The new government that comes into office after general elections due to be held next month, would be faced not by only stagflation, and a very difficult debt situation, but will have to make a lot of climate-related expenditure so that the country can meaningfully move towards becoming a climate- change-resilient economy. The central thing in dealing with all of these issues is that the economy grows at a meaningfully high rate, and that such growth is inclusive, and green.
At the same time, the outlook of global economic risks is also quite challenging, as pointed out by the recently released ‘Global risks report 2024’ by World Economic Forum (WEF), which pointed out in this regard ‘‘As we enter 2024, results of the Forum’s Global Risks Perception Survey 2023-2024 (GRPS) highlight a predominantly negative outlook for the world over the short term that is expected to worsen over the long term… Surveyed in September 2023, the majority of respondents (54 percent) anticipate some instability and a moderate risk of global catastrophes, while another 27 percent expect greater turbulence and 3 percent expect global catastrophic risks to materialize in the short term. Only 16 percent expect a stable or calm outlook in the next two years. The outlook is markedly more negative over the 10-year timeframe, with 63 percent of respondents expecting a stormy or turbulent outlook and less than 10 percent expecting a calm or stable situation.’
For one, the climate change crisis is getting worse, while the climate finance needed to deal with it is yet to be made available. A recent article ‘2023 smashes record for world’s hottest year by huge margin’, published by The Guardian pointed out in this regard ‘The planet was 1.48C hotter in 2023 compared with the period before the mass burning of fossil fuels ignited the climate crisis. The figure is very close to the 1.5C temperature target set by countries in Paris in 2015, although the global temperature would need to be consistently above 1.5C for the target to be considered broken. Scientists at the EU’s Copernicus Climate Change Service (CCCS) said it was likely the 1.5C mark will be passed for the first time in the next 12 months.’
Moreover, over-board monetary austerity policies in general have deepened the debt distress of developing countries including Pakistan. The new government will need to revisit this policy with the International Monetary Fund (IMF), given a significant influence of supply-side factors in determining inflation in the country, and overboard aggregate demand squeeze policies are not only exacerbating the debt crisis, but also adding to cost-push inflation, in addition to causing unnecessary and significant sacrifice of economic growth for achieving at most some temporary relief from high inflation.
The incoming government after the elections will also have to initiate deep economic reforms, which are non-neoliberal, and counter-cyclical in nature. This is important for both reining-in unnecessarily overboard austerity policy, and also enhancing productivity in the economy, with both likely resulting in boosting economic growth.
In this regard, the government should highlight to the IMF– especially as it moves towards a likely another programme with the IMF in April reportedly– their own research, which calls for adopting counter-cyclical reforms, as indicated in April 2023 World Economic Outlook (WEO) as follows: ‘‘adequately timed (for example, during economic expansions) and appropriately designed (for example, more expenditure- than revenue-based in advanced economies) fiscal consolidations have a high probability of durably reducing debt ratios. The debt-reducing effects of fiscal adjustments are reinforced when accompanied by growth-enhancing structural reforms and strong institutional frameworks. At the same time, because these conditions and accompanying policies may not always be present, and partly because fiscal consolidation tends to slow GDP growth, consolidations on average have negligible effects on debt ratios.’
In this regard, the government should highlight to the IMF– especially as it moves towards a likely another programme with the IMF in April reportedly– their own research, which calls for adopting counter-cyclical reforms, as indicated in April 2023 World Economic Outlook (WEO) as follows: ‘‘adequately timed (for example, during economic expansions) and appropriately designed (for example, more expenditure- than revenue-based in advanced economies) fiscal consolidations have a high probability of durably reducing debt ratios.
Also, highlighting the same report, renowned economist, Jayati Ghosh, in her article ‘Schizophrenia at the IMF’ published in Project Syndicate (PS) in April 2023, called on the IMF to move away from emphasizing fiscal consolidation (or austerity) policies 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 favoured 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 programmes 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.’