How Countries Should Respond to Strong Dollar?

The US dollar is at its highest level since 2000, having appreciated 22% against yen, 13% against the euro and 6% against emerging market currencies since the start of this year. Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the greenback in international trade and finance.

While the US share in world merchandise exports has declined to 8% from 12% since 2000, the dollar’s share in world exports has held around 40%. For many countries fighting to bring down inflation, the weakening of their currencies relative to the dollar has made the fight harder. On average, the estimated pass through of a 10% dollar appreciation into inflation is one percent. Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies.

The dollar’s appreciation also is reverberating through balance sheets around the world. Approximately half of all cross-border loan and international debt securities are denominated in US dollars. While emerging market governments have made progress in issuing debt in their own currency, their private corporate sectors have high levels of dollar-denominated debt. As world interest rates rise, financial conditions have tightened considerably for many countries. A stronger dollar only compounds these pressures, especially for some emerging market and many low-income countries that are already at a high risk of debt distress.

In these circumstances, should countries actively support their currencies? Several countries are resorting to foreign exchange interventions. Total foreign reserves held by emerging market and developing economies fell by more than 6% in the first seven months of this year.

The appropriate policy response to depreciation pressures requires a focus on the drivers of the exchange rate change and on signs of market disruptions. Specifically, foreign exchange intervention should not substitute for warranted adjustment to macroeconomic policies. There is a role for intervening on a temporary basis when currency movements substantially raise financial stability risks and/or significantly disrupt the central bank’s ability to maintain price stability.

As of now, economic fundamentals are a major factor in the appreciation of the dollar, rapidly rising US interest rates and a more favorable terms of trade a measure of prices for a country’s exports relative to its imports for the US caused by the energy crisis.

Fighting a historic increase in inflation, the Federal Reserve has embarked on a rapid tightening path for policy interest rates.

The European Central Bank, while also facing broad-based inflation, has signaled a shallower path for their policy rates, out of concern that the energy crisis will cause an economic downturn.

Meanwhile, low inflation in Japan and China has allowed their central banks to buck the global tightening trend.

The massive terms of trade shock triggered by Russia’s invasion of Ukraine is the second major driver behind the dollar’s strength. The euro area is highly reliant on energy imports, in particular natural gas from Russia. The surge in gas prices has brought its terms of trade to the lowest level in the history of the shared currency.

As for emerging markets and developing economies beyond China, many were ahead in the global monetary tightening cycle—perhaps in part out of concern about their dollar exchange rate—while commodity exporting EMDEs experienced a positive terms-of-trade shock. Consequently, exchange-rate pressures for the average emerging market economy have been less severe than for advanced economies, and some, such as Brazil and Mexico, have even appreciated.

Given the significant role of fundamental drivers, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to its target.

The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt.

Fiscal policy should be used to support the most vulnerable without jeopardizing inflation goals.

Additional steps are also needed to address several downside risks on the horizon. Importantly, we could see far greater turmoil in financial markets, including a sudden loss of appetite for emerging market assets that prompts large capital outflows, as investors retreat to safe assets.

In this fragile environment, it is prudent to enhance resilience. Although emerging market central banks have stockpiled dollar reserves in recent years, reflecting lessons learned from earlier crises, these buffers are limited and should be used prudently.

Countries must preserve vital foreign reserves to deal with potentially worse outflows and turmoil in the future. Those that are able should reinstate swap lines with advanced-economy central banks.

Countries with sound economic policies in need of addressing moderate vulnerabilities should proactively avail themselves of the IMF’s precautionary lines to meet future liquidity needs.

Those with large foreign-currency debts should reduce foreign-exchange mismatches by using capital-flow management or macro-prudential policies, in addition to debt management operations to smooth repayment profiles.

In addition to fundamentals, with financial markets tightening, some countries are seeing signs of market disruptions such as rising currency hedging premia and local currency financing premia.

Severe disruptions in shallow currency markets would trigger large changes in these premia, potentially causing macroeconomic and financial instability.

In such cases, temporary foreign exchange intervention may be appropriate. This can also help prevent adverse financial amplification if a large depreciation increases financial stability risks, such as corporate defaults, due to mismatches.

Finally, temporary intervention can also support monetary policy in the rare circumstances where a large exchange rate depreciation could de-anchor inflation expectations, and monetary policy alone cannot restore price stability.

 

 

Asia losing growth momentum

Asia’s strong economic rebound early this year is losing momentum, with a weaker-than-expected second quarter. International Monetary Fund (IMF) has cut growth forecasts for Asia and the Pacific to 4.0% this year and 4.3% next year, which are well below the 5.5% average over the last two decades. Despite this, Asia remains a relatively bright spot in an increasingly dimming global economy.

Waning momentum reflects three formidable headwinds, which may prove to be persistent:

1-      A sharp tightening of financial conditions, which is raising government borrowing costs and is likely to become even more constricting, as central banks in major advanced economies continue to raise interest rates to tame the fastest inflation in decades. Rapidly depreciating currencies could further complicate policy challenges.

2-      Russia’s invasion of Ukraine, which is still raging and continues to trigger a sharp slowdown of economic activity in Europe that will further reduce external demand for Asian exports.

3-      China’s strict zero-COVID policy and the related lockdowns, which, coupled with a deepening turmoil in the real estate sector, has led to an uncharacteristic and sharp slowdown in growth, that in turn is weakening momentum in connected economies.

After near-zero growth in the second quarter, China will recover modestly in the second half to reach full-year growth of 3.2% and accelerate to 4.4% next year, assuming pandemic restrictions are gradually loosened.

