ME conflict caused supply shock, and IMF policy-II

It needs to be pointed out that IMF has given no indication for provision of enhanced special drawing rights (SDRs) allocation. In addition, IMF has apparently not indicated providing a platform that allows for fast-tracked resolution of possible debt forgiveness/moratorium/restructuring related discussions. Both of these initiatives would have better cushioning of foreign exchange reserves, and fiscal space, and also helped light debt burden. Moreover, such provision on needs-basis, and not quota-basis, given the emergency situation of a substantial conflict, would have allowed countries, many of which in the shape of being programme countries like Pakistan have already been pursuing pro-cyclical, austerity, and overall neoliberal policies, which have kept growth rates, aggregate supply base, and investment levels low, making, in turn, it all the more difficult to shift away from fossil fuel dependence and overall creating higher resilience. READ MORE: ME conflict: supply shock, and IMF policy-I Hence, rather than just highlighting to the countries the limitations of their fiscal space, focus should have been on enhancing that capacity so that countries could not only provide counter-cyclical boost for economic growth, and greater broad-based subsidy provision both in terms of quantity, and coverage, given the low economic institutional quality and overall weak markets do not allow appropriate level of provision of targeted subsidies, running the danger of a significant level of people being left out of such targeted support. Another source of disappointment with regard to delay was apparently a difference in approach, whereby while in the case of the Ukraine War, which started in 2022, the response was swift, and relatively much deeper than has been the case in the case of the Middle East conflict. An April 9, ‘Bretton Woods Project’ published article ‘Spring Meetings 2026 preamble: ‘Rupture in world order’ further challenges IMF and World Bank’s legitimacy’ pointed out in this regard, ‘Despite its mandate to safeguard global macroeconomic stability, the IMF has chosen a suspicious silence, according to Nabil Abdo of Oxfam International, claiming it is “closely monitoring developments” and will assess the situation in its April World Economic Outlook. .. .This contrasts with the Fund’s response to Ukraine, which Abdo suggests reflects IMF leadership’s fear of angering the US administration – a dynamic that raises broader questions about the Fund’s ability to act impartially. .. .If the IMF applies one standard to powerful economies while prescribing austerity elsewhere, its credibility as an ‘impartial institution’, already strongly criticised by civil society, will be further and significantly undermined, including in the eyes of financial markets and states in the Global South. ’ In addition, not only has IMF not given any indication regarding provision of enhanced SDR allocation, there has also not been any creative policy suggestion by IMF, for instance, with regard to putting a windfall tax on significant profits made by oil companies during the conflict. Moreover, IMF has not emphasized putting a wealth tax. Both of these steps, for instance, would likely allow much greater fiscal space to countries. With regard to the profits being made by oil companies, an April 15, Guardian published article ‘$30m an hour: big oil reaping huge war windfall from consumers, analysis finds’ pointed out, ‘The world’s top 100 oil and gas companies banked more than $30m every hour in unearned profit in the first month of the US-Israeli war in Iran, according to exclusive analysis for the Guardian. Saudi Aramco, Gazprom and ExxonMobil are among the biggest beneficiaries of the bonanza, meaning key opponents of climate action continue to prosper. The conflict pushed the price of oil to an average of $100 (£74) a barrel in March, leading to estimated windfall war profits for the month of $23bn for the companies. Oil and gas supplies will take months to return to pre-war levels and the companies will make $234bn by the end of the year if the oil price continues to average $100. ’ Moreover, in its April 13 published press release ‘Wealth largely absent from IMF tax guidance, benefiting the rich’ Oxfam highlighted lack of focus by IMF on wealth tax as ‘Only 3 percent of the more than 1, 000 tax recommendations made by the International Monetary Fund (IMF) to governments in recent years focus on taxing wealth and income from wealth, new analysis by Oxfam reveals ahead of the IMF and World Bank Spring Meetings in Washington, D. C. Oxfam examined the IMF’s tax advice to 125 countries between 2022 and 2024. Despite the rapid growth of extreme wealth billionaire wealth has surged by 81 percent since 2020 just 30 of 1, 049 tax recommendations focus on net wealth taxes and the taxation of income from wealth, namely capital gains. ’ Sadly, this lackluster focus continued even in the wake of the Middle East conflict caused severe aggregate supply shock, which is likely to deepen an already difficult fiscal space, debt burden related situation in a number of countries. The same press release pointed out in this regard, ‘“As billionaire fortunes grow at extraordinary speed, the IMF’s