Constituent policy

IMF Pandemic and Procyclical Policy

“It’s cost inflation…it’s an increase in fuel costs, which is something that’s used in everything else. It’s used in the production of many other goods and services, it’s used in transportation, and so it doesn’t just affect prices at the pump, it actually affects every other price in the economy. The problem is that then governments say, well, what we need to do is get the central bank to tighten monetary policy, raise interest rates. It’s not the problem, it’s not the solution, it doesn’t affect the cause of inflation, so you really have to think of different measures in this situation. …Prices themselves have risen more than expected given the actual impact on supply…and that is because there has been very feverish speculative activity in what are known as the futures markets. raw materials. – Excerpt from a recent interview with Jayati Ghosh, on ‘Democracy Now’

According to Oxfam, in 87% of International Monetary Fund (IMF) programs over the past two years – which are also the years of the pandemic, and its recessionary effects, particularly on developing countries that have been driven to suffering from vaccine apartheid and the low level of moratorium/debt relief – program countries were urged to adopt austerity policies.

That doesn’t make a whole lot of sense, not only because at the same time the IMF encouraged countries in the North to stimulate their economies – where the rapid and adequate supply of vaccines and more than $13 trillion in stimulus led much faster acceleration. and a greater economic recovery than developing countries as a whole – but also because developing countries needed to boost their population and improve their purchasing power as a result of, first, supply constraints of the group of OPEC+ countries as a whole that had led to a high price of oil, where from a drop in oil prices during the first months of the pandemic, it had reached very high levels of crossing from $130 a barrel, down to just below $100 a barrel, as the United States for example released significant amounts of its oil stocks following Russia’s war in Ukraine.

Second, developing countries, many of which were already in dire debt straits, during the pandemic had to provide most of the stimulus/social spending and health sector spending they could, from from their own resources, given that very little debt moratorium/relief has been provided by creditors, including multilateral institutions.

It is important that the IMF does not insist that program countries like Pakistan adopt a strongly pro-cyclical policy.

Third, developing countries have not been able to provide much stimulus, as they have not received significant amounts under the IMF’s enhanced Special Drawing Rights (SDR) allocation. So when last August the IMF provided an enhanced allocation of SDRs to the tune of $650 billion, most of it went to rich and advanced countries, as it was allocated inappropriately, given the situation of the current pandemic, according to the usual practice of distributing on the basis of the quotas of SDRs of the member countries – the richer countries which contribute more to the pool of resources of the IMF have larger quotas – while it is the developing countries who needed the lion’s share.

So, for example, Pakistan only received $2.75 billion in enhanced SDR allocation. That said, the possibility of a relocation of the enhanced SDR allocation from developed to developing countries through a recently created window in the form of the Resilience and Sustainability Trust by the IMF could help bridge some of the financing gap in developing countries, but the main success would be if the IMF could persuade the US Congress to pass the bill concerning the allocation of $2.2 billion in enhanced SDRs. Moreover, during unusual times of the pandemic, any possible subsequent allocation of enhanced SDRs should be made in such a way that those countries most in need of such support receive it accordingly.

Here it is worth mentioning that the financing needs of developing countries were much higher than they could receive, where these needs were also not reduced by an adequate level of moratorium/debt relief. debt, or by providing a significant amount of climate finance. , something rich countries committed to in the 2015 Paris Climate Accord, which said they would provide $100 billion each year to developing countries in climate finance. The amount of financing developing countries needed to provide stimulus, improve debt sustainability, boost purchasing power and reduce the imported component of cost inflation was indicated, for example, by the United Nations Conference on Trade and Development (UNCTAD) last December, between 2,000 and 3,000 billion dollars.

Therefore, in this context, it is important that the IMF does not insist on program countries such as Pakistan adopting a strongly pro-cyclical policy, since for example the increase in the key interest rate – which, being close of zero real interest rate, is already very high and needs to come down significantly, given that inflation is mainly driven through the cost-push channel, not through the demand channel – increasing the tax burden /cutting tariffs and reducing/eliminating subsidies, especially on oil and essential food items, would not only very likely increase inflation, given that it is mainly caused by cost pressure, but would also significantly harm the dynamic economic growth, which reached, with great difficulty, a reasonable level of 5% more than the previous year, not to mention the overall catastrophe of this slowdown ment and this high inflation on the management of the very difficult situation of debt, poverty and inequality.