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.

Restructuring Debt of Poorer Nations

According to International Momentary Fund (IMF), low-income countries face fewer debt challenges today than they did 25 years ago, thanks in particular to the Heavily Indebted Poor Countries initiative, which slashed unmanageable debt burdens across sub-Saharan Africa and other regions.

Although debt ratios are lower than in the mid-1990s, debt has been creeping up for the past decade and the changing composition of creditors will make restructurings more complex.

Improvements to the Group of Twenty Common Framework for Debt Treatments—from which the 73 countries that were eligible for the G20 Debt Service Suspension Initiative (DSSI) in 2020-21 can now benefit—could clear a path through this increasing creditor complexity.

So far only a handful of countries have requested to use the common framework, which was launched in November 2020, underscoring the need for change to build confidence and encourage participation at a pivotal moment for heavily indebted low-income countries.

Rising risks of debt distress

Spurred by low interest rates, high investment needs, limited progress raising additional domestic revenue and stretched systems for managing public finances, the debt ratios of DSSI countries have increased, partly reversing a decline seen in the early 2000s.

Now, the economic shocks from COVID-19 and the war in Ukraine are adding to the debt challenges faced by low-income countries, even as central banks start to raise interest rates.

About 60 percent of DSSI countries are at high risk of debt distress or already in debt distress—when a country has started, or is about to start, a debt restructuring, or when a country is accumulating arrears.

Among the 41 DSSI countries at high risk of or in debt distress, Chad, Ethiopia, Somalia (under the HIPC framework) and Zambia have already requested a debt treatment. Around 20 others exhibit significant breaches of applicable high-risk thresholds, half of which also have low reserves, rising gross financing needs, or a combination of the two in 2022.

On the domestic side, difficult trade-offs will exist between the need to restructure sovereign debt owed to domestic banks, in some cases, and the impact of such restructurings on financial sector stability and the capacity of domestic banks to finance growth.

Local currency debt for the median DSSI country doubled from 7% of gross domestic product in 2010 to 15% in 2021. For those DSSI countries with market access, the share more than tripled from 8 percent to 28 percent in 2021. Many of these DSSI countries have also experienced a tightening of sovereign-bank links, with larger holdings of domestic sovereign debt at domestic banks.

Coordination challenge

On the external side, increased diversity of creditors raises important coordination challenges.

In past decades, DSSI countries borrowed mainly from Paris Club official creditor nations and private banks, alongside multilateral institutions. Today, China and private bondholders play a much larger lending role.

The share of DSSI countries’ external debt owed to Paris Club creditors fell to 11% in 2020, from 28% in 2006. Over the same period, the share owed to China rose to 18% from 2% and the share of Eurobonds sold to private creditors increased to 11 from 3%.

The situation differs significantly across countries. Averages conceal a diversity of debt composition, from the shares of bilateral, multilateral and private creditors, to the composition of official bilateral creditors themselves.

China is now the largest official bilateral creditor in more than half of DSSI countries, including when counting all 22 Paris Club creditors as a single pool. China would therefore play a key role in most DSSI countries’ debt restructurings that would involve official bilateral creditors.

While the diversity of creditor compositions calls for greater attention to country specificities, appropriate coordination mechanisms will be the key in all cases.

Common framework

Putting in place mechanisms that ensure coordination and confidence among creditors and debtors has become urgent. Improvements to the G20 Common Framework could play an important role by ensuring broad participation of creditors with fairer burden sharing.

Experience so far shows that greater clarity on restructuring steps, earlier engagement of official creditors with the debtor and with private creditors, a standstill in debt service payments during negotiations, and specifying the mechanics of comparability of treatment is still needed.

Strengthening debt management and debt transparency should also be priorities. This would help countries manage debt risks, reduce the need for debt restructurings, and facilitate more efficient and durable resolution if debt becomes unsustainable.
 
It is in the interest of debtor countries as well as their creditors that debt restructurings, where necessary, are accomplished speedily, smoothly, and efficiently. This would support global stability and prosperity, too.

 

Sanctions against Russia a threat to US dollar dominance

The recent financial sanctions imposed on Russia for its invasion of Ukraine are likely to weaken the dominance of US petrodollar as the world currency, Gita Gopinath, First Deputy Managing Director, International Monetary Fund (IMF) told The Financial Times.

The sanctions may result in a more fragmented international monetary system, warned Gopinath.

She had previously said that the sanctions against Russia would not foreshadow the demise of US dollar as the world’s reserve currency and that the Ukraine crisis would slow growth, but would not cause a global recession.

The United States, European Union (EU) and Group of Seven nations have hit Russia with a bundle of heavy sanctions and blocked the country from using SWIFT, the global communications service that clears international financial transactions, virtually cutting it off from the global financial markets and international trade.

The United States also froze US$630 billion in assets held in international reserves by the Russian Central Bank.

The Russian government is retaliating by demanding payment in rubles or gold for purchases of energy and other important commodities.

“If they want to buy, let them pay either in hard currency and this is gold for us, or pay as it is convenient for us, this is the national currency,” said the head of Russia’s energy committee, Pavel Zavalny.

