“This is cost-inflating inflation… it’s an increase in the cost of fuel that’s being used for everything else. It’s used in the production of many, many other goods and services, it’s used in transportation, and so it affects not only prices at the pump, but virtually every other price in the economy. The problem is that governments then say, well, what we have to do is get the central bank to tighten monetary policy, raise interest rates. That’s not the problem, that’s not the solution, that’s not the cause of inflation, so you really have to look at other measures in this situation. … Prices themselves have risen more than you would expect given the actual impact on supply … and that’s because there has been very feverish speculative activity in the so-called commodity futures markets.’ – Excerpt from a recent interview by Jayati Ghosh on “Democracy Now”
According to Oxfam, 87 percent of International Monetary Fund (IMF) programs over the past two years — which are also the years of the pandemic and its recession-inducing effects, especially on developing countries — have suffered vaccination apartheid and little debt moratorium/facilitation — the Countries in the program were asked to take austerity measures.
That doesn’t make much sense, not only because the IMF has simultaneously encouraged countries in the Global North to boost their economies – where both rapid and adequate vaccine delivery and more than $13 trillion in stimulus have resulted in much faster development and a more pronounced economic recovery than developing countries as a whole – but also because developing countries had to incentivize their populations and improve their purchasing power after, first, supply shortages led to high oil prices overall by the OPEC+ group of countries, where oil prices are benefiting from a decline in the Oil prices had reached very high levels of over $130 a barrel in the first few months of the pandemic before falling to just under $100 a barrel when, for example, the US released significant amounts from its oil reserves in the wake of Russia’s war in Ukraine .
Second, during the pandemic, developing countries, many of which were already facing difficult debt situations, had to fund most of all stimulus/benefit and health sector spending that they could fund from their own resources given a very low debt moratorium. Creditors, including multilateral institutions, put things right.
It is important that the IMF does not push program countries like Pakistan to adopt strong pro-cyclical policies.
Third, not much stimulus could be provided by developing countries, as developing countries did not receive significant amounts in the form of enhanced allocations of Special Drawing Rights (SDRs) from the IMF. So when the IMF provided an increased allocation of SDRs of $650 billion last August, most of it went to rich, advanced countries because it was improperly allocated given the situation of the pandemic at hand, according to standard practice of allocation based on member countries’ SDR quotas—richer countries with a higher contribution to the IMF’s resource pool have larger quotas—when it was the developing countries that needed the lion’s share.
Thus, for example, Pakistan received only $2.75 billion in expanded SDR allocation. However, the possibility of shifting an increased allocation of SDRs from developed countries to developing countries through a recently established window in the form of the IMF’s Resilience and Sustainability Trust could help fill some of the developing countries’ financing gap, but the greatest success would be if the IMF could persuade the US Congress to pass the $2.2 billion expanded SDR allocation bill. Furthermore, during the unusual times of the pandemic, any potential subsequent allocation of expanded SDRs should be done in a manner that ensures that those countries most in need of such assistance receive it accordingly.
It is worth mentioning here that the financing needs of developing countries were much greater than they could obtain, and these needs were not reduced by an adequate debt moratorium/alleviation or by providing a significant amount of climate finance, which is enough countries pledged during the 2015 Paris Climate Agreement, indicating they would provide $100 billion annually in climate finance to developing countries. For example, the amount of financing developing countries need to provide stimulus, improve debt sustainability, increase purchasing power and reduce the imported component of costly inflation has been specified by the United Nations Conference on Trade and Development (UNCTAD). between $2 and $3 trillion last December.
It is therefore important in this context that the IMF does not push program countries like Pakistan to adopt strong pro-cyclical policies, since, for example, a hike in the key interest rate – which is close to zero in real terms – is already very high and needs to be reduced significantly, since inflation is mainly driven by the cost-push channel and not the demand-pull channel – increasing the overall tax/tariff burden and reducing/removing subsidies, particularly for oil and essential commodities, would not only most likely increase inflation, since as stated in first line is caused by cost pressures, but on the other hand also seriously affect the dynamics of economic growth, which has reached a reasonable level of 5 percent plus in the last financial year with great difficulty, not to mention the general disaster of coping with this slowdown and high inflation ng the very difficult debt, poverty and inequality situation.
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