Zafar Iqbal
Macroeconomic policies play a vital role in shaping the overall economic landscape of a country. These policies encompass a range of strategies and measures aimed at regulating and stabilizing key economic indicators such as inflation, unemployment, and economic growth. Through effective macroeconomic policies, governments can influence and manage aggregate demand, control price levels, and steer the economy towards sustainable growth. Additionally, these policies can address structural weaknesses, promote investment, and safeguard against external shocks. By fostering a conducive environment for economic stability and resilience, sound macroeconomic policies are instrumental in supporting long-term prosperity and welfare for the population.
The recent decrease in the Consumer Price Index (CPI) inflation rate to single digits, at 9.6 per cent in August, marked a significant milestone after nearly three years of double-digit inflation. This decline was preceded by a sharp increase in inflation, with rates reaching as high as 35.4 per cent in March 2023, coinciding with policy rate hikes. Despite the efforts to control inflation through monetary and fiscal austerity measures, the effectiveness of these policies has been called into question, given the prolonged period it took for inflation to recede to single-digit levels.
The persistent emphasis on demand squeeze policies, such as increasing policy rates and moving towards a primary surplus, has been unable to yield swift results, and it is evident that positive real interest rates close to 10 per cent continue to be in effect. Although the current policy rate stands at 19.5 per cent, the inflation rate has declined to 9.6 per cent, down from 11.8 per cent in May. This calls into question the efficacy of the austerity approach, particularly in the absence of significant stimulus to bolster aggregate demand.
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The impact of global supply chain disruptions during the pandemic and the consequent rise in inflation was compounded by the pursuit of stringent austerity policies, both within and outside of the IMF program. The focus on curbing aggregate demand through austerity measures failed to address supply-related bottlenecks, such as institutional inefficiencies, suboptimal market pricing, high energy costs, and regressive taxes. These systemic weaknesses have persisted for far too long, impeding sustainable economic growth and necessitating repetitive adoption of destabilizing stabilization policies.
Since the late 1980s, adherence to the neoliberal model, both independently and under IMF programs, has engendered recurrent cycles of unsustainable macroeconomic stability. Despite sporadic upgrades in the country’s risk ratings by agencies like Moody’s and Standard & Poor’s, the underlying supply-side vulnerabilities have limited the potential for enduring improvements in the country’s economic risk profile.
The protracted period of high inflation has exacted a heavy toll in terms of capital costs and price levels. The delayed impact of monetary transmission, exacerbated by high indirect taxes, exorbitant electricity tariffs, and substantial subsidy demands in key sectors, continues to exert upward pressure on inflation, fiscal deficits, and debt distress. Furthermore, the international adoption of extensive monetary austerity policies by major central banks, compounded by the lack of meaningful allocation of Special Drawing Rights (SDRs) by the IMF, has further constrained the pursuit of countercyclical measures.
Given these challenges, it is imperative for the government to avoid embracing an IMF program that espouses pro-cyclical austerity and neoliberal policies, as they have proven inadequate in fostering sustainable macroeconomic stability or generating adequate revenues for essential investments in economic resilience. With Pakistan ranking among the ten most vulnerable countries to the impacts of climate change and facing substantial vulnerabilities in the healthcare sector, particularly amid the ongoing ‘Pandemicene’ phenomenon, it is crucial that the IMF revisits its policies, including the surcharge policy and the provision of SDRs to address climate-related concerns. The role of economists, policymakers, international financial institutions, and stakeholders in Pakistan’s economy is crucial in this process.