The United States and the Britain have imposed embargoes on Russian energy exports, but EU, which is more reliant on energy imports, is more reluctant to ban it. The new policy has hit EU the hardest, sending gas prices on the continent up by 30% on March 30.

Meanwhile, ruble has since risen to a three-week high past 95 against dollar after the Moscow Stock Exchange reopened after the initial round of sanctions.

Zavalny has suggested that buyers from countries friendly to Russia, such as China, could pay in their own fiat currencies or in Bitcoin.

Russia had been planning for years to reduce its dependence on petrodollar since the United States imposed sanctions in retaliation for its annexation of Crimea in 2014. The current crisis in Ukraine has only accelerated those plans.

Before the recent conflict, Russia still had roughly a fifth of its foreign reserves in dollar-denominated assets, mainly held overseas in Germany, France, Britain and Japan, which have since sided with the United States to isolate Moscow from the global financial system.

Gopinath said that Russia’s response to the sweeping sanctions could encourage the emergence of small currency blocs based on trade between separate groups of countries and would lead to further diversification of the reserve assets held by national central banks.

“Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role in reserve assets,” she said.

However, Gopinath doubts that the dominance of US dollar would likely be challenged in the medium term, as it is backed by strong and highly credible institutions and the fact that it is freely convertible.

“Dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” said Gopinath.

“We are already seeing that with some countries renegotiating the currency in which they get paid for trade.”

Gopinath did note that dollar’s share of international reserves had fallen from 70% to 60% over the past 20 years, with the emergence of other trading currencies.

About a quarter of the decline in dollar’s share is attributed to greater use of Chinese yuan, but less than 3% of global central bank reserves are denominated in that currency, according to the IMF.

The IMF deputy director said that the conflict is spurring the adoption of an international digital finance system, utilizing cryptocurrencies and central bank digital currencies.

“All of these will get even greater attention following the recent episodes, which draws us to the question of international regulation,” said Gopinath. “There is a gap to be filled there.”

The CCP had been preparing for the use of yuan as a global currency before the current crisis and was already ahead in adopting a central bank digital currency.

However, Gopinath said that yuan was unlikely to replace the dollar as the dominant reserve currency.

“That would require having full convertibility of the currency, having open capital markets and the institutions that can back them. That is the slow-moving process that takes time, and dollar’s dominance will stay for a while,” she said.

 

Russia-Ukraine conflict a major blow to the global economy

According to the blog writers of the International Monetary Fund (IMF), Russia-Ukraine conflict is a major blow to the global economy that will hurt growth and raise prices. 

Beyond the suffering and humanitarian crisis from Russia’s invasion of Ukraine, the entire global economy will feel the effects of slower growth and faster inflation. Impacts will flow through three main channels:

1) Higher prices for commodities like food and energy will push up inflation further, in turn eroding the value of incomes and weighing on demand.

2) Neighboring economies in particular will grapple with disrupted trade, supply chains, and remittances as well as an historic surge in refugee flows.

3) Reduced business confidence and higher investor uncertainty will weigh on asset prices, tightening financial conditions and potentially spurring capital outflows from emerging markets.

Russia and Ukraine are major commodities producers, and disruptions have caused global prices to soar, especially for oil and natural gas. Food costs have jumped, with wheat, for which Ukraine and Russia make up 30% of global exports, reaching a record.

Beyond global spillovers, countries with direct trade, tourism, and financial exposures will feel additional pressures. Economies reliant on oil imports will see wider fiscal and trade deficits and more inflation pressure, though some exporters such as those in the Middle East and Africa may benefit from higher prices.

Steeper price increases for food and fuel may spur a greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to further increase in parts of Africa and the Middle East.

Gauging these reverberations is hard, but we already see our growth forecasts as likely to be revised down next month when we will offer a fuller picture in our World Economic Outlook and regional assessments.

Longer term, the war may fundamentally alter the global economic and geopolitical order should energy trade shift, supply chains reconfigure, payment networks fragment, and countries rethink reserve currency holdings. Increased geopolitical tension further raises risks of economic fragmentation, especially for trade and technology.

IMF Forecasts Disrupted Global Recovery

According to an IMF communique the continuing global recovery faces multiple challenges as the pandemic enters its third year. The rapid spread of the Omicron variant has led to renewed mobility restrictions in many countries and increased labor shortages. 

Supply disruptions still weigh on activity and are contributing to higher inflation, adding to pressures from strong demand and elevated food and energy prices. Moreover, record debt and rising inflation constrain the ability of many countries to address renewed disruptions.

Some challenges could be shorter lived than others. The new variant appears to be associated with less severe illness than the Delta variant, and the record surge in infections is expected to decline relatively quickly. The IMF’s latest World Economic Outlook therefore anticipates that while Omicron will weigh on activity in the first quarter of 2022, this effect will fade starting in the second quarter.

Other challenges, and policy pivots, are expected to have a greater impact on the outlook. IMF projects global growth this year at 4.4 percent, 0.5 percentage point lower than previously forecast, mainly because of downgrades for the United States and China. In the case of the United States, this reflects lower prospects of legislating the Build Back Better fiscal package, an earlier withdrawal of extraordinary monetary accommodation, and continued supply disruptions. China’s downgrade reflects continued retrenchment of the real estate sector and a weaker-than-expected recovery in private consumption. Supply disruptions have led to mark downs for other countries too, such as Germany. IMF expects global growth to slow to 3.8 percent in 2023. This is 0.2 percentage point higher than stated in the October 2021 WEO and largely reflects a pickup after current drags on growth dissipate.