In Japan, IMF expects growth to remain unchanged at 1.7% this year before slowing to 1.6% next year, weighed down by weak external demand. Korea’s growth in 2022 was revised up to 2.6% due to a strong second-quarter growth but revised down to 2% in 2023 reflecting external headwinds.

India’s economy will expand, albeit more slowly than previously expected, by 6.8% this year and 6.1% in 2023, owing to a weakening of external demand and a tightening of monetary and financial conditions that are expected to weigh on growth.

Southeast Asia is likely to enjoy a strong recovery. In Vietnam which is benefitting from its growing importance in global supply chains, IMF expects 7% growth and a slight moderation next year. The Philippines is forecast to see a 6.5% expansion this year, while growth will top 5% in Indonesia and Malaysia.

Cambodia and Thailand will expand faster in 2023 on a likely pickup in foreign tourism. In Myanmar, which has endured a deep recession due to the coup and pandemic, growth this year is expected to stabilize at a low level amid continued unrest and suffering.

The outlook is more challenging for other Asian frontier markets. Sri Lanka is still experiencing a severe economic crisis, though the authorities have reached an agreement with IMF staff on a program that will help to stabilize the economy.

In Bangladesh, the war in Ukraine and high commodity prices has dampened a robust recovery from the pandemic. The authorities have preemptively requested an IMF-supported program that will bolster the external position, and access to the IMF’s new Resilience and Sustainability Trust to meet their large climate financing need, both of which will strengthen their ability to deal with future shocks.

High debt economies such as Maldives, Lao PDR, and Papua New Guinea, and those facing refinancing risks, like Mongolia, are also facing challenges as the tide changes.

IMF expects growth across Pacific Island Countries to rebound strongly next year to 4.2% from 0.8% this year as tourism-based economies benefit from eased travel restrictions.

Inflation now exceeds central bank targets in most Asian economies, driven by a mix of global food and energy prices, currencies falling against the US dollar, and shrinking output gaps. Core inflation, which excludes volatile food and energy prices, has also risen and its persistence—driven by inflation expectations and wages—must be closely monitored.

Meanwhile, the US dollar has strengthened against most major currencies as the Federal Reserve raises interest rates and signals further hikes to come. Most Asian emerging market currencies have lost between 5% and 10% of their value against the dollar this year, while the yen has depreciated by more than 20%. These recent depreciations have started passing through to core inflation across the region, and this may keep inflation high for longer than previously expected.

Finally, spikes in global food and energy prices early this year threatened to abruptly raise the cost of living across the region, with particularly strong implications for the real incomes of lower-income households that spend more of their disposable income on these commodities.

Amid lower growth, policymakers face complex challenges that will require strong responses.

Central banks will need to persevere with their policy tightening until inflation durably falls back to target. Exchange rates should be allowed to adjust to reflect fundamentals, including the terms of trade—a measure of prices for a country’s exports relative to its imports—and foreign monetary policy decisions. But if global shocks lead to a spike in borrowing rates unrelated to domestic policy changes and/or threaten financial stability or undermine the central bank’s ability to stabilize inflation expectations, foreign-exchange interventions may become a useful part of the policy mix for countries with adequate reserves, alongside macro-prudential policies. Countries should urgently consider improving their liquidity buffers, including by requesting access to precautionary instruments from the Fund for those eligible.

Public debt has risen substantially in Asia over the past 15 years—particularly in the advanced economies and China—and rose further during the pandemic. Fiscal policy should continue its gradual consolidation to moderate demand alongside monetary policy, focused on the medium-term goal of stabilizing public debt.

Accordingly, measures to shield vulnerable populations from the rising cost of living will need to be well-targeted and temporary. In countries with high debt levels, support will need to be budget-neutral to maintain the path of fiscal consolidation. Credible medium-term fiscal frameworks remain an imperative.

Beyond the short term, policies must focus on healing the damage inflicted by the pandemic and war. Scarring from the pandemic and current headwinds are likely to be sizable in Asia, in part because of elevated leverage among companies that will weigh on private investment and education losses from school closures that could erode human capital if remedial measures aren’t taken today.

Strong international cooperation is needed to prevent greater geo-economic fragmentation and to ensure that trade aids growth. There is an urgent need for ambitious structural changes to boost the region’s productive potential and address the climate crisis.

 

 

Pakistan: Crucial IMF Board Meeting Today

Reportedly, Executive Board of the International Monetary Fund (IMF) is scheduled to meet Today (Monday) to consider a bailout package for Pakistan.

If the Board approves the deal, the IMF will immediately disburse about US$1.2 billion to Pakistan and may provide up to $4 billion over the remainder of the current fiscal year, which began on July 01, 2022.

“The board is likely to approve the disbursement of the 8th and 9th tranche (over US$1.2 billion) on Monday.” “Not doing so will send a negative signal, particularly during the floods.”

Pakistan, could also request emergency help from the IMF’s Rapid Financing Instrument (RFI), which may bring additional funds of up to US$500 million.

In April 2020, the Board approved the disbursement of US$1.386 billion to Pakistan under the RFI to address the economic impact of the Covid-19 shock.

Also, The Wall Street Journal (WSJ) reported on Sunday that in recent weeks Pakistan has tied up at least US$37 billion in international loans and investments, pulling the country away from the kind of financial collapse seen in Sri Lanka”.

Both WSJ and Voice of America (VOA), a semi-official broadcasting service, confirmed that the Board is meeting on Monday to consider Pakistan’s request.

The VOA reported that in the last six weeks Pakistan has secured loans, financing, deferred oil payments and investment commitments close to US$12 billion from China, Saudi Arabia, Qatar and UAE to avoid a default. But such commitments will become available only after the IMF Board approves the package.

