In the face of numerous upheavals over the past four years, the global economy has demonstrated unexpected resilience. Despite the swiftest surge in interest rates in four decades, major economies are largely emerging unscathed, devoid of the typical aftermath of high unemployment rates or financial crises.

Global inflation is being managed without plunging the world into recession, a feat uncommonly achieved without triggering an economic downturn. The prospect of a “soft landing” appears increasingly plausible.

However, looking beyond the next two years, the future appears bleak. By the end of 2024, the world will reach the midpoint of what was anticipated to be a decade of profound transformation, with aims of eradicating extreme poverty, eliminating major communicable diseases, and significantly reducing greenhouse gas emissions.

Instead, a grim milestone awaits — the weakest global growth performance in any five-year period since the 1990s, with one in every four developing economies experiencing increased poverty compared to pre-pandemic levels.

The sudden fluctuations in commodity prices cause boom-and-bust cycles

According to Global Economic Prospects forecasts, advanced and developing economies are expected to experience slower growth in 2024 and 2025 compared to the pre-Covid-19 decade. Global growth is projected to decrease for the third consecutive year, reaching 2.4 per cent before a slight uptick to 2.7pc in 2025, still significantly below the 3.1pc average of the 2010s.

Per-capita investment growth in 2023 and 2024 is anticipated to average just 3.7pc, which is only half of the previous two decades’ average. Without intervention, global growth is expected to remain below potential throughout the rest of the 2020s.

Delving deeply into policy analysis offers slight hope. What is required to foster the most desirable type of investment boom, characterised by an increase in per-capita income growth, a rise in productivity, and a decrease in poverty? The answer is a comprehensive policy package: consolidating government finances, expanding trade and financial flows, strengthening fiscal and financial institutions, and improving the investment climate for private enterprises.

The current economic outlook indicates a slowdown in growth this year, influenced by various factors, including tight monetary policies, restrictive financial conditions, and sluggish global trade and investment.

In the context of Pakistan’s economy, trade, and industry, these challenges are exacerbated by specific local dynamics such as high borrowing costs, trade fragmentation, currency depreciation, and climate-related disasters. Additionally, the ongoing war in the Middle East and its impact on commodity markets pose significant downside risks.

The majority of investment accelerations are either preceded by or occurred simultaneously with policy changes aimed at enhancing macroeconomic stability, implementing structural reforms, or both. These policy measures prove especially effective in fostering investment accelerations when implemented alongside effective institutional frameworks.

Amidst these challenges, policymakers in Pakistan are confronted with immense tasks. Despite subdued investment prospects in Pakistan, characterised as an emerging market and developing economy (EMDEs), there are lessons to be learned from historical periods of investment growth acceleration. These lessons emphasise the critical role of macroeconomic and structural policies, as well as the importance of well-functioning institutions in stimulating investment and fostering long-term growth.

An opportunity exists to improve Pakistan’s economy and economic dynamics. With its reliance on low-value exports, applying the Hippocratic principle to fiscal policy — first, do no harm — could prove beneficial.

Pakistani economy often faces the challenge of volatile boom-and-bust cycles due to sudden fluctuations in commodity prices owing to geopolitical instability and policy discontinuity. Fiscal policies, if not carefully managed, exacerbate these cycles.

In fact, the level of fiscal procyclicality in commodity-exporting developing economies like Pakistan is 30 per cent higher compared to other developing economies. Additionally, fiscal spending in commodity-exporting countries tends to be 40pc more volatile, further highlighting the need for prudent fiscal management in Pakistan.

Risks still predominantly lean towards the downside. The potential escalation of the war in the Middle East presents a significant risk, along with escalating geopolitical tensions in other regions, which could negatively affect markets, trade, financial linkages, and overall confidence.

Weak growth, high debt levels, and persistently high interest rates increase the likelihood of financial strain, particularly in more vulnerable EMDEs such as Pakistan.

The current decade, the 2020s, has thus far witnessed unfulfilled pledges and aspirations. Governments worldwide, including Pakistan, have failed to meet the ambitious targets they set for themselves to achieve by 2030: ending poverty and hunger, addressing inequalities, and ensuring environmental sustainability.

The writer is the head of content at a communications agency.

Email: sara.amj@hotmail.co.uk

Published in Dawn, The Business and Finance Weekly, February 26th, 2024