Lahore: Financial globalization has continued at a rapid pace over the past three decades. Private capital flows have dominated and driven this process. Most of the developed countries are taking maximum advantage of this process. However, many developing countries are finding it difficult to negotiate with this process and Pakistan is no exception. International financial institutions are guiding and monitoring this process.
The International Monetary Fund (IMF) is designing and asking governments of developing countries to facilitate capital flows. If there is a deviation from the guided path, the IMF will alert policymakers to get back on track. This is usually done through a conditional clause. The World Bank is designing and overseeing structural adjustment programs for developing countries. It aims to align the infrastructure of developing countries with the requirements of developed economies.
Generally, the World Bank extends loans to developing countries if they receive clearance from the IMF. In the absence of clearance, the World Bank suspends existing programs and freezes ongoing installments. The case of Pakistan is instructive in this regard. Pakistan was unable to complete the IMF’s Extended Fund Facility (EFF) either due to a change of political regime in April 2022 or subsequent political turmoil.
Although the government fulfilled the front-loaded conditions and took advance measures, it could not restart the stalled programme. Analysts and observers believed that the government had lost credibility in the eyes of lenders, which made it difficult to revive the program. In the absence of the IMF program, the government faced enormous financial challenges. Even multilateral lenders stopped disbursing loans. The government was also not in a position to launch Eurobonds and Sukuk as credit rating agencies downgraded Pakistan’s bonds.
Under these circumstances, the government approached the bilateral lender to meet its commitments. It could not maintain the minimum level of foreign exchange reserves as they continued to decrease in the absence of large dollar inflows. Most media analysts and commentators, apart from a few optimists, painted a gloomy picture of the default. Although the government tried to prevent the depreciation of the rupee against the dollar, it paved the way for the establishment of a black market. Due to low foreign exchange reserves, the government could not stop the depreciation of the rupee. The forces of globalization made it difficult for the government to control the value of the US dollar.
Meanwhile, the economy continued to slump due to import restrictions during this period. Hence, shortages of raw materials and intermediate inputs predispose to reduced capacity utilization. Pakistan and the IMF entered into a standby agreement in July 2023 and the government had to ease import restrictions. Although he has met the front-loaded conditions, he has committed to taking some future steps to keep the program on track. In a stagnant economy, the government has to increase tax and non-tax revenue. In such situations, petroleum products act as a revenue spinner. Therefore, the government has increased the Petroleum Development Levy target for the financial year 2023-24 and has already increased the prices of petroleum products despite public outcry.
A rise in international crude oil prices will increase the prices of petroleum products in Pakistan, irrespective of the political administration. In short, financial globalization has substantially reduced the policy space of government. Generally, people and media commentators blame the current government in Islamabad for the increase in administrative costs and ignore the rapid pace of globalization. Let’s see how things unfold in the future.
