‘The growth outlook for the MENA region and Pakistan is characterized by an uneven recovery against a backdrop of armed conflicts, hydrocarbon dependence, and persistent structural challenges. …After contracting in 2023, growth in Pakistan is projected to rebound to 2.0 percent in 2024, supported by continuing positive base effects in the agriculture and textile sectors.’ – An excerpt from the IMF ‘Regional Economic Outlook: Middle East and Central Asia’
The recently released April 2024 ‘World Economic Outlook’ (WEO) by the International Monetary Fund, projected a rather weak economic outlook for Pakistan for the current, and the next fiscal year, whereby for 2023-24, real GDP growth was projected at 2 percent, and for 2024-25 at 3.5 percent. Here, it needs to be indicated that growth projections for Pakistan, as per the WEO, are well below than overall for developing countries ‘In emerging market and developing economies, growth is expected to be stable at 4.2 percent in 2024 and 2025, with a moderation in emerging and developing Asia offset mainly by rising growth for economies in the Middle East and Central Asia and for sub-Saharan Africa. Low-income developing countries are expected to experience gradually increasing growth, from 4.0 percent in 2023 to 4.7 percent in 2024 and 5.2 percent in 2025, as some constraints on near-term growth ease.’
This is indeed a serious cause of concern for the country, which needs domestic production to dent inflation from the supply-side, and greater exports for much-needed positive consequences in terms of foreign exchange built-up to ease imported inflationary channels, and help lighten an otherwise acute debt distress issue.
Highlighting the importance of tackling inflation from not just through demand-squeeze policies, but also through supply-side initiatives, an answer in the ‘Transcript of Global Financial Stability Report April 2024 press briefing’ to a question regarding Pakistan, and countries with similar economic context, IMF staff member Jason Wu pointed out in this regard ‘It is, indeed, the case that both the supply and demand side contribute to inflation. So in that sense, policy is needed on both sides. In the case of Pakistan, for example, monetary policy has been tightening over the past two or three years to control inflation. And inflation is projected to come down, but more work needs to be done. And that includes on the demand side; fiscal consolidation needs to be continued. But also on the supply side, including things like, you know, the reform of the energy sector, state[-]owned enterprises.’
Over-emphasis on interest rate to control inflation from the demand side has apparently had strong negative consequences for economic growth, due to the underlying increase in cost of borrowing, and overall cost push inflation denting investment prospects.
Moreover, economic growth is needed for greater revenue collection to increase fiscal space so that welfare-oriented spending could be made to dent the otherwise quite fast increase in people falling below the poverty line, given an apparently almost two-year of stagflationary headwinds facing the economy. In addition, the serious climate change challenge facing the country also needs greater spending to build resilience in this regard.
Hence, while it is important that expenditure efficiency needs to be enhanced, it is important that a counter-cyclical policy approach is adopted– at the back of enhancing the tax base, and possibly an enhanced special drawing rights (SDRs) allocation by IMF, in addition to inflows under the current SBA, and likely EFF programme– to make necessary climate change and welfare spending.
At the same time, as per the WEO, while the CPI inflation for the current fiscal year has been projected at 24.8 percent, the IMF expects CPI inflation to drastically fall to 12.7 percent during the next fiscal year. Such a substantial drop in inflation apparently is based on very strong assumptions, since otherwise there are serious underlying challenges in the shape of polycrisis facing the global economy, including Pakistan, especially in terms of the climate change crisis, the Pandemicene phenomenon, and the conflict in Ukraine, and the Middle East.
In a 2023 published book ‘Permacriis: a plan to fix a fractured world’ by Gordon Brown, Muhammad A. El-Erian, and Michael Spence, it was pointed out with regard to the polycrisis facing the world economy, as follows: ‘Russia invaded Ukraine. Tensions between US and China surged. Inflation in the United States and throughout Europe was raging at levels not seen in decades. …And climate change’s ceaseless trail of destruction grew with floods in Pakistan and heatwaves across Europe. …Do you feel like we’re in a permacrisis? …As Ronald Regan famously asked while campaigning for president in 1980, ‘Are you better off today than you were four years ago?’ What about one year ago, or six months ago? Do you feel the world is heading in the right direction? Chances are you feel a bit of anxiety. There aren’t enough green lights out there. Too many are flashing yellow or solid red.’
Hence, while it is important that expenditure efficiency needs to be enhanced, it is important that a counter-cyclical policy approach is adopted– at the back of enhancing the tax base, and possibly an enhanced special drawing rights (SDRs) allocation by IMF, in addition to inflows under the current SBA, and likely EFF programme– to make necessary climate change and welfare spending.