IMF has revised up our 2022 inflation forecasts for both advanced and emerging market and developing economies, with elevated price pressures expected to persist for longer. Supply-demand imbalances are assumed to decline over 2022 based on industry expectations of improved supply, as demand gradually rebalances from goods to services, and extraordinary policy support is withdrawn. Moreover, energy and food prices are expected to grow at more moderate rates in 2022 according to futures markets. Assuming inflation expectations remain anchored, inflation is therefore expected to subside in 2023.

Even as recoveries continue, the troubling divergence in prospects across countries persists. While advanced economies are projected to return to pre-pandemic trend this year, several emerging markets and developing economies are projected to have sizeable output losses into the medium-term. The number of people living in extreme poverty is estimated to have been around 70 million higher than pre-pandemic trends in 2021, setting back the progress in poverty reduction by several years.

The forecast is subject to high uncertainty and risks overall are to the downside. The emergence of deadlier variants could prolong the crisis. China’s zero-COVID strategy could exacerbate global supply disruptions, and if financial stress in the country’s real estate sector spreads to the broader economy the ramifications would be felt widely. Higher inflation surprises in the United States could elicit aggressive monetary tightening by the Federal Reserve and sharply tighten global financial conditions. Rising geopolitical tensions and social unrest also pose risks to the outlook.

To address many of the difficulties facing the world economy, it is vital to break the hold of the pandemic. This will require a global effort to ensure widespread vaccination, testing, and access to therapeutics, including the newly developed anti-viral medications. As of now, only 4 percent of the populations of low-income countries are fully vaccinated versus 70 percent in high-income countries. In addition to ensuring predictable supply of vaccines for low-income developing countries, assistance should be provided to boost absorptive capacity and improve health infrastructure. It is urgent to close the US$23.4 billion financing gap for the Access to COVID-19 Tools (ACT) Accelerator and to incentivize technological transfers to help speed up diversification of global production of critical medical tools, especially in Africa.

At the national level, policies should remain tailored to country specific circumstances including the extent of recovery, of underlying inflationary pressures, and available policy space. Both fiscal and monetary policies will need to work in tandem to achieve economic goals. Given the high level of uncertainty, policies must also remain agile and adapt to incoming economic data.

With policy space diminished in many economies, and strong recoveries underway in others, fiscal deficits in most countries are projected to shrink this year. The fiscal priority should continue to be the health sector, and transfers, where needed, should be effectively targeted to the worst affected. All initiatives will need to be embedded in medium-term fiscal frameworks that lay out a credible path for ensuring public debt remains sustainable.

Monetary policy is at a critical juncture in most countries. Where inflation is broad based alongside a strong recovery, like in the United States, or high inflation runs the risk of becoming entrenched, as in some emerging market and developing economies and advanced economies, extraordinary monetary policy support should be withdrawn. Several central banks have already begun raising interest rates to get ahead of price pressures. It is the key to communicate well the policy transition towards a tightening stance to ensure orderly market reaction. Where core inflationary pressures remain subdued, and recoveries incomplete, monetary policy can remain accommodative.

As the monetary policy stance tightens more broadly this year, economies will need to adapt to a global environment of higher interest rates. Emerging market and developing economies with large foreign currency borrowing and external financing needs should prepare for possible turbulence in financial markets by extending debt maturities as feasible and containing currency mismatches. Exchange rate flexibility can help with needed macroeconomic adjustment. In some cases, foreign exchange intervention and temporary capital flow management measures may be needed to provide monetary policy with the space to focus on domestic conditions.

With interest rates rising, low-income countries, of which 60 percent are already in or at high risk of debt distress, will find it increasingly difficult to service their debts. The G20 Common Framework needs to be revamped to deliver more quickly on debt restructuring, and G20 creditors and private creditors should suspend debt service while the restructurings are being negotiated.

At the start of the third year of the pandemic, the global death toll has risen to 5.5 million deaths and the accompanying economic losses are expected to be close to US$13.8 trillion through 2024 relative to pre-pandemic forecasts. These numbers would have been much worse had it not been for the extraordinary work of scientists, of the medical community, and the swift and aggressive policy responses across the world.

However, much work remains to ensure the losses are contained and to reduce wide disparities in recovery prospects across countries. Policy initiatives are needed to reverse the large learning losses suffered by children, especially in developing countries. On average, students in middle-income and low-income countries had 93 more days of nation-wide school closures than those in high income countries. On climate, a bigger push is needed to get to net-zero carbon emissions by 2050, with carbon pricing mechanisms, green infrastructure investment, research subsidies, and financing initiatives so that all countries can invest in climate change mitigation and adaptation measures.

The last two years reaffirm that this crisis and the ongoing recovery is like no other. Policymakers must vigilantly monitor a broad swath of incoming economic data, prepare for contingencies, and be ready to communicate and execute policy changes at short notice. In parallel, bold, and effective international cooperation should ensure that this is the year the world escapes the grip of the pandemic.

