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.

Kamala Harris made President of United States for 85 minutes

Kamala Harris, Vice President became the first acting female President of United States on Friday for 85 minutes. President Joe Biden before going for a routine colonoscopy chose to temporarily transfer powers to the Vice President, making her acting president for the time of the examination.

In that time, she served as president, the first woman to do so in the nation's history. Acting presidents, according to The Wall Street Journal, have all the powers of the president except for naming a vice president. 

A section of the 25th Amendment states that Presidents may temporarily transfer their powers to their vice president, should they be unable to do their job. It is not mandatory under circumstances such as a routine colonoscopy, but Biden chose to do so.

Joe Biden notified leaders of the Senate and the House of Representatives of the decision. After his medical procedure, he submitted a letter reclaiming presidential powers. 

The colon has historically been a source of presidential power transfers in the US. Former President Ronald Reagan transferred power to George W. Bush while undergoing colon cancer surgery, and George W. Bush transferred powers to then-vice president Dick Cheney twice while also undergoing colonoscopies. 

White House Press Secretary Jen Psaki said that the Biden administration knew that they "make history every time they’re working together, every time she’s out there speaking on behalf of the government as the Vice President of the United States.  But certainly, today was another chapter in that history that I think will be noted for many women [and] young girls across the country."

An attempt to block US$650 million US arms sale to Saudi Arabia

According to the reports, a group of senators in the United States is opposing the Biden administration’s first major arms sale to the Kingdom of Saudi Arabia over Riyadh’s involvement in the conflict in Yemen.

A joint resolution of disapproval to block a proposed US$650 million in US arms sales to the Kingdom of Saudi Arabia was introduced by Republicans Rand Paul and Mike Lee, as well as Bernie Sanders who caucuses with Democrats.

While many US lawmakers consider Saudi Arabia an important partner in the Middle East, they have criticized the country for its involvement in the war in Yemen, a conflict considered one of the world’s worst humanitarian disasters. They have refused to approve many military sales for the kingdom without assurances US equipment would not be used to kill civilians.

Activists have said Saudi Arabia has lobbied heavily against extending a mandate of United Nation investigators who have documented possible war crimes in Yemen by both the Riyadh-led coalition and the Houthi movement.

The package which was approved by the State Department would include 280 AIM-120C-7/C-8 Advanced Medium Range Air-to-Air Missiles (AMRAAM), 596 LAU-128 Missile Rail Launchers (MRL) along with containers and support equipment, spare parts, US government and contractor engineering and technical support.

In a statement Paul said, “This sale that could accelerate an arms race in the Middle East and jeopardize the security of our military technologies.”

 “As the Saudi government continues to wage its devastating war in Yemen and repress its own people, we should not be rewarding them with more arms sales,” said Sanders in the joint statement.

The Biden administration has said it adopted a policy of selling only defensive weapons to the Gulf ally.

When the State Department approved the sale a spokesman said the sale “is fully consistent with the administration’s pledge to lead with diplomacy to end the conflict in Yemen.” The air-to-air missiles ensure “Saudi Arabia has the means to defend itself from Iranian-backed Houthi air attacks,” he said.

State Department approval of a sale is not necessarily the indication of a signed contract.

Is the US hegemony around the world ending?

The horrifying images of desperate Afghans trying to get out of Kabul after the US-backed government collapsed in August signify a major twist in world history, the end of the US hegemony had come earlier than anticipated.

The growing weakness of United States can be attributed more to the domestic issues rather than its overseas proxy wars. The country is gradually losing status of largest ‘economic power’ as well as its ability to fix internal problems.

The peak period of the US hegemony lasted less than 20 years, from the fall of the Berlin Wall in 1989 to the financial crisis of 2007-09. The country was dominant in many domains of power—military, economic, political and cultural.

The height of American hubris was the invasion of Iraq in 2003, when it hoped to remake not just Iraq and Afghanistan, but the whole Middle East. The United States not only overestimated the effectiveness of its military power to bring about deep political change, but also underestimated the impact of its free-market economic model on global finance.

The decade ended with its troops bogged down in two counterinsurgency wars and a financial crisis that accentuated the inequalities of US-led globalization had brought about.

The degree of uni-polarity in this period has been rare in history, and the world has been reverting to a more normal state of multi-polarity ever since, with China, Russia, India, Europe and others gaining power relative to counter the US.

Afghanistan’s ultimate effect on geopolitics is not likely to be small. The US may have survived an earlier, humiliating defeat when it withdrew from Vietnam in 1975, but regained its dominance within little more than a decade. The much bigger challenge to the US global standing is domestic.

