ME conflict, austerity, and stagflation

Like anything else in life global economy is increasingly facing a moral question, which has roots in responsibility on international relations, and that is, resolving conflicts – giving all the more attention to the perennial ones given the high level of sensitivities, and rise in complexities over time – based on justice and timeliness. This, in turn, requires adjusting international order away from hegemony of ‘veto’ to a democratic and equality-based disposition. In addition, global economics needs to address questions surrounding its increasingly disruptive economic philosophical underpinnings, which are based on the misgivings of neoliberal, and austerity-based order. This so-called ‘sound’ mainstream economic policy framework exists over the last four decades or so. Having said that, economic philosophy similar to neoliberal, and austerity policies appeared in similar tones during the colonial times, in apparently assisting elite capture of resources, and in extracting resources from the colonies by the colonized. In the post-colonial world, similar consequences have seen perpetuation of extractive politico-economic institutional design, inordinate influence of the rich, advanced countries in leading the multilateral system to more or less serving outcomes that allow for perpetuation of elite capture both within countries, and through strengthening the global order. Unfortunately, even popular waves in countries as a result of rising level of inequality and poverty have continued to be mainly distracted to focus on populist agendas like (wrongly) blaming the immigrants, and not the neoliberal, and austerity policies, which are primarily the basis of economic and political issues facing countries in general. ‘Chicago boys’-styled policymakers naturally apparently seemed to receive favour from political, and economic elites both in domestic policy circles, and in multilateral organizations like International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO), leading to a rise in inequality and in weakening political voice overall globally. In addition to exacerbating inequality and diminishing political voice, these policies led to fast-unfolding of climate change crisis and the related ‘Pandemicene’ phenomenon, and not allowed, in turn, appropriate level of resilience-enhancing investments, and even contributed to conflict. Not learning from the misgivings of the pursuing pro-cyclical policy in the wake of Covid-19 pandemic and the Ukraine War and continuation of practice of austerity policies, in general globally, once again in the wake of severe aggregate supply shock caused inflationary, and significant supply shortages, are raising significant possibility coming into the grips of stagflation. At the same time, IMF is not allocating special drawing rights (SDRs) to countries, and that is on needs basis; it will not provide needed cushion to fiscal space of especially net oil importing countries like Pakistan to usher in counter-cyclical policies as a needed antidote to rising stagflationary pressures. Highlighting a rather lacklustre response by IMF, and World Bank in terms of financial support, and internalizing the neoliberal, and austerity-based economic philosophical underpinnings of their policies, an April 17 published article ‘War, aid cuts and austerity: IMF and World Bank responses risk deepening global humanitarian crisis’ by ‘European Network on Debt and Development’ (Eurodad) pointed out, ‘The IMF and World Bank have sounded the alarm on a deepening global economic crisis, but their response at the 2026 Spring Meetings has raised serious concerns [in the wake of ME conflict], as they continue to promote policies that risk worsening the situation. .. .Yet, despite recognising the scale of the shock, the institutions largely stuck to business as usual. .. .Jean Saldanha, Director of the European Network on Debt and Development said: “Instead of advancing urgent measures such as debt payment suspensions for crisis-hit countries, the IMF are offering more loans tied to austerity-driven reforms. “Calls to suspend IMF surcharges on countries like Pakistan and Egypt, strongly affected by the spillovers of the conflict, were ignored. ”’ It is important to note that there is little learning being shown by policy response, in general, by economic policymakers in economic ministries, and at the IMF in terms of continuing with neoliberal, and austerity-based policies. Hence, monetary austerity is wrongly being practiced – State Bank of Pakistan (SBP) recently raised policy rate by one percentage point to 11. 5 percent – on top of an already significant level of real interest rate regime for long now even though inflation is overwhelmingly the result of aggregate supply shock, and also given there is significant research consensus that inflation is at least equally a fiscal phenomenon in developing countries, raising, in turn, prospects of lowering – of already low – growth rate, increasing, in turn, unemployment and fuelling inflation even as aggregate demand is being squeezed. Furthermore, additional austerity is being imposed through the fiscal channel, which is not only increasing the likelihood of stagflation but also exacerbating the debt burden through higher interest payments and a higher cost of capital. Simultaneously, pursuing a primary surplus (fiscal austerity) is likely to diminish debt-repayment capacity by lowering growth, which in turn results in lower revenues, lower exports, and reduced investment, ultimately hindering the appropriate accumulation of foreign exchange reserves. Instead of putting in austerity policies, and that too putting the burden of taxation across the broad in terms of otherwise regressive, indirect taxation on consumption, or putting heavy income tax burden on the already taxed, tax broadening effort should have been enhanced in an urgent way. Moreover, even in terms of austerity the burden has not been placed in an equitable way. Hence, in terms of better burden sharing, for instance, a meaningful wealth tax should have been