Financial globalisation and govt

Forces of globalisation make it difficult for govt to stem dollar’s appreciation

LAHORE:

Financial globalisation has been going on at a rapid pace over the past three decades. Private capital flows have been dominating and driving this process. Most of the advanced countries are squeezing maximum benefit out of this process. However, many developing countries are finding it difficult to negotiate with the process and Pakistan is not an exception. International financial institutions have been guiding and monitoring this process.

The International Monetary Fund (IMF) is designing and asking the governments of developing countries to smoothen the flow of capital. If there is any deviation from the guided path, the IMF will apprise policymakers to come back on track. This is normally done through the conditionality clause. The World Bank has been designing and monitoring the structural adjustment programmes for the developing countries. The purpose is to align the structure of the developing countries with demands of the advanced economies.

Usually, the World Bank extends loans to the developing countries if they get clearance from the IMF. In the absence of the clearance, the World Bank puts the existing programmes on hold and halts the ongoing instalments. The case of Pakistan is instructive in this regard. Pakistan could not complete the Extended Fund Facility (EFF) of the IMF either due to the change in political government in April 2022 or the political turbulence thereafter.

Although the government fulfilled the front-loaded conditions and took prior actions, yet it could not restart the stalled programme. Analysts and commentators were of the view that the government had lost its credibility in the eyes of the lender, which was why it faced difficulties in restoring the programme. The government faced enormous financial challenges in the absence of the IMF programme. Even multilateral lenders stopped the disbursement of loans. The government was also not in a position to launch Eurobonds and Sukuk as credit rating agencies downgraded the rating of Pakistan’s bonds.

Under these conditions, the government approached the bilateral lender to roll over its commitments. It could not maintain the minimum level of foreign exchange reserves as they kept dwindling in the absence of major dollar inflows. Most of the media analysts and commentators painted a gloomy scenario of default apart from some optimistic ones. Although the government tried to stop the devaluation of the rupee vis-a-vis the dollar, yet that paved the way for the creation of a black market. With the low foreign exchange reserves, the government could not arrest the decline of the rupee. The forces of globalisation made it difficult for the government to stem the appreciation of the US dollar.

Meanwhile, the economy kept sliding owing to import restrictions during that period. Hence, shortages of raw material and intermediate inputs came as a prelude to the curtailment of capacity utilisation. Pakistan and the IMF reached a standby agreement in July 2023 and the government had to relax import restrictions. Although it has met the front-loaded conditions, yet it has committed to certain future actions to keep the programme on track. In a stagnating economy, the government has to increase the tax and non-tax revenue. Under such conditions, petroleum products act as a revenue spinner. Therefore, the government has raised the target of petroleum development levy for fiscal year 2023- 24 and has already hiked prices of petroleum products despite a hue and cry among the masses.

Higher international crude oil prices will translate into elevated prices of petroleum products in Pakistan regardless of the political administration in place. In a nutshell, financial globalisation has reduced policy space of the government a great deal. Usually, people and media commentators attribute the administrative price hikes to the existing regime in Islamabad and ignore the rapid pace of globalisation. Let’s see how things unfold in future.

THE WRITER HAS WORKED AT SDSB, LAHORE UNIVERSITY OF MANAGEMENT SCIENCES (LUMS)