American society has become deeply polarized and has found it difficult to find consensus on virtually anything. This polarization started over conventional policy issues like taxes and abortion, but has since metastasized into a bitter fight over cultural identity.

Normally a big external threat such as a global pandemic should be the occasion for citizens to rally around a common response. But the covid-19 crisis served rather to deepen divide in the United States, with social distancing, mask-wearing and vaccinations being seen not as public-health measures but as political markers. These conflicts have spread to all aspects of life, from sport to the brands of consumer products that red and blue Americans buy.

Many analysts believe that the US influence abroad depends on its ability to fix its internal problems. Polarization has affected foreign policy directly.

During Barack Obama’s presidency, Republicans took a hawkish stance and scolded Democrats for the Russian “reset” and alleged naivety regarding Vladimir Putin.

Donald Trump turned the tables by embracing Putin, and today roughly half of Republicans believe that the Democrats constitute a bigger threat to the American way of life than Russia does.

There is more apparent consensus regarding China as both Republicans and Democrats agree it is a threat to democratic values. A far greater test of the US foreign policy than Afghanistan will be Taiwan, if it comes under direct Chinese attack. Will the United States be willing to sacrifice its sons and daughters on behalf of that island’s independence?

Would the US risk military conflict with Russia should it invade Ukraine? These are serious questions with no easy answers. A reasoned debate about the US national interest has to be conducted primarily through the lens of how it affects the partisan struggle.

The biggest policy debacle of President Joe Biden’s administration in its first year has been its failure to plan adequately for the rapid collapse of Afghanistan.

Biden has suggested that withdrawal was necessary in order to focus on meeting the bigger challenges from Russia and China. Obama was never successful in making a “pivot” to Asia because the US remained focused on counterinsurgency in the Middle East.

In 2022, the administration needs to redeploy both resources and the attention of policymakers to deter geopolitical rivals and engage with allies.

The United States is not likely to regain its earlier hegemonic status, nor should it aspire to. What it can hope for is to sustain, with like-minded countries, a world order friendly to democratic values. The ability do this depend on recovering a sense of national identity and purpose at home.

United States may send some evacuees back to Afghanistan

According to a CNN report, Biden administration is mulling plans to send some Afghan evacuees at a US military base in Kosovo back to Afghanistan, in case they fail to pass a vigorous vetting process. 

The option is one of several being considered by US officials who have not yet developed a wider plan for where to resettle Afghans who do not pass the security clearance process.

About 70,000 Afghan evacuees have come to the United States following the chaotic scramble to evacuate US forces and vulnerable populations from Afghanistan in August.

Tens of thousands of other evacuees were sent to sites across Europe and the Middle East to be processed before moving on to the US or a partner third country.

Administration officials have made clear that all Afghans looking to come to the United States must pass a security screening and vetting process and receive necessary vaccinations before they are permitted to enter.

But those whose cases required more intense vetting are being transferred to Camp Bondsteel in Kosovo, with roughly 200 individuals, including family members, now at the base. The administration and Kosovo’s government have an agreement to house evacuees there for up to a year.

Should an individual at Bondsteel not pass vetting, he/she could then choose to go back to Afghanistan and would not be sent back to the country against their will.

Before such a move, there would be a conversation to examine whether there was a third country where they could travel instead.

Sending evacuees back to Afghanistan without their permission would be a departure from the administration’s previous promise to transfer such individuals to a third country and raise human rights concerns and legal questions.

US officials have also been very vague about which countries would then take those individuals.

While nobody sent to Kosovo has yet been deemed unable to enter the United States, some US officials and lawmakers worry that should individuals not pass clearances there are limited options for them. They could, for example, be stuck on a base long-term.

One senior administration official told CNN that the security flags that have led to people being transferred to Bondsteel are usually not those “that can be resolved within hours or even within days.”

The US has not sent anyone back to Afghanistan, but the official said they “would leave all such possibilities on the table, which includes the fact that you might have evacuees for whom that is their preferred destination if the United States is not an option.”

Europe decoupling from China would not be right, says Merkel

German Chancellor Angela Merkel has said that decoupling from China is not the right option for Europe, despite tense relationship. The outgoing leader told Reuters in an interview that Germany may have been naive in some areas of cooperation with China.

“Maybe initially we were rather too naive in our approach to some cooperation partnerships,” she said. “These days we look more closely, and rightly so.”

But, she said it was important for Germany and the European Union to continue to cooperate with China and to learn from one another.

“Total decoupling wouldn’t be right in my view, it would be damaging for us,” she said.