The VOA quoted experts as telling, “Pakistan’s economy is broad and deep and its geostrategic position strong enough for it to avoid default.”

Tamanna Salikuddin, Director of South Asia programs at the United States Institute of Peace, told VOA that despite differences Washington still supports the loans through the IMF because a crisis on Afghanistan’s border is not something that the US wants to see.

She identified “Counterterrorism, nuclear security and stability” as being the main factors for continued US interest in Pakistan.

Salikuddin noted that “Geostrategic importance (often) leads Pakistan to make irresponsible economic policies as the leadership perhaps believes the country is too big to fail.”

The WSJ noted that the IMF had asked the country to first arrange additional funds to cover the rest of its external funding shortfall for the fiscal year, pointing out that Islamabad appears to have met that target.

Among allies, “China led the way, providing more than $10 billion, mostly by rolling over existing loans,” the report added.

In an interview to WSJ, Finance Minister Miftah Ismail said Saudi Arabia was rolling over a US$3 billion loan and was providing at least US$1.2 billion worth of oil on a deferred payment basis. Riyadh would also invest US$1 billion in Pakistan.

The UAE will invest a similar amount in Pakistan’s commercial sector, and it is rolling over a $2.5 billion loan. Last week, Qatar announced it would invest US$3 billion in the country.

But the WSJ report warned that the scale of the flooding from heavier-than-usual monsoon rains means that the country will need more financing than it had planned for.

It goes without saying that the opposition and government forces in Pakistan also need to end fighting each other over everything if they want to stabilize the economy.

 

Japan seeks to organize meeting of creditors to Sri Lanka

Japan is seeking to organize a Sri Lanka creditors' conference, hoping it could help solve the South Asia nation's debt crisis, but uncertainties cloud the outlook for any talks.

Tokyo is open to hosting talks among all the creditor nations aimed at lifting Colombo from its worst debt crisis since independence, but it is not clear whether top creditor China would join and a lack of clarity remains about Sri Lanka's finances.

Japan would be willing to chair such a meeting with China if that would speed up the process for addressing Sri Lanka's debt, estimated at US$6.2 billion on a bilateral basis at the end of 2020.

President Ranil Wickremesinghe told Reuters last week that Sri Lanka would ask Japan to invite the main creditor nations to talks on restructuring bilateral debts. He said he would discuss the issue with Prime Minister Fumio Kishida in Tokyo next month, when he is expected to attend the funeral of the assassinated former premier Shinzo Abe.

Tokyo, the number two creditor, has a stake in rescuing Sri Lanka, not just to recoup its US$3 billion in loans but also its diplomatic interest in checking China's growing presence in the region.

S&P Global this month downgraded Sri Lanka's government bonds to default after it missed interest and principal payments. The island nation of 22 million people off India's southern tip, with debt at 114% of annual economic output, is in social and financial upheaval from the impact of COVID-19 pandemic on top of years of economic mismanagement.

An International Monetary Fund (IMF) team met Wickremesinghe on Wednesday to discuss a bailout, including restructuring US$29 billion in debt, as Colombo seeks a US$3 billion IMF aid program. 

The president met the same day with Japan's ambassador.

Tokyo believes a new platform is needed to pull creditors together.

Sri Lanka is running out of time since it defaulted on its debt. The priority is for creditor nations to agree on an effective scheme.

Japan is keen to move this forward. But it's not something Japan alone can raise its hand and push through, the cooperation of other nations was crucial.

Japan's Foreign Ministry declined to comment. Sri Lanka's central bank and Finance Ministry did not immediately respond to requests for comment. An IMF spokesperson declined to comment.

Concerns include rivalry and territorial tensions between big creditors China and India, while Sri Lanka would have to commit to reforming its finances and disclose more information about its debt, the sources said.

Last month, shortly after Wickremesinghe took office when his predecessor fled the country, Chinese President Xi Jinping wrote to him that he was ready to provide support and assistance to the best of my ability to President Wickremesinghe and the people of Sri Lanka in their efforts.

Getting Beijing's cooperation on a debt restructuring was complicated by factors such as a large number of lenders.

A Chinese foreign ministry spokesman told Reuters that Beijing was willing to stand with relevant countries and international financial institutions and continue to play a positive role in helping Sri Lanka respond to its present difficulties, relieve its debt burden and realize sustainable development.

Japan hopes to see a new debt restructuring framework resembling one set up by the Group of 20 big economies targeting low-income countries. Sri Lanka does not fall under this "common framework" because it is classified as a middle-income emerging country.

It must be a platform where all creditor nations participate to ensure they all shoulder a fair share in waiving deb. Until these conditions are met, it would be difficult for any talks to succeed.

The common framework, launched by the G20 and the Paris Club of rich creditor nations in 2020, provides debt relief mainly through extension in debt-payment deadlines and reduction in interest payments.

Some people involved think an initial creditors' meeting could be held in September, but one source said it would "take a little while, possibly several months".

Restructuring talks are only possible after the IMF scrutinizes Sri Lanka's debt, the sources said.

 

 

Pakistan: Remittances continue to be the biggest source of foreign exchange

Remittances have remained high in June 2022. Eid festivity impact was restricted to the month, the inflow of US$2.5 billion depict a higher rate of remittance. Even though remittances were down 9%MoM, analysts expect growth during the year to remain tepid backed by increase in Pakistani worker registration in GCC countries.