silence on taxing extreme wealth is increasingly untenable, ” said Kate Donald, Head of Oxfam International’s Washington DC Office. “The Fund is reinforcing a system in which ordinary people — already strangled by rising prices — are forced to shoulder the brunt of taxes. Meanwhile, vast concentrations of obscene wealth remain largely untaxed. Serious fiscal reform should start with those most able to contribute. ”’ Moreover, the press release indicated that the analysis by Oxfam also highlighted a strangely contradictory approach with regard to taxation being taken by IMF, while advising countries belonging to different income groups. It is strange because the underlying economics fundamentally at play in all countries is the same with regard to taxation consequences. The press released indicated in this regard, ‘Oxfam’s analysis exposes two striking discrepancies in IMF guidance depending on a country’s income level. First, 52 percent of tax advice to high-income countries was progressive, while 59 percent of tax advice to low- and lower-middle-income countries was regressive. .. .IMF tax advice to Canada and the United States was overwhelmingly progressive, while advice to South Asia was by far the most regressive, followed by Latin America and the Caribbean, and sub-Saharan Africa. India received the highest number of regressive recommendations. ’ This fiscal space is indeed very important for providing social protection, given poverty is likely to increase as a result of the Middle East conflict, as an April 13, Guardian published article ‘Iran war could plunge 32 million into poverty, says United Nations’ pointed out: ‘More than 32 million people worldwide could be plunged into poverty by the economic fallout from the Iran war, with developing countries expected to be hit hardest. In a report issued amid doubts over a fragile ceasefire, the United Nations Development Programme (UNDP) said the world was facing a “triple shock” involving energy, food and weaker economic growth. ’ This likely consequence on poverty from the Middle East conflict is in addition to the possible build-up of food insecurity, for instance, as a result of lack of supply of fertilizer to farmers. Moreover, it is important to provide subsidy to farmers to protect them from likely higher sowing costs due to rising fertilizer price in the wake of its supply shock which, in turn, will also help keep its inflationary impact lower than if such subsidy is not provided, not to mention lack of provision of subsidy will likely lead to possible dip in quantity of agricultural produce, due to probably lower level of application of fertilizer at the back of its rising affordability concerns. An article ‘“Food security timebomb”: a visual guide to the Gulf fertiliser blockade’ published by Guardian on April 3 indicated in this regard: ‘The world has become well versed in the importance of the strait of Hormuz to the world’s energy flows, but attention is increasingly turning to its vital role in another market – the fertiliser on which harvests depend. A third of the global trade in raw materials for fertiliser passes through the maritime choke point, which is also the route for 20% of shipments of natural gas, which is required to make it. The waterway’s near-total shipping blockade is a “food security timebomb”, the head of the International Rescue Committee, David Miliband, said this week, adding: “The window to avert a massive global hunger crisis is rapidly closing. ”’ This delay, and disappointing IMF response – similar to what happened in the wake of the Covid-19 pandemic when enhanced SDR allocation not only came a little over one-and-a half years later into the pandemic, August 2021 to be precise, but that allocation mostly went to already rich countries, given the routine criterion of quota-based allocation was adopted in that deep crisis situation – highlights an apparently little-learning attitude from its past mistakes. That response significantly weakened the capacity of countries to manage their debt better, given subsidy provision especially to cushion lock-down, and overall recessionary situation likely came mainly out of limited fiscal space. Hence, wrong policy advice by IMF to control inflation through primarily applying monetary austerity when inflation back then – like now – was clearly a significantly supply-side concern, and required a more balanced policy approach, which also meant subsidy needs met with further borrowing as well, which overall enhanced debt distress, due to higher payment needs generated; not to mention resources from fiscal space taken away to pay higher interest payments meant curtailing of otherwise important expenditures with regard to health and education, for instance. Also, the negative consequence of application of monetary austerity on economic growth in countries in general, as a second-round consequence resulted in both lower domestic resource mobilization, and export earnings, along with diminishing debt repayment capacity all the more. The fact that the same pathway of monetary, and fiscal austerity is being indicated by IMF for countries to tread, making, in turn, IMF’s policy advice dangerous. (Concluded) Copyright Business Recorder, 2026

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