 

Increases in shipping rates and consumer prices in Asia

According to an IMF Report, as the world economy recovers from the pandemic, inflation is mounting in advance and emerging economies. Pent-up demand fueled by stimulus and pandemic disruptions is helping accelerate inflation, spread around the world through global factors like higher food and energy prices, and soaring shipping costs.

It is believed that Asia’s inflation has been more moderate as compared to other regions, affording central banks room to keep interest rates low and support economic recovery. However, Asia’s tepid price gains may see greater momentum in year 2022. The outlook remains uncertain, and central banks should be ready to tighten policy if inflation pressures and expectations mount.

Several factors explain Asia’s lower inflation. Among Asia’s emerging economies, a delayed recovery has kept core inflation—which strips out volatile food and energy costs—running at half the rate of peers in other regions. The cost of food—which makes up about one third of the consumer price index baskets—grew 1.6% over the past year as against 9.1% in other regions.

This reflects unique factors such as a solid harvest in India, a hog population rebound from a recent swine flu epidemic in China, and contained increases in rice prices. By contrast, lower inflation in Asia’s advanced economies reflects a different set of factors. The region has enjoyed more muted energy inflation than Europe and the United States.

Some Asian countries managed the pandemic in a way that avoided major supply disruptions and the associated pressure on prices. Korea embraced comprehensive contact tracing and testing, for example, while Australia and China contained infections with border closures and localized lockdowns.

Broad inflationary pressures will eventually moderate globally, as supply-demand mismatches ease and stimulus recedes. But in 2022, as the recovery strengthens, the persistent impact of high shipping costs could put an end to the benign inflation Asia has enjoyed in 2021.

One benchmark measure of global shipping costs, the Baltic Dry Index, tripled this year through October. IMF analysis shows such large increases in shipping costs boost inflation for 12 months, which could add about 1.5% points to the pace of Asia’s inflation in the second half of 2022.

IMF and Pakistan conclude staff level meeting

An International Monetary Fund (IMF) mission led by Ernesto Ramirez Rigo held virtual discussions during October 4–November 18, 2021 in the context of the 2021 Article IV consultations and the sixth review of the authorities’ reform program supported by the IMF’s Extended Fund Facility (EFF).

The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the sixth review under the EFF. The agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms.

Completion of the review would make available SDR 750 million (about US$1,059 million), bringing total disbursements under the EFF to about US$3,027 million and helping unlock significant funding from bilateral and multilateral partners. An additional SDR 1,015.5 million (about US$1,386 million) was disbursed in April 2020 to help Pakistan address the economic impact of the COVID-19 shock.

Despite a difficult environment, progress continues to be made in the implementation of the EFF-supported program. All quantitative performance criteria (PCs) for end-June were met with wide margins, except for that on the primary budget deficit.

Notable achievements on the structural front include the finalization of the National Socio-Economic Registry (NSER) update, parliamentary adoption of the National Electric Power Regulatory Authority (NEPRA) Act Amendments, notification of all pending quarterly power tariff adjustments, and payment of the first tranche of outstanding arrears to independent power producers (IPPs) to unlock lower capacity payments fixed in renegotiated power purchase agreements (PPAs).

The authorities have also made progress in improving the anti-money laundering and combating the financing of terrorism (AML/CFT) framework, although some additional time is needed to strengthen its effectiveness.

On the macroeconomic front, available data suggests that a strong economic recovery has gained hold, benefiting from the authorities’ multifaceted policy response to the COVID-19 pandemic that has helped contain its human and macroeconomic ramifications.

The Federal Board of Revenue’s (FBR) tax revenue collection has been strong. At the same time, external pressures have started to emerge: a widening of the current account deficit and depreciation pressures on the exchange rate—mainly reflecting the compound effects of the stronger economic activity, an expansionary macroeconomic policy mix, and higher international commodity prices.

In response, the authorities have started to adjust policies, including by gradually unwinding COVID-related stimulus measures. The State Bank of Pakistan (SBP) has also taken the right steps by starting to reverse the accommodative monetary policy stance, strengthening some macro-prudential measures to contain consumer credit growth, and providing forward guidance.

In addition, the government plans to introduce a package of fiscal measures targeting a small reduction of the primary deficit with respect to last fiscal year based on: 1) high-quality revenue measures to make the tax system simpler and fairer (including through the adoption of reforms to the GST system) and 2) prudent spending restraint, while fully protecting social spending.

These policies will help safeguard the positive near-term outlook, with growth projected to reach, or exceed, 4% in FY22 and 4.5% the fiscal year after that. However, inflation remains high, although it should start to see a declining trend once the pass-through of rupee depreciation is absorbed, and temporary supply-side constraints and demand-side pressures dissipate.

However, the current account is expected to widen this fiscal year despite some export growth, reflecting the rising import demand and international commodity prices. This economic outlook continues to face elevated domestic and external risks, while structural economic challenges persist.

In this regard, and looking beyond the near term, discussions also focused on policies to help Pakistan achieve sustainable and resilient growth to the benefit of all Pakistanis.

