As the end of the year approaches, a series of events have led to a boisterous global economy raising a need for proper policy action. The Russia and Ukraine war caused severe supply shocks that in turn caused commodity prices to rise. Where fuel adds to the already burning-hot inflation caused by recovering demand amid supply chain disruption. Central banks across the world have been forced to tighten financial constraints to fight inflation. This means central banks have had to start normalizing the loose liquidity/monetary policy seen during the pandemic earlier than expected to tame rising inflation. In 2023, several lingering risk factors are expected to hamper global economic growth, i.e. geopolitical tension, stubbornly high inflation, climbing interest rates, and likely, recession. Inflation and increasing interest rates have led to declining confidence in the prospect of growth. Adding to the pressure, one of the largest economies, China, recorded worse-than-expected economic growth, as the country continued with its zero-COVID policy, which led to the partial lockdown of the economy. The slowdown in the world’s largest economies will have significant consequences on the global outlook. International Monetary Fund projected growth to slow from 6.1% in 2021 to 3.2% this year. The economy is projected to slow further to 2.9% in 2023.
Pakistan’s economy is also forecasted to have a slow pace of growth up to slow to 3.5% in fiscal year FY-2023.amid devastating floods, policy tightening, and critical efforts to tackle sizable fiscal and external imbalances, even as growth in FY2022 is expected to have reached 6.0% (ADB). In fragile economies, a small political shake-up can disturb a country’s entire development process, slowing down the pace of economic activity, creating a sense of insecurity in the financial sector, and diverting the nation’s progress toward economic security. All of this can result in another set of problems. This is exactly what we expect for Pakistan in 2023. As per current statistics of the State Bank of Pakistan our net reserves of $8.8 billion, Commercial bank reserves of $5.67 billion, our Current account deficit for the financial year 2021–2022 of $17.41 billion, and for July 2022 of $3.13 billion and balance of trade deficit for the financial year 2021–2022 of $44.71 billion and for July 2022 of $3.35 billion. Till July 2022, the Country’s, Consumer Price Index inflation increased to 24.9% (from 21.3% in the previous month). So far this year, GDP has grown at a rate of 5.97% (against a target for 2022–2023 of 5%).
Pakistan’s economy is under pressure due to a current account deficit of almost $10 billion and principal repayments of external debts of $24 billion. From April to July 2022, the rupee devalued by more than 10% due to political disturbances while the demand for US$ is continuously increasing, and uncertainty in the money market resulted in the depreciation of reserves. Fuel and energy prices contribute significantly to inflation and the state is totally blind that how to tackle these challenges of trade and current account imbalances and increasing inflation.
State bank of Pakistan took extreme measures by imposing a 100% cash margin against 177 imported goods in April in order to minimize the gap between increasing imports and declining exports along with the pre-approval of the bank before importing automobiles, phones, and types of machinery. However, after four months, it relaxed such requirements. Currently, if the terms of payment for imports are 91 to 180 days, the cash margin requirement will be 25%. It will be 0% if the terms exceed 180 days. The cash margin requirement measures have had a positive impact on the import bill. It decreased from $7.9 billion Pakistani rupees in June 2022 to $6.1 billion in July 2022. The International Monetary Fund’s 23rd program for Pakistan has been approved and the first tranche of around $1.2 billion has been received. Bearing in mind the country’s foreign exchange reserves position, Pakistan needs extra support of $4 billion. A funding arrangement is being planned from different sources, including loans from friendly countries.
In view of the economic problems of developing countries such as Pakistan, effective and sustainable policy-making and reform can only be done on the basis of proper data analysis. If Pakistan’s economy is not growing at the required pace, then policymakers must find out the causes and prepare a comprehensive development plan to implement sustainable growth without political interference. On the administrative front, there are various issues that need to be addressed; implementing the best policies will not work if there is weak enforcement which is one of the biggest problems in Pakistan. At the same time, Pakistan needs stability. Political instability ruins the process of economic development and creates bad governance, which ultimately takes over all civil institutions, resulting in recurring financial crises.
This is not the end of the story, growing inequality between and within countries is continuously rising as an outcome of COVID-19, which indicates uncoordinated policy action by the World. Soaring inflation and decline in wages generate the major problem of the cost of living crisis and hit the most deprived sector. The earth’s climate is the ultimate ‘tragedy of the global commons’: individual and collective incentives are misaligned because the price of harmful economic activities does not accurately reflect the true social cost. It results in the over-production of carbon-intensive assets to the ultimate detriment of global welfare but all this activity harshly damages our economies as an outcome so, Pricing carbon emissions or the internalization of their negative externality is the first step to solving this ‘market failure’. Increasing their price, disincentivizes carbon emissions, while also generating public revenues to compensate groups negatively affected by the transition and fund public goods such as low-carbon energy infrastructure. Therefore, such a carbon pricing mechanism would ideally be global in nature, to avoid regulatory arbitrage and cross-border carbon leakage and support our economies in 2023 and in the future.
Overall it is concluded that there will be few significant challenges for the entire world in the year 2023, which are inflation, labor, supply chain, the cost of capital, and environmental, social, and governance (ESG) and sustainability issues so, short term and long term policies must be taken to reduce the vulnerabilities of future where in short-term governments should provide transfers for the poorest populations to compensate increases in food prices. This helps to keep people from sliding into poverty and extreme poverty. Subsidies should be designed and funded carefully to avoid larger fiscal imbalances that could contribute to higher inflation rates while Long-term policies should target structural factors to reduce future vulnerabilities. Investing in agricultural innovation, research, and climate change adaptation is key to improving productivity in agro-industries, food system resilience, and strengthening food security.
Access to good jobs is an integral part of both obtaining and sustaining quality of life and well-being. From a labor market perspective, policies that could dramatically benefit vulnerable populations include skills-based hiring, pay and wage transparency, second-chance hiring, accessibility tools, and accommodations, and inclusive and unbiased hiring. While some leaders look to a one-size-fits-all policy to address the cost of living issues, the truth is this rarely results in the desired outcome. Instead, policymakers must consider both the broader, long-term picture, as well as the unique situation within industries, locations, and individual needs to help close these gaps.
As the World is facing hardships ranging from the increased cost of living, global warming, and geopolitical tensions, employment opportunity and protection for all is key to future prosperity. The micro and macro benefits of adequate, gainful employment enable increased quality of life and well-being, the opportunity for economic mobility, and benefits to both physical and mental health. Ultimately, on a global scale, we must identify and build on technology that is being used effectively to support workers and ensure that job mobility, continuous learning and access to information are widely available to drive employment opportunities and protection for workers so, its high time for policymakers and states to adopt appropriate policy actions to secure the future of this entire World which makes it a better place for living.
The Author is MD IRP/Faculty Department of Humanities & Social Sciences, Bahria University Karachi