As per Board of Emigration and Overseas Employment (BEOE), around 458,000 Pakistanis have expatriated during 7MFY22TD as against 288,000 and 225,000 during FY21 and FY20, respectively. Most of the expatriations have occurred towards Middle East countries which continue to enjoy better macros in a high oil price environment. 

Notwithstanding a better current account deficit (CAD) in July 2022, the overall Balance of Payment (BoP) position was reported at a negative US$1.8 billion. This is largely owing to the absence of financial flows from any country during the month. 

During June 2022, Pakistan received US$2.3 billion deposit from China while in July 2022 external debt repayments of US$748 million eroded foreign exchange reserves.

Pakistan’s monthly CAD nearly halved during the month under review to US$1.2 billion (3.7% of GDP), despite hefty oil payments as the free-fall in Pak Rupee (fall of 17%) continued to act as a key shock absorber, supported by administrative measures that reduced trade deficit to US$3 billion (21%MoM decline). 

Notwithstanding the fizzling out of Eid festivity impact, rate of remittance flows remained steady at US$2.5 billion for July 2022. 

Trend reversal in PBS-SBP import differential was witnessed owing to oil payments where most shipments, at high crack spreads and as under PBS data, were made during July 2022. Adherence to the renewed IMF program is imperative besides administrative measures to conserve energy in order to keep CAD within the targeted level of US$10 billion (3.0% of GDP).

Pakistan is poised to receive US$4 billion under friendly assistance from GCC countries, which will effectively put its external account at an over-financed status.

SBP has already indicated a pause in tightening with a few downside risks from exogenous factors and deviation from the path of fiscal consolidation. While the end of overheating of economy is in sight (June 2023), Pakistan needs stay adequately congruent to the Fund’s stipulations and implement energy conservation drives to reduce oil import bill.

Trade deficit has come off from its fresh peak of US$3.9 billion to US$3.1 billion, largely owing to demand moderation as well as administrative measures on restricting non-essential items, more specifically the CKD imports.

The biggest decline was seen in machinery and transport group. Infrequent trend reversal in the PBS-SBP import difference was also witnessed during the month, which was primarily on account of higher crack spreads booked in prior month and cash transactions being settled in July 2022. This also kept Pakistan’s average cost of oil import higher than oil prices.

 

Bangladesh: IMF team arriving on Thursday

A delegation from the International Monetary Fund (IMF) is scheduled to reach Dhaka on Thursday on a nine-day trip to discuss the government’s request for a US$4.5 billion support program.

Rahul Anand, Division Chief in the IMF’s Asia and Pacific Department, will lead the team during talks with the senior officials of the Finance Ministry, the central bank, the National Board of Revenue and the Economic Relations Division.

If everything proceeds smoothly, the loan deal could be finalized by October this year, said an official of the Finance Ministry yesterday.

The request for IMF support comes to shore up the precarious foreign currency reserves, which slipped to US$39.8 billion — the lowest since October 14, 2020. This is enough to cover about five months’ import bills.

Typically, the World Bank and the IMF prescribe an import cover of three months, but in times of economic uncertainty, they advise keeping sufficient reserves to meet 8-9 months’ imports.

Going forward, even though imports are slowly contracting, the elevated inflation levels around the world mean the odds of a slowdown in both remittance inflows and export orders, two sources of foreign currency for Bangladesh.

The IMF officials will look into the impacts of the Russia-Ukraine war and escalated global commodity prices on the Bangladesh economy, the status of recovery from the global coronavirus pandemic and the government’s large subsidy program.

They will see whether the subsidy spending is justified and compare it with the other countries. If it is deemed excessive, the IMF mission may suggest ways to trim it.

Subsidy spending in the just-concluded fiscal year is Tk 66,825 crore, 24.1% more than the original allocation thanks to the spiral in fuel and fertilizer prices in the global market.

In this fiscal year’s budget, Tk 82,745 crore has been earmarked for subsidy.

But considering the price trend of oil, gas, and fertilizer in the international market, the estimated spending can be 15-20% higher than the initial estimates, said Finance Minister AHM Mustafa Kamal in his budget speech in June.

The conditions could include measures to increase revenue, lower subsidy expenditure, market-based exchange rate and lending rate, and reforms in the banking sector and tax administration, the Finance Ministry official said.

Bangladesh has unveiled a relatively smaller budget for the current fiscal year, put on hold low-priority projects, suspended foreign tours of government officials, adjusted the prices of gas and diesel to some extent, and loosened the exchange rate policy.

The government has also signalled that it may raise the price of fuel oil and has proposed to the Bangladesh Energy Regulatory Commission to increase the electricity tariff to cut the subsidy burden.

Surjit Bhalla, Executive Director of the IMF for India, Bangladesh, Bhutan and Sri Lanka, who represented Bangladesh on the board of the Washington-based lender, is also set to visit Bangladesh separately.

 

Pakistan: Excessive taxing is disastrous for economy

Today I have found Asad Ali Shah* one of the supporters of my propagations. I have picked up the following text from one of his posts at LinkedIn. He has talked why excessive tax in the name of super tax and poverty alleviation tax on corporate entities is disastrous for Pakistan’s economy:

1) Pakistan already has highest tax rates in the world, imposition of additional taxes will increase the rates in range of 39 – 49 percent (specified sectors and banks). Add workers welfare fund (2%), and workers profit participation fund (5% on industrial entities) and dividend 15% ‑ tax rate on shareholders goes up in range of 55 to 65 percent;

2) In most countries, corporate tax rates are significantly lower than individual rates- as large scale value addition, productivity and innovation happens in corporate sector. Further, most countries have been competing to reduce tax rates to attract investment and multinationals to locate their head quarters/operations in their country. For instance tax rates for Corporates in a developed economy like UK is 19%, while tax rates for high income individuals are 40% and 45%. Similar trend prevails in most economies. Therefore, all economies promote corporate entities- in land of pure, Pakistan does exactly the opposite.