brought in. Doing this will likely significantly enhance fiscal space and, in turn, and together with putting in place meaningful level of administrative controls on imports, and prices of essential commodities for consumption, production, and export, would allow greater possibility for adopting counter-cyclical policy, which, in turn, will significantly help in avoiding stagflation, enhance capacity to repay debt, not to mention reduce debt raising requirements, and overall allow greater space for welfare spending. In addition, provision of SDRs by IMF will immensely boost fiscal space of government in doing all that. Also, energy companies, which have received windfall profits, should have faced a windfall energy tax. The extent of profits received by the energy companies could be gauged from the fact that according to analysis by noted Financial Times (FT) columnist, Martin Wolf, in his article ‘The great commodities disruption’ that was published by FT on April 29, oil price rise in March was the highest monthly increase in oil prices since 1988, and by a big distance. Hence, his analysis indicated that the increase in oil price in March in the wake of the Middle East (ME) conflict stood around 45 percent, which was almost three times more than the next month, which was in May 2008, when oil prices rose by around 15 percent! To give an example of these windfall profits for energy companies, a May 7 The Guardian published article ‘Climate campaigners attack Shell over “windfall” profits from Iran war’ pointed out, ‘Shell has reported better than expected profits of $6. 9bn (£5bn) after its oil traders reaped the benefits of soaring energy prices during the war in Iran, angering climate campaigners. Europe’s biggest oil and gas company posted a 115% jump in first-quarter profits from the $3. 2bn reported in the last three months of 2025. ’ Moreover, another The Guardian published article ‘Middle East crisis could cost world $1tn while oil firms make “obscene” profit, analysis finds’ on April 28 indicated the following: ‘The Middle East oil and gas crunch will impose as much as a trillion dollars of additional costs on the global economy while petroleum companies rake in spectacular profits from elevated fuel prices, analysis has revealed. .. .Even if the Strait of Hormuz swiftly returns to normal operations, the burden of elevated oil and gas prices will reach about $600bn, according to recent International Monetary Fund figures analysed by the climate campaign organisation 350. org. Should the supply disruption continue, the economic hit to households, businesses and governments could surge above $1tn, it said. This is likely to be an underestimate because it does not include the substantial knock-on effects of inflation, particularly higher fertiliser and food costs, lower economic activity and rising employment. ’ Having said that, the issue of putting a windfall tax also needs a nuanced approach, given the complexity at hand, so that tax design learning from similar, yet less fruitful attempts in terms of tax collection from taxing energy windfall profits in the wake of Covid-19 pandemic, and Ukraine War. Highlighting the rising calls for putting a windfall tax on substantial rise in profits of energy companies in the wake of the ME crisis, a May 1 New York Times (NYT) article ‘Blockbuster Oil Company Profits Revive Calls for Windfall Tax’ pointed out: ‘The British oil giant BP, citing an “exceptional” performance, more than doubled its profits in the first three months of this year over last. TotalEnergies, based in Paris, raised its dividends and doubled its share buybacks after announcing $5. 4 billion in net profits for the first quarter. Around the world, the bumper returns have revived calls for taxes on oil and gas companies’ sudden jackpots. Finance ministers from Austria, Germany, Italy, Portugal and Spain, as well as a raft of advocacy groups like Oxfam and the World Wildlife Fund, have asked the European Commission to tax excessive profits. ’ Moreover, the same article pointed towards the need to check possible watering down efforts by energy companies with regard to taxing windfall oil profits as follows: ‘The idea behind a tax on windfall profits is that the unusual gains are a result not of any business acumen, hard work or investment decisions, but of unpredictable events. .. .The last time a war triggered a global energy crisis and prompted calls for a windfall profits tax was in 2022 when Russia invaded Ukraine. That year, the world’s oil and gas suppliers more than doubled their net income compared with 2021. Then, the industry’s extraordinary returns caused most members of the European Union to introduce a temporary tax on “surplus profits” and use the money to reduce consumers’ energy bills. .. .The French economist Gabriel Zucman said France had raised 69 million euros instead of an estimated €3 billion. Why? Because companies shifted profits either to offshore tax havens or to countries where the oil was produced instead of where it was refined or consumed. .. .One answer, Mr. Zucman said, is to tax global windfall profits, which would end the loopholes, and then redistribute the revenues to households in a lump sum. He pointed to the annual check that Alaskans receive from their state’s Permanent Fund, which is supplied by oil and mining revenue. ’ Hence, while it is better for countries to come together to place a global windfall tax, nonetheless it is important to tax at the national level till the consensus towards a global tax among countries is reached. Concluding, it is indeed quite shocking that a meaningful level of windfall tax on energy companies is not being placed in general, and also in Pakistan. At the same time, even if the ME conflict stopped today, the chances of stagflation have considerably increased. More shockingly, policy response has hardly learnt from the aggregate supply crisis earlier in the decade due to Covid-19 pandemic, the Ukraine War, and in the wake of the ongoing ME conflict. Copyright Business Recorder, 2026

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