging markets– are “in or at high levels of debt distress.” While some of these countries are already working on reform programs that will make them eligible for IMF funding and offer good prospects for economic growth, many are not. A developing-world debt crisis is looming. …If several of the larger emerging markets and low-income countries are simultaneously confronted with rising interest rates and an increasing reluctance by creditors to roll over their debts, a global debt crisis is likely to erupt. To avoid this scenario, the world needs an international agreement that establishes procedures for supporting debt-distressed sovereigns, thereby enabling the IMF to deliver loans faster. And all creditors must adhere to it.’
At the same time, many of these developing countries, including Pakistan, are following over-board austerity policies, which not only add to their already acute debt burdens, it also suppresses their economic growth prospects, which in turn, means that both domestic production, and exports volumes also get reduced. In addition to adding to cost-push inflation, low level of exports means less inflows into foreign exchange reserves, in turn, not only putting pressure on domestic currency, and increasing the imported inflation, also reduces countries’ capacity to service debt.
An important revisit to adopting austerity policies needs to be made– by both individual governments, and by the IMF– in favour of pro-cyclical, non-austerity policies. Such a revisit is indeed important for Pakistan, as the country suffers from stagflation, and acute debt distress, and subscription to over-board monetary austerity has likely contributed to inflationary pressures, and has made unnecessary sacrifice of economic growth.
In this regard, noted economist, Jayati Ghosh pointed out in her (PS) published article ‘Schizophrenia at the IMF’ published on April 19, whereby she was critical of the International Monetary Fund’s (IMF’s) fiscal consolidation (or austerity policies) hindered reducing debt burden, since such policies dented economic growth. She indicated as follows: ‘It has taken far too long, but it seems that the International Monetary Fund has finally internalized some hard truths about sovereign-debt reduction. Chief among them is that growing economies have an easier time repaying. As such, fiscal consolidation– the organization’s favored strategy– undermines efforts to reduce debt-to-GDP ratios because it inhibits economic growth. …The IMF’s latest World Economic Outlook presents the results of its own investigation into various debt-reduction programs undertaken by 33 emerging-market economies and 21 developed economies between 1980 and 2019. “On average,” the authors note, “consolidations do not lead to a statistically significant effect on the debt ratio.” Instead, they find that higher GDP growth– “as captured by positive demand and supply shocks together”– is “an important force” responsible for roughly one-third of the observed debt reduction during that period. The analysis even recognizes that fiscal expansion improved debt ratios in several cases, largely due to its positive effect on GDP growth.’
Therefore, going into 2024, an important revisit to adopting austerity policies needs to be made– by both individual governments, and by the IMF– in favour of pro-cyclical, non-austerity policies. Such a revisit is indeed important for Pakistan, as the country suffers from stagflation, and acute debt distress, and subscription to over-board monetary austerity has likely contributed to inflationary pressures, and has made unnecessary sacrifice of economic growth.