3) Considering very large portion of Pakistan’s economy is informal, imposing excessive tax on few corporate entities that are in formal sector and transparently report higher profits tantamount to punishing them for honesty. It will naturally prove counterproductive and will promote tax evasion. As saying goes, "No good deed goes unpunished".

4) Biggest cause of Pakistan's bankruptcy is huge cost and inefficiency of public sector- the Government of Pakistan spends 22% of GDP vs. 15% in Bangladesh. Much of such spending is wasted- payments of salaries to much larger number of people than required and other costs against which service delivery remains substandard. Even the so called development expenditure (aggregating Rs2.3 trillion for federal PSDP and provincial ADPs in current budget) is poorly spent on projects that do not generate adequate economic benefits. Most projects are initiated based on political considerations without adequate economic justification; poorly executed resulting in huge cost over runs and inordinate delays. It would have been far better, if such development spending was cut by 50% for reducing fiscal deficit rather than imposing such exorbitant taxes on private sector corporates.

5) All over the world, it is through private sector that countries produce goods and services at lower cost for their citizens and become competitive to generate exports. Bulk of employment is also created in private sector. All of this happens when the governments have small role ‑ promoting efficiently and regulating private sector through competitive and adequate fiscal and monetary policies.

Unfortunately, in Pakistan the keep governments have kept growing the public sector through excessive taxation on a very small formal sector that is shrinking with time.

It is unfortunate that in Pakistan economic and social indicators continue to get worse; but the governments keep on going back to IMF every 3 years, but unwilling to learn.

*Asad Ali Shah is a Fellow Chartered Accountant, engaged in management consultancy, tax, corporate and financial advisory services for over 35 years. He has been advising large national and international organizations across a range of industries and markets in the areas of strategy development, organization design, governance and Consulting. Have advises clients to help them improve their governance, strategy, operations, internal control and risk management systems. He frequently writes on macro economy, governance and matters of public interest.

Pakistan-IMF discussions remain inconclusive

In the simplest words, Pakistan-IMF discussions held in Doha remained inconclusive. The International Monetary Fund (IMF) on Wednesday emphasized upon Pakistan the urgency of removing fuel and energy subsidies to achieve program objectives.

The incumbent government does not seem ready to withdraw subsidies.

According to the IMF, the mission held highly constructive discussions with the Pakistani authorities to reach an agreement on policies and reforms that would lead to the conclusion of the pending seventh review of the authorities’ reform program.

It said the considerable progress was made during the discussions, including on the need to continue to address high inflation and the elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable.

"In this regard, the further increase in policy rates implemented on May 23, 2022 was a welcome step. On the fiscal side, there have been deviations from the policies agreed upon in the last review, partly reflecting the fuel and power subsidies announced by the authorities in February this year."

Meanwhile, Foreign Minister Bilawal Bhutto-Zardari said the ongoing bailout deal between Pakistan and the IMF was "outdated" given a number of global crises.

"This IMF deal is not based on ground realities, and the context has absolutely changed from the time that this deal was negotiated," Bilawal told Reuters on the sidelines of the World Economic Forum.

"This deal is a pre-Covid deal. It is a pre-Afghanistan fallout deal. It is a pre-Ukrainian crisis deal. It is a pre-inflation deal," said Bilawal.

Terming the deal "outdated" he said it would be unfair and unrealistic to expect a developing country like Pakistan to navigate geopolitical issues under the current agreements.

"We have to engage with the IMF and we have to keep Pakistan's word to the international community ... However, going forward, it is very legitimate for Pakistan to plead its case," Bilawal said.

The newly-elected government began talks with the Fund a week ago over the release of a US$ one billion tranche under an Extended Fund Facility, a process slowed by concerns about the pace of economic reforms in the country.

A US$6 billion IMF bailout package signed in 2019 has never been fully implemented because the government reneged on agreements to cut or end some subsidies and to improve revenue and tax collection.

Over the past weeks as the government has failed to take decisive economic decisions, most prominent being reversal of fuel subsidies.

Analysts and experts have linked the economic pressure to uncertainty over the continuation of the IMF loan program coupled with a rising oil import bill and widening trade deficit.

In recent meetings with Pakistan, the IMF linked the continuation of its loan program with the reversal of fuel subsidies, which were introduced by the previous government. However, Prime Minister Shehbaz Sharif has multiple times rejected summaries by the Oil and Gas Regulatory Authority and the finance ministry to increase fuel prices.

The PTI had announced a four-month freeze until June 30, 2022 on petrol and electricity prices in February this year as part of a series of measures to bring relief to the public.

PML-N and other political parties, part of the new coalition government were critical of Imran Khan's government for derailing the IMF program through unfunded fuel subsidies, but despite being in power for nearly six weeks, have not reversed these subsidies.

 

Prime Minister of Pakistan, Shehbaz Sharif must bid farewell to his idiosyncrasy

Pakistan’s Prime Minister, Shehbaz Sharif is stuck between a rock and a hard place. He has to make certain decisions at his own, because the cabinet has not been put in place. 

Considering his leeway he is likely to make some populist decisions which could further widen the already wide breach between the Government of Pakistan (GoP) and the lender of last resort, International Monetary Fund (IMF).

Since revision of petroleum prices was due on April 15, 2022, Oil and Gas regulatory Authority (OGRA) had recommended a substantial increase in the prices of petroleum products for recovering the full import cost and exchange rate losses from consumers.