On the fiscal policy front, staying on course on achieving small primary surpluses remains critical to reduce high public debt and fiscal vulnerabilities. Continued efforts to broaden the tax base by removing remaining preferential tax treatments and exemptions will help generate much-needed resources to scale up critical social and development spending.

Monetary policy needs to remain focused on curbing inflation, preserving exchange rate flexibility, and strengthening international reserves. As economic stability becomes entrenched and the independence of the State Bank of Pakistan (SBP) is strengthened with the approval of the SBP Act Amendments, the central bank should gradually advance the preparatory work to formally adopt an inflation targeting (IT) regime in the medium term, underpinned by a forward-looking and interest-rate-focused operational framework. While some key elements of IT are already in place, including a medium-term inflation objective and prohibition of monetary financing, additional efforts are needed, to modernize the SBP’s operational framework as well as to strengthen monetary transmission and communication.

Advancing the strategy for the electricity sector reforms, agreed with international partners, is important to bring the sector to financial viability, and tackle its adverse spillovers on the budget, financial sector, and real economy. In this regard, steadfast implementation of the Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable. Substantially lowering supply costs. However, this will require a modern electricity policy that: 1) ensures that PPAs do not impose a heavy burden on end-consumers; 2) tackles the poor and expensive generation mix, including a wider use of renewables; and 3) introduces more competition over the medium term.

Strengthening the medium-term outlook, including by unlocking sustainable and resilient growth, creating jobs, and improving social outcomes, hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy. To this end, increased focus is needed on measures to strengthen economic productivity, investment, and private sector development, as well as to address the challenges posed by climate change:

Improving the governance, transparency and efficiency of the state-owned enterprise (SOE) sector 

Putting Pakistan’s public finances on a sustainable path—while leveling the playing field of firms across the economy and improving the provision of services—requires following through with the current reform agenda, especially with the: 1) creation of a modern legal framework; 2) better sectoral oversight by the state, supported by regular audits, especially of the largest SOEs; and 3) reduction of the footprint of the state in the economy, based on the recently completed comprehensive stocktaking.

Fostering the business environment, governance, and the control of corruption

The business climate would benefit from simplifying procedures for starting a business, approving FDI, preparing trade documentation, and paying taxes; and the empowerment of people and production of more complex goods from investing more in education and human capital. Ensuring a level playing field and the rule of law also remains essential, mainly by bolstering the effectiveness of existing anti-corruption institutions and accountability of high-level public officials and by completing the much-advanced action plan on AML/CFT.

Boosting competitiveness and exports

To this end, key objectives include: 1) implementing the approved national tariff policy, based on time-bound strategic protection; 2) negotiating new free trade agreements; and 3) facilitating the integration in global supply chains by improving firms’ reliability and product quality, and registering firms with all necessary entities for tax and business purposes.

Promoting financial deepening and inclusion

To better channel savings toward productive investment, improve the allocation of resources, and diversify risks, key policies remain: 1) entrenching macroeconomic stability; 2) strengthening institutional and regulatory frameworks; 3) creating conditions that allow for a greater role of private credit; and 4) boosting financial coverage of underserved segments of the population and SMEs.

Stepping up to climate change

Worldwide, Pakistan ranks both among the top 10 countries with the largest damages from climate-related disasters and top 20 countries with the largest greenhouse gas (GHG) emissions. Critical next climate policy steps are: 1) accelerating the finalization of the authorities’ National Adaptation Plan (NAP); and 2) implementing an adequate set of measures to meet the COP26 Nationally Determined Contribution (NDC) targets and securing sufficient financing, including from international partners.

Surging Energy Prices May Not Ease Until Next Year, says IMF

Soaring natural gas prices are rippling through global energy markets and other economic sectors from factories to utilities. 

According to a report by International Monetary Fund (IMF), an unprecedented combination of factors is roiling world energy markets, rekindling the memories of the 1970s energy crisis and complicating an already uncertain outlook for inflation and the global economy. Energy futures indicate that prices are likely to moderate in the coming months.

Spot prices for natural gas have more than quadrupled to record levels in Europe and Asia and the persistence and global dimension of these price spikes are unprecedented. Typically, such moves are seasonal and localized. Asian prices, for example, saw a similar jump last year but those didn’t spill over with an associated similar rise in Europe.

Analysts expect prices will revert back to normal levels early next year, when heating demand ebb and supplies adjust. However, if prices stay high as they have been, this could begin to be a drag on global growth.

Meanwhile, ripple effects are being felt in coal and oil markets. Brent crude oil prices, the global benchmark, recently reached a seven-year high above US$85 per barrel, as more buyers sought alternatives for heating and power generation amid already tight supplies. Coal, the nearest substitute, is in high demand as power plants turn to it more. This has pushed prices to the highest level since 2001, driving a rise in European carbon emission permit costs.

Bust, boom, and inadequate supply

Given this backdrop, it helps to look back to the start of the pandemic, when restrictions halted many activities across the global economy. This caused a collapse of energy consumption, leading energy companies to slash investment. However, consumption of natural gas rebounded fast—driven by industrial production, which accounts for about 20 percent of final natural gas consumption—boosting demand at a time when supplies were relatively low.

