What causes macroeconomic instability? Main determinants that come to mind are elevated levels of inflation, fiscal deficit (FD), current account deficit (CAD), and debt burden. Moreover, what brings sustainable macroeconomic stability? Naturally, starting with inflation, and notwithstanding sudden and short-lived spikes from temporary and not so deep exogenous shocks, sources of demand-pull, cost push, and imported inflationary channels remain in normal range – for instance in low, single digits – gap between revenue and expenditure or FD as a percentage of gross national income (GNI) is on the lower side, and similarly, difference between exports and imports as a percentage of foreign exchange reserves is once again on the lower side.

The problem is that all of these are on the higher side in general, and it is only after a lot of growth sacrifice is given that macroeconomic instability falls. But such decline in instability is short-lived because the way inflation is reduced is by adopting overboard monetary and fiscal austerity – very significantly increasing policy rate, and pushing for primary surplus – which, in turn, reduces inflation mostly through squeezing aggregate demand. Moreover, fiscal austerity while reduces expenditures – but here the manner of reduction is undesirable because of a significant cut in development expenditures – on the one hand, expenditures in the shape of high interest payments that follow only allow the return of instability, on the other hand.

Similarly, a reduction in current account deficit at the back of overboard demand squeeze means while reduction in imports provides reduction in CAD, and even results in surplus, reduction in exports that soon follows – since most of intermediary goods for exports come from imports........

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