According to the estimates of the regulator, the GoP was required to raise petrol prices by Rs21.30 a litre and diesel by above Rs83 a litre in order to recover the full costs. In case it also wants to recover the sales tax and the petroleum development levy on these products, Ogra has proposed a hike of Rs53.30 in petrol and up to Rs120 in diesel prices.

Who would intentionally opt to step on this landmine that PML-N leader Miftah Ismail referred to in his press conference earlier this week? Certainly not a new coalition that, though faced with an enormous economic crisis, has to contend with a formidable political foe. The big question now is: for how long can Prime Minister Shehbaz Sharif delay defusing the landmine, which his predecessor left for him, by freezing petroleum and electricity rates for four months?

He can’t afford to wait for too long, and would need to start deactivating it, even if gradually — unless he wants to allow a bloating budget deficit to spiral out of control by the end of the current financial year.

Thus, the decision to not hike petroleum prices at all is an ill-advised one.

Pakistan is facing a dire economic crisis and populist policies made under political pressure are certainly not going to help anyone in the long run — least of all the people benefiting from them.

At the end of the day, the beneficiaries always end up paying back such subsidies in a harder way through more indirect levies or higher taxes and heavy cuts in public sector spending on essential services, such as education, water supply and healthcare.

The gravity of the looming economic crisis demands that the new government take prudent, forward-looking policy decisions to put the country back on the trajectory of sustainable growth, even it wants to tread cautiously. However, the Shehbaz Sharif government does not have the option of letting things remain as they are or keep delaying tough decisions. If Sharif continues with populist policies for fear of a backlash from the opposition PTI, he would leave the economy in far more dire straits than he inherited.

Who is responsible for ongoing turmoil in Lebanon?

“Saudi Arabia and the United States are exerting economic pressure on Lebanon to isolate Hezbollah” says Jamal Wakim, a professor at the Lebanese University (LU). “Saudi Arabia believes that exerting pressure on the Lebanese economy would help them achieve their political objective by isolating Hezbollah,” Wakim tells the Tehran Times.

“As the US could not get rid of Hezbollah militarily, it thought of doing so by exerting economic pressure on the Lebanese economy in order to incite the whole population against Hezbollah,” he adds.

Lebanon is going through a financial crisis that the World Bank says could rank among the world’s three worst since the mid-1800s in terms of its effect on living standards.

According to Jamal Wakim, after the Civil War in Lebanon, country’s economy has become solely dependent on the tertiary sector and the financial sector and on marginalizing the productive sectors, i.e. agriculture and industry. 
As the US could not get rid of Hezbollah militarily, it thought of doing so by exerting economic pressure on the Lebanese economy in order to incite the whole population against Hezbollah. By controlling the Lebanese financial system, the US was able to dry it off, leading the whole economy to collapse.

Rafiq al-Hariri governments between 1992 and 2004 were the ones that led to the restructuring of the economy to fit the interests of the financial and tertiary sectors. After his assassination, the class which benefited from the al-Hariri policies continued the policies that led to the current crisis. 

Saudi Arabia wants to exert pressure on Hezbollah so they thought that exerting pressure on the Lebanese economy would help them achieve their political objective by isolating Hezbollah. 

The incumbent government is not able to tackle the economic problem because the Prime Minister and the government members represent the interests of the political-financial class that rules the country and whose interests lay in continuing the previous policies that protect the interests of the financial capitalist class. 

To find a sustainable solution to Lebanese malice it is necessary to understand the main areas of economic cooperation between Iran and Lebanon. It is too bad that there are no areas of cooperation between Lebanon and Iran, because Lebanon is under full Western control. 

While Lebanon is still struggling to get over the ramifications of a deadly 2020 blast at Beirut Port, some people on Capitol Hill are busy drawing up plans to further exacerbate the situation in the country.

Lebanon is in bad shape economically and its people are grappling with day-to-day hardships to make ends meet regardless of their religion or political persuasions. However, this does not seem enough for some the US congressmen to refrain from fanning the flames of political divisions in Lebanon at a delicate moment.

Ever since the 2020 destructive explosion devastated the port of Beirut and the surrounding area, the economic situation in Lebanon has been steadily deteriorating. The country’s currency has significantly lost its value against the US dollar. Many gas stations and power stations ran out of fuel needed to power Lebanese cars and light homes.

The explosion led to a political vacuum in Lebanon after Hassan Diab, who assumed premiership in late 2019 by virtue of consensus among Lebanon’s main religiopolitical factions including Hezbollah, resigned. Diab remained in power as caretaker Prime Minister for about 13 months, highlighting the challenges of forming government in a country where political factions are divided along sectarian lines and pulling in different directions. Diab sought to strike a balance and render services to the Lebanese people without prioritizing foreign pressure to undermine certain groups that are part and parcel of Lebanon’s political system. 

Saad Hariri sought to form a government but he was given the cold shoulder due to a perception in some regional and transregional countries that he was unable to undertake reforms long demanded by these countries. And the main target of reforms is Hezbollah. In other words, Hariri was under pressure to form a government bent on weakening Hezbollah. Hariri simply withdrew and then went into self-exile.  

The external pressures continued unabated even after Lebanese leaders across the political spectrum formed a new government led by veteran politician Najib Mikati. 

Mikati has been trying to improve the economic situation in the country. But he is facing daunting challenges in this regard. Because Lebanon is resource-poor and relies, to large extent, on foreign aid to shore up its economy. To overcome economic woes, Lebanon needs foreign loans. The Mikati administration has formally begun negotiations with the International Monetary Fund to reportedly extend US$4 billion loan. 