Energy supply, in fact, has reacted slowly to price signals due to labor shortages, maintenance backlogs, longer lead times for new projects, and lackluster interest from investors in fossil fuel energy companies. Natural gas production in the United States, for example, remains below pre-crisis levels. Production in the Netherlands and Norway is also down. And Europe’s biggest supplier, Russia, has recently slowed its shipments to the continent.

Weather has also exacerbated gas market imbalances. The Northern Hemisphere’s severe winter cold and summer heat boosted heating and cooling demand. Meanwhile, renewable power generation has been reduced in the United States and Brazil by droughts, which curbed hydropower output as reservoirs ran low, and in Northern Europe by below-average wind generation this summer and fall.

Coal supplies and inventories

While coal can help offset natural gas shortages, some of those supplies are also disrupted. Logistical and weather-related factors have crippled production from Australia to South Africa, while coal output in China, the world’s largest producer and consumer, has fallen amid emissions goals that dis-incentivize coal use and production in favor of renewables or gas.

In fact, Chinese coal stockpiles are at record lows, which increases the threat of winter fuel supply shortfalls for power plants. And in Europe, natural gas storage is below average ahead of winter, adding risk of more price increases as utilities compete for scarce resources before the arrival of cold weather.

Energy prices and inflation

Coal and natural gas prices tend to have less of an effect on consumer prices than oil because household electricity and natural gas bills are often regulated and prices are more rigid. Even so, in the industrial sector, higher natural gas prices are confronting producers that rely on the fuel to make chemicals or fertilizers. These dynamics are particularly concerning as they are affecting already uncertain inflation prospects amid supply chain disruptions, rising food prices, and firming demand.

Should energy prices remain at current levels, the value of global fossil fuel production as a share of gross domestic product this year would rise from 4.1 percent (estimated in our July projection to 4.7 percent. Next year, the share could be as high as 4.8 percent, up from a projected 3.75 percent in July. Assuming half of this increase in costs for oil, gas, and coal is due to reduced supply, this would represent a 0.3 percentage point reduction in global economic growth this year and about 0.5 percentage points next year.

Energy prices to normalize next year

While supply disruptions and price pressures pose unprecedented challenges for a world already grappling with an uneven pandemic recovery, the silver lining for policymakers is that the situation doesn’t compare to the early 1970s energy shock.

Back then, oil prices quadrupled, directly hitting household and business purchasing power and, eventually, causing a global recession. Nearly a half century later, given the less dominant role that coal and natural gas plays in the world’s economy, energy prices would need to rise much more significantly to cause such a dramatic shock.

Moreover, we expect natural gas prices to normalize by the second quarter as the end of winter in Europe and Asia eases seasonal pressures, as futures markets also indicate. Coal and crude oil prices are also likely to decline. However, uncertainty remains high and small demand shocks could trigger fresh price spikes.

Tough policy choices

That means central banks should look through price pressures from transitory energy supply shocks, but also be ready to act sooner—especially those with weaker monetary frameworks—if concrete risks of inflation expectations de-anchoring do materialize.

Governments should act to prevent power outages in the face of utilities curtailing generation if it becomes unprofitable. Blackouts, particularly in China, could dent chemical, steel, and manufacturing activity, adding to global supply-chain disruptions during a peak season for sales of consumer goods. Finally, as higher utility bills are regressive, support to low-income households can help mitigate the impact of the energy shock to the most vulnerable populations.

IMF Completes Combined Review of EFF for Pakistan

Reportedly, Executive Board of International Monetary Fund (IMF) has completed combined second through fifth reviews of the Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan, allowing for an immediate release of US$500 million for budget support, taking total budgetary support under the arrangement to about US$2 billion.

Program performance has remained satisfactory notwithstanding the unprecedented challenges of the COVID-19 shock, and the authorities’ policies have been critical in supporting the economy and saving lives and livelihoods.

Pakistani authorities have remained committed to ambitious policy actions and structural reforms to strengthen economic resilience, advance sustainable growth, and achieve economic reform program medium-term objectives.

Pakistan’s 39-month EFF arrangement was approved by the Executive Board on 3rd July 3, 2019 for about US$6 billion at the time of approval of the arrangement, or 210% of quota. The program aims to support Pakistan’s policies to help the economy and save lives and livelihoods amid the still unfolding COVID-19 pandemic, ensure macroeconomic and debt sustainability, and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.

Following the Executive Board discussion on Pakistan, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, issued the following statement:

The Pakistani authorities have continued to make satisfactory progress under the Fund-supported program, which has been an important policy anchor during an unprecedented period. While the COVID-19 pandemic continues to pose challenges, the authorities’ policies have been critical in supporting the economy and saving lives and livelihoods. The authorities have also continued to advance their reform agenda in key areas, including on consolidating central bank autonomy, reforming corporate taxation, bolstering management of state-owned enterprises, and improving cost recovery and regulation in the power sector.

Reflecting the challenges from the unfolding pandemic and the authorities’ commitment to the medium-term objectives under the EFF, the policy mix has been recalibrated to strike an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reforms while maintaining social cohesion. Strong ownership and steadfast reform implementation remain crucial in light of unusually high uncertainty and risks.

