Falling oil prices and general inflation figures around the world, including Pakistan, on the one hand, offer the potential for a greater increase in global growth, but the rapidly spreading climate change crisis and rising geopolitical tensions in the Middle East could easily change this structure. Optimism about global economic recovery.

For example, the World Bank Group’s October 2024 ‘Commodity Markets Outlook’ remains optimistic that the decline in oil prices will continue, stating that ‘The energy price index is forecast to fall 6 percent (y/y) in 2024. There will be a further decline of 6 percent in 2025 and 2 percent in 2026. ‘The forecast assumes that there will be no additional prolonged escalation in ongoing armed conflicts, global economic growth will remain stable, and oil supplies from non-OPEC+ producers will expand steadily.’ However, this optimistic scenario could quickly reverse if the conflict situation in the Middle East escalates further. Interruptions in oil supply could lead to stagflationary consequences around the world, and higher import payments could mean balance of payments difficulties and lead to debt sustainability problems for net oil importers such as Pakistan.

The ‘World Economic Outlook: policy axis, increasing threats’ (WEO) report, released by the International Monetary Fund (IMF) last month, showed that global growth remained as predicted, but in the medium term, growth was still below previous periods. -pandemic average; Growth recovery remains more challenging for developing countries. The report includes the following statements on this subject: ‘Global growth is expected to remain stable but insufficient. The growth forecast of 3.2 percent for 2024 and 2025 is virtually unchanged from the forecasts in both the July 2024 World Economic Outlook Update and the April 2024 World Economic Outlook. …The latest forecast for global growth five years from now – 3.1 percent – ​​is mediocre compared to the pre-pandemic average. Persistent structural disadvantages, such as population aging and weak productivity, are hindering potential growth in many economies. …The negative supply shocks experienced in the global economy since 2020 have created permanent effects on production and inflation, with different effects among individual countries and groups of countries. The sharpest differences are between developed and developing economies. While the first captures the activity and inflation predicted before the pandemic, the second shows more permanent traces…’

Regarding Pakistan, the Report expects the general government balance to remain negative at 6 percent and 6.7 percent in the current and last fiscal year respectively, while predicting a rather sharp decline in this regard; Thus, for the next four years, the budget deficit stood at an average of 3.5 percent! The obvious reason is that the country currently under the IMF program is required to have a primary surplus.

Regarding Pakistan, the WEO report projected real GDP growth for 2024-25 at 3.2 percent; In contrast, it showed a slight increase from the projected growth of 2.4 per cent for 2023-24. This suggests that the country has required a very strong retrenchment of aggregate demand through the adoption of acute monetary and fiscal austerity policies, allowing only a very weak increase in real GDP figures projected for the current fiscal year. Therefore, the economic outlook for Pakistan also remains very complex, given the strong aggregate supply determination of inflation, and therefore, should the conflict situation in the region worsen – which is quite possible – any significant increase in oil prices could lead to stagflationary consequences. In this context, the IMF’s CPI inflation forecast for the current fiscal year at 9.5 percent in the Report reflects much more optimism than the author of this article, given the possibility that the level of conflict will seriously increase. Middle East.

In addition to geopolitical conflicts complicating the global economic outlook, another source of concern regarding the recovery of economic growth after the pandemic emerges in the form of the problem of generally high levels of public debt. In another report titled ‘Fiscal monitor: closing the public debt’ published by the IMF in October, it was emphasized that ‘Global public debt is very high’. It is expected to exceed $100 trillion (93 percent of global GDP) in 2024 and continue to rise by the end of the decade (approaching 100 percent of GDP in 2030). Although debt is projected to stabilize or decline in about two-thirds of countries, it will remain well above levels projected before the pandemic. ‘Countries where debt is not expected to stabilize account for more than half of global debt and nearly two-thirds of global GDP.’

Regarding Pakistan, the Report expects the general government balance to remain negative at 6 percent and 6.7 percent in the current and last fiscal year respectively, while predicting a rather sharp decline in this regard; Thus, for the next four years, the budget deficit stood at an average of 3.5 percent! The obvious reason is that the country currently under the IMF program is required to have a primary surplus. For a country that needs to spend to create economic resilience, targeting a primary surplus is actually undesirable, considering that it is among the top 10 countries in the world struggling with climate change.