The loan is part of a broader reform plan that aims to improve the economic situation. But it has been conditioned on the Lebanese government undertaking painful economic reforms and more importantly making a pledge to undermine Hezbollah.

The Tehran Times has learned that Senator James Lankford is spearheading efforts at the US Congress to draw up some legislation on the situation in Lebanon that would direct the US administration to refrain from supporting IMF assistance until needed reforms are made. 

The proposed bill also directs the US to support incremental IMF assistance to Lebanon once reforms are made. 

In addition, the bill calls on the US to impose sanctions on Lebanese leaders thought to be obstructing reforms. 

It goes without saying that reforms here mean measures against Hezbollah, which has long been in the crosshairs of the US. On the surface, the bill seeks to ensure stability in Lebanon, but deep down, it may well end up destabilizing Lebanon by pitting the Lebanese against each other.

The draft prepared by Senator Lankford lays out an array of measures to be taken by the US administration with regards to Lebanon.

 

State of Pakistan Economy

Pakistan’s central bank, State Bank of Pakistan (SBP) has recently released its Annual Report for the financial year ended 30th June 2016. The Report is full of praises of the economic managers for achieving targets under prevailing difficult circumstances. However, it also highlights the serious problems facing the country. The bottom line is that unless right structural reforms are undertaken the country may once again plunge deeper in serious crises, worst being balance of payment crisis. I would talk about praises later as I consider it my ardent duty to first highlight the problems facing the country.

Notwithstanding these positive macroeconomic stability gains, the Report highlights some challenges as well. Firstly, the current level of private investments and savings in the country needs acceleration to keep pace with required investible resources. Secondly, structural issues in the export industry need to be resolved. Thirdly, the reliance of the tax system on stop-gap measures is creating distortions in the economy. Finally, the country needs to spend more on social sector development to address social issues.

The Report, considers Pakistan to be well positioned to address these challenges. It anticipates all-important support coming from a stable macroeconomic environment and growing investments in CPEC-related projects. These would help improve the existing infrastructure and power supplies to businesses. Some analysts don’t agree with this rationalization.

The Report recognizes the positive impact of improved macroeconomic environment, better energy supplies, and subsiding security concerns. The central bank believes that in addition to CPEC, economic activity would benefit from pro-growth policies. It specifically says that the current policy rate, at a historic low of 5.75 percent has made funding easier for businesses and consumers. Similarly, growing development spending, despite a planned reduction in budget deficit, would continue to support infrastructure-related industries. One also tends to disagree with this because bulk of the deposits are being invested by commercial banks in government securities rather than extended to private sector.

The Report further explains that though some macroeconomic indicators were short of targets, they still posted better performance over the last year. For instance, real GDP growth of 4.7 percent during FY16 was below its target, but nevertheless higher than the growth achieved a year earlier. Meanwhile, the accumulation of the country’s foreign exchange reserves reached an all-time high level at end FY16; the exchange rate remained stable; and CPI inflation fell to only 2.9 percent during the year. Similarly, fiscal consolidation remained on track, and the budget deficit was reduced to 4.6 percent of GDP – the lowest since FY07. All this is not due to any good policies adopted by the government but lower international prices of crude oil.

The government envisages a GDP growth of 5.7 percent for FY17. The current account deficit is likely to stay in the range of 0.5 – 1.5 percent of GDP during the current financial year. The Report draws attention to the IMF program’s contribution in restoring macroeconomic stability and confidence of international creditors. Crucially, it maintains that the reform process – related to energy-sector, loss-making PSEs (like PSM, PIA), and business-friendly regulations – must continue after the IMF program’s completion.

Finally, the Report reiterates that without private sector participation, it will be hard to achieve a higher and sustainable growth that is built on the pillars of entrepreneurship, innovation and competitiveness.

The detailed Report is available at SBP website www.sbp.org.pk

Pakistan Stock Exchange witnesses 28 percent decline in trading volume

Pakistan Stock Exchange (PSX) continued its bearish momentum during the week ended 28th October 2016. The sentiments were driven by rising political uncertainty over 2nd November PTI protest and lower international oil prices. The benchmark Index slipped below 40,000 mark and close at 39,873, down by 3.44%WoW. The average daily trading volumes for the week declined to 341.2 million shares, down by 27.7%WoW.

The key news flow during the week included: 1) China's Baosteel Group expressed its interest in acquiring PSM, 2) GoP expressed intentions to disallow dedicated gas supply from new discoveries to 4 fertilizer plants, including EFERT during the upcoming winter season, 3) Sindh High Court allowed benefit of SRO 1125/2011 to spinning mills at the rate of zero percent on the import of raw cotton, 4) GoP raised Rs90.2 billion though Treasury Bills auction, where cut off yield for the 3-months were raised while yields on 6 and 12 month Bills remained stable and 5) IMF Chief Christine Lagarde during her visit praised Pakistan for emerging from an economic crisis to a stabilizing economy.

Volume leaders for the week were BOP, KEL, TRG, PACE and PIAA. While gainers were: MLCF, FCCL, PIOC and ICI, laggards included: SHEL, ASTL, LOTCHEM and PSMC. Foreigners emerged net buyers with net inflow amounting to US$14.1 million as compared to net outflow of US$8.46 million a week ago. With result season nearing its end, analysts expect market sentiments to be driven by political developments ahead of PTI protest. Furthermore, escalation in cross border tension and domestic security concerns can add further pressure. However, textile sector may come into limelight upon expected announcement of the export package worth Rs75 billion by the GoP. On the global front, OPEC countries are scheduled to meet in November to discuss details over output freeze/cut. The outcome can impact oil prices and performance of companies listed at PSX accordingly.