Fiscal performance in the first half of FY21 was prudent, providing targeted support and maintaining stability. Going forward, further sustained efforts, including broadening the revenue base carefully managing spending and securing provincial contributions will help achieve a lasting improvement in public finances and place debt on a downward path. Reaching the FY22 fiscal targets rests on the reform of both general sales and personal income taxation. Protecting social spending and boosting social safety nets remain vital to mitigate social costs and garner broad support for reform.

The current monetary stance is appropriate and supports the nascent recovery. Entrenching stable and low inflation requires a data-driven approach for future policy rate actions, further supported by strengthening of the State Bank of Pakistan’s autonomy and governance. The market-determined exchange rate remains essential to absorb external shocks and rebuild reserve buffers.

Recent measures have helped contain the accumulation of new arrears in the energy sector. Vigorously following through with the updated IFI-supported circular debt management plan and enactment of the National Electric Power Regulatory Authority Act amendments would help restore financial viability through management improvements, cost reductions, regular tariff adjustments, and better targeting of subsidies.

Despite recent improvements, further efforts to remove structural impediments will strengthen economic productivity, confidence, and private sector investment. These include measures to: 1) bolster the governance, transparency, and efficiency of the vast SOE sector; 2) boost the business environment and job creation; and 3) foster governance and strengthen the effectiveness of anti-corruption institutions. Also, completing the much-advanced action plan on AML/CFT is essential.

United States the biggest war machine

It may not be wrong to say that military bases of the United States are the key pieces of the global war machine, but people don’t hear about these very often. It is estimated 800 US military bases are located around the globe that play an essential role in turning the whole world into a bloody battlefield. These bases are located in more than seventy countries around the world and represent a mighty military presence, yet rarely acknowledged in US political discourse.

The Marine Corps Air Station Futenma in Okinawa might occasionally grab a headline thanks to sustained and vigorous anti-base protests, and US military bases in Guam might briefly make news due to public opposition to “Valiant Shield” war exercises that have taken place on the US colony during the pandemic. But, overwhelmingly, foreign bases simply are not discussed.

They are immutable, unremarkable facts, rarely considered even during elections that repeatedly invokes concepts like “democracy” and “endless war” and, thanks to a raging pandemic and climate crisis, raises existential questions about what United States is and should be.

The people living in the countries and US colonies impacted by these bases — the workers who build their plumbing systems, latrines, and labor in the sex trades that often spring up around them, the residents subjected to environmental toxins and war exercises — simply do not exist.

These military bases hold the key to understanding why the United States has consistently been in some state of war or military invasion for nearly every year of its existence as a country.

US military bases around the world, from Diego Garcia to Djibouti, are nuts and bolts in the war machine itself. Military bases provide the logistical, supply, and combat support that has allowed the United States to turn the whole world into its battlefield. They make conflict more likely, and then more wars lead to more military bases, in a vicious cycle of expansion and empire. Put another way, “bases frequently beget wars, which can beget more bases, which can beget more wars, and so on.”

While the idea that the global expansion of military bases corresponds with the rise of US empire may seem obvious, it is both consequence and cause. The way global military positions spread — which are always sold to the public as defensive — are by their very nature, offensive and become their own, self-fulfilling ecosystems of conquest.

Just as the induced demand principle shows, building more lanes on highways actually increases traffic, United States of War makes the argument that military bases themselves incentivize and perpetuate military aggression, coups, and meddling.

The trajectory toward empire started with white settler expansion within the United States. In 1785, the US Army initiated what “would become a century-long continent-wide fort-construction program. These forts were used to launch violent invasions of Native American lands, to protect white settler towns and cities, and to force Native Americans further and further away from the East Coast.

They were also used to expand the fur trade, which, in turn, encouraged other settlers to keep moving west, with some forts functioning in part as trading posts. The famed expedition of Lewis and Clark was a military mission to collect geographic data that would be used for more “fort construction, natural resource exploitation and westward colonization by settlers.”

While the United States was expanding its frontier, its Navy was also pursuing fort construction overseas, from North Africa’s Barbary Coast to Chile, often for the purpose of securing trade advantages. In the thirty years following the war of 1812 — primarily a war of US expansion — settlers pushed westward within the United States, building infrastructure as they went: roads, trails, and more than sixty major forts west of the Mississippi River by the 1850s. After the United States went to war with Mexico, army bases were constructed in the annexed territory. Forts in Wyoming protected wagon trails, allowing settlers to expand through the western United States.

The violent conquest and massacre of Native Americans did not stop during the Civil War, and it escalated from 1865 to 1898, when the US Army fought no fewer than 943 distinct engagements against Native peoples, ranging from skirmishes to full-scale battles in twelve separate campaigns. White supremacist policies were particularly pronounced in California, but took place across the West. After 1876, when President Ulysses S. Grant turned over Native Americans to the War Department, Fort Leavenworth was transformed into a prisoner of war camp for the Nimi’ipuu tribe.

Over almost 115 consecutive years of US wars against indigenous nations, US military forts played a consistent role in protecting white settler pillaging and conquest.