Recent developments with regards to upgraded fuel quality, volumetric sales dynamics and long term competitive dynamics were discussed at PSO's 1QFY17 analyst briefing session. To recall, the OMC posted earnings of Rs4.38 billion (EPS: Rs16.11) for the quarter, where growth of 35%YoY was led by inventory gains of Rs1.0 billion (R3.68/share) as compared to a small loss in the comparable period last year. Overall, PSO: 1) lost market share (56.5% currently) due to losing out on white oil segment growth, 2) benefitied from higher margins (HSD and Mogas), lower Mogas cost of supply, 3) provisioning for receivables from PIA of Rs300 million (on gross receivable of Rs15 billion) and, 4) absence of late payment income from IPPs where power sector receivables of Rs162 billion remain unresolved. Having the footprint PSO does, it cannot take part in inventory curtailment or limit supply, but has to follow a strict system of procurement.

FATIMA has posted unconsolidated profit after tax of Rs3.9 billion (EPS: Rs1.62) for 3QCY16 as compared to net profit of Rs612 million (EPS: Rs0.29) for 3QCY15. Key highlight of the result includes: 1) strong growth in topline to Rs10.13 billion caused by increase in Urea, CAN and NP offtake, post subsidy in budget FY17, 2) decline in gross margin due to weak domestic Urea/CAN/NP prices and 3) dealer discounts to clear out high inventory levels. On a cumulative basis, 9MCY16 earnings declined to Rs6.37 billion (EPS: Rs3.03) compared to Rs7.45 billion (EPS: Rs3.55) for 9MCY15, down 15%YoY on account of unprecedented adverse market conditions caused by weak farm economics and delayed implementation of subsidy on urea by the GoP.

LUCK announced its 1QFY16 results posting profit after tax of Rs3.24 billion (EPS: Rs10.01) as compared to Rs2.97 billion (EPS: Rs9.18) for 1QFY16. The reported earnings were higher than expected of owing to: 1) higher than expected topline resulting from 0.145 million tons clinker sales during the period and 2) improvement in gross margin due to cheaper coal inventories. Result Highlights included: 1) topline growth due to higher dispatched, 2) improvement in gross margin, 3) addition of 5MW WHR, 4) substitution of exports by domestic sales, 5) reduction in distribution cost owing to decline in export dispatches, 6) other income rising jumped due to interest income on higher cash balances, and 7) effective tax rate of 30%.

Pakistan: Can Nawaz Sharif Redefine Priorities?

The process of oath taking by the elected members has started. On Wednesday the elected members of Sindh Assembly sworn in and shortly members of other provincial assemblies and National Assembly will also take oath. Mian Nawaz Sharif will create the history by becoming Prime Minister of Pakistan for the third time. All the fellow countrymen wish him the best and wish his government completes its term. The haunting memories of dismissal of his previous two governments are still fresh.

In these pages it has been highlighted repeatedly that it will not be the bed of roses for the rulers, particularly for Mian Sahib. His party will form government at federal because it enjoys simple majority and in Punjab it enjoys two-third majority. However, his worst critics and opponents will form the government in remaining three provinces.

Since all the parties want to put economy of the country on fast development, resolve energy crisis, curb militancy and establish writ of the government establishing good working relationship is a must because they have consensus on the issues and also on the priorities. The management gurus say ‘a problem well diagnosed is half solved’.

Fortunately or unfortunately all the parties have consensus on four basic issues facing the country that are: 1) balance of payment, 2) energy, 3) law and order and 4) internal and external threats. It may be another thing that they may not priorities the way these have been listed here. During the election campaign political parties have talked a lot about these problems and the root causes. Now the time has come to come up with policies through consensus and implement these in letter and spirit.

To begin with the new government will have to finalize details of Saudi bailout package and IMF extended financial facility.  The two options will help in different ways, Saudi package will help in containing further erosion of existing paltry foreign exchange reserves and IMF facility will provide the much needed breathing space to come up with a home grown plan for overcoming balance of payment crisis. Delaying the decision for next 100 days to witness the impact of policies can prove fatal if desired results are not achieved.

People are disappointed with the statement of Mian Sahib that energy crisis is far worse than estimated. They had got some idea when PML-N leadership extended the period from three months to three years and lost hopes with the announcement that the government needs 500 billion rupees or five billion dollars to overcome the issue. Even the experts wonder how such a colossal amount could be mobilized and what will be the required measures to pay off this debt.

Some cynics say the country does not needs money but a solid plan to resolve the crisis. Both electric and gas utilities have to overcome blatant theft and improve recoveries to improve cash flow. At present about 6000MW electricity is produced at hydel plants which don’t require even a drop of oil and remaining 6000MW electricity is supplied by IPPs.

If NTDC clears all the outstanding amounts IPPs will have enough cash to buy fuel. The much talked about debate that ministry of finance is not releasing the required amount is spreading disinformation rather than helping in resolving the crisis. The federal government can pay the amount pertaining to federal and provincial governments, state owned enterprises and make the deductions at source.

Law and order situation can be improved by taking action against the culprits irrespective of their association with political parties or religious groups. Let one point be very clear that economic prosperity can’t be achieved without ensuring security of people and their assets. Operation in a particular area or against a specific ethnic group can’t resolve the issue.

Once the economy is put on track, the government can address internal and external threats, worst being growing militancy and sectarian killing. The time has come to weed out foreign militants, who are also being used by various local groups for settling scores. Across the board operation is required against the perpetrators, irrespective of their association with local political parties and religious groups.