The War of 1898 was the start of a new form of overseas empire which saw the country expanded across the continent with the help of US Army forts and near-continuous war. In some cases, it’s possible to draw a direct line between expansion within the United States and conquest abroad.

US Army waged brutal battles against the Kiowa, Comanche, Sioux, Nez Perce, and Apache tribes, then ordered cavalry to massacre as many as three hundred Lakota Sioux in 1890, and then violently put down the Pullman, Illinois railroad workers strike in 1894.

A bloody counterinsurgency war in the Philippines was aimed at defeating its independence movement. Similar continuity between domestic and global repression can be found today as counterinsurgency tactics and military weapons and equipment are used by US police departments.

Organized labor, immigrants, recently freed slaves and indigenous peoples at home and abroad were all subdued by the same military and police forces making way for white settlement and capital expansion.

After seizing Spanish colonies during the 1898 war, the US began to pursue a new form of imperialism that was less dependent on the creation of new formal colonies and more dependent on informal, less overtly violent — but violent nonetheless — political and economic tools backed by military might, including bases abroad. The US built up the military presence in the Philippines to seventy thousand troops, using these forces to help put down China’s Boxer rebellion, and used its military might to intervene ruthlessly in Panama.

World War II saw the dramatic expansion of military bases, an era commencing in 1940, when President Franklin D. Roosevelt signed a deal with Prime Minister Winston Churchill to trade naval destroyers for ninety-nine-year leases in eight British colonies, all located in the Western Hemisphere. In the immediate aftermath of the war, the US temporarily shrank military personnel spending, and returned roughly half its foreign bases.

Yet the basic global infrastructure of bases remained entrenched and a permanent war system was established. During the post–World War II era of decolonization, the US used its military base network and economic influence, buttressed by new institutions like the World Bank and International Monetary Fund, to protect its preeminence.

During the Cold War, overseas base expansion became central to the goals of containment and forward positioning, premised on the idea that global bases allow quick response to threats and rapid interventions and deployments in crises. While giving the illusion of increased safety, these bases actually made foreign wars more likely because they made it easier to wage such wars. In turn, conflict increased construction of US bases.

The Korean War, which killed between three and four million people, prompted a 40 percent increase in the number of US bases abroad, and increasing concern about maintaining bases in the Pacific Ocean. Bases also spread across Latin America, Europe, and the Middle East.

CIA stations expanded alongside military bases, and clandestine meddling and supporting coups became a preferred tool of US Empire. When the US waged brutal war in Vietnam, Laos, and Cambodia, it was assisted by hundreds of bases in Japan, Okinawa, the Philippines, and Guam.

The fate of the roughly one thousand Chagossians (descendants of Indian indentured workers and enslaved Africans) from Diego Garcia, an island in the Indian Ocean, spotlights the remarkable cruelty the US during this period of strategic island approach, whereby the US established control over small, colonial islands.

After making a secret agreement with Britain in 1966 to purchase basing rights, the US and UK governments expelled its residents between 1967 to 1973, leaving them trapped on Mauritius and Seychelles, without jobs or homes, many of their possessions lost to them forever.

During some phases of the expulsion, residents were forced onto cargo ships, their dogs killed. By 1973, the US was using this base to support Israel in its 1973 war with Arab nations. To this day,” Vine notes, Chagossians and many others among the displaced are struggling to return home, to win some justice and recompense for what they have suffered.”

The United States used bases from Diego Garcia to Oman to invade Afghanistan in 2001 and, once there, established more bases, and took over former Soviet ones. Likewise, bases from Kuwait to Jordan to Bahrain to Diego Garcia were critical for the 2003 invasion of Iraq, where the US immediately began building bases and installations post-invasion.

While the Bush-Cheney administration closed some bases in Europe, overall spending on bases reached record highs during their time in office. The war with ISIS has seen troops return to Iraq, and the acquisition of bases, even after the Iraqi parliament in 2011 rejected a deal to keep fifty-eight bases in the country.

Since September 11, 2001, the US has also expanded its presence in Africa, building “lily pads” across the continent — smaller profile, somewhat secretive installations, suggesting a frog jumping from lily pad to lily pad toward its prey. US bases have been central to waging the 2011 NATO war in Libya, drone strikes in Yemen, military intervention in Somalia and Cameroon. The military has been conducting a variety of operations regularly in at least 49 African countries.

Meanwhile, base spending has played a key role in the steady uptick of overall military spending. In addition to the direct harm they do through enabling war, bases are associated with incredible fraud and waste, and base contractors renowned for their significant political contributions. This political force, and self-contained logic of sustenance and expansion, is the key to understanding how the Military Industrial Complex can be like Frankenstein’s monster, taking on a life of its own thanks to the spending it commands.

The War on Terror ethos, in which the whole world is considered a US battlefield and the US grants itself broad latitude to wage preemptive war, has come to define US foreign policy. George W. Bush talked about the importance of having a military ready to strike at a moment’s notice in any dark corner of the world to the Middle East, Africa, and Muslim areas of Asia.

Today, the war on ISIS — responsible for significant civilian deaths — continues, so does brinkmanship with Iran, hedging against China, brutal war in Afghanistan, and US support for the war on Yemen, which has unleashed a profound humanitarian crisis.