Merkel also said, Germany was continuously in discussions with Beijing on intellectual property and patent protection, “both with regard to Chinese students in Germany and German enterprises operating in China”.

Merkel has sought to engage with China during her 16 years at the helm and helped to nurture EU-China ties. She did not seek re-election in the September election and will step down once a new coalition government is formed.

China became Germany’s biggest trade partner in 2016 and its rapid economic expansion has fuelled German growth throughout Merkel’s tenure. Some critics say Germany is now too reliant on China, and becoming too soft on Beijing on awkward issues such as human rights violations.

Merkel’s government has said she always addressed human rights issues on her official visits to China – she has visited the country 12 times as chancellor – and has sought to diversify trade in Asia.

Her remarks come as relations between China and the EU are at a low point over a growing list of issues, including Hong Kong and Xinjiang. In May, the European Parliament halted ratification of an investment treaty with China after the two sides imposed tit-for-tat sanctions over Beijing’s alleged human rights abuses against Uygurs in the far western Xinjiang region.

Beijing hits back at Western sanctions against China’s alleged treatment of Uygur Muslims.

Beijing has also been angered by some European nations seeking closer ties with self-ruled Taiwan, which it claims as its own territory. Brussels was preparing to announce a new strategic format for liaising with Taiwan on trade and economic issues this week, but it was postponed at the eleventh hour, sources told the South China Morning Post. It is expected to be revisited at a later date, according to a European Parliament source.

As Brussels tries to balance ties between Beijing and Taipei, China is trying to re-engage with Europe. Zhang Ming, China’s ambassador to the European Union, has said there are plans to hold an EU-China summit by the end of this year.

On climate issues, Merkel told Reuters that she had urged Chinese Premier Li Keqiang in a phone call to use cleaner technology if new coal-fired plants were being built in China.

“I have just spoken to the Chinese premier and discussed whether it would not be better, if his country is going to build coal-fired power plants, to at least build the latest generation,” she said.

Merkel’s party, the Christian Democratic Union, is headed for the opposition and likely to take a “hawkish turn on China” after she steps down, according to Noah Barkin, a Europe-China expert at Rhodium Group.

“The government that replaces her will also strike a different tone because it will include two parties, the Greens and Free Democrats, who support a harder line,” Barkin said.

“In her final months in office, Merkel has been doing all she can to ensure that her dialogue-first approach to China remains in place after her departure. But the political mood in Germany, as well as China’s own trajectory, suggest otherwise.”

 

Iran keen in developing links with neighbors

Deputy Foreign Minister of Iran for Economic Diplomacy Mehdi Safari has said it is a priority to expand economic and trade cooperation with neighbors, saying the Economic Cooperation Organization (ECO) can help achieve this goal.

Safari made the remarks at a meeting with ECO Secretary-General Khosrow Nazeri on the eve of the ECO summit in Turkmenistan, Mehr reported on Wednesday.

ECO includes Iran, Turkey, Afghanistan, the Republic of Azerbaijan, Kyrgyzstan, Kazakhstan, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan.

At the meeting, the ECO chief presented a report on the process to prepare for the summit in Ashgabat and hailed Iran for its assistance in this regard.

Safari said expansion of economic and trade cooperation with neighbors is a priority of the new Iranian administration and stressed the role of ECO in achieving the goals of member countries.

The top diplomat said a plan by Iran to send a high-level team to the forthcoming summit signifies the prominent position of ECO.

Safari said Iran is ready help ECO members to implement important decisions at the ECO summit in Ashgabat.

Iranian Transport and Urban Development Minister Rostam Qasemi said that positive agreements have been reached with neighboring countries, for expansion of transportation cooperation, especially in the aviation sector, IRNA reported.

Speaking at the ceremony on introducing the new head of Civil Aviation Organization (CAO), Qasemi said, “We recently reached agreements with Turkmenistan and Kyrgyzstan, part of which is related to the development of aviation.”

According to the official, the expansion of transportation cooperation with other countries will lead to the expansion of trade ties and eventually will increase the country’s revenues.

“We have made plans for upgrading our transportation fleet. However, we need effective measures to be taken for the development of the aviation industry,” he stressed.

He further stated that the most important factor in the development of the aviation industry is the use of specialists to promote it, adding: “In order to empower the aviation industry to meet the needs of the country, we need more work to be done, and this capability exists inside the country.”

Elsewhere in his remarks, Qasemi mentioned the needs of other transportation sectors including road, maritime, and rail, and said, “The transport sector needs to modernize its fleet, and we have not yet achieved the goals of the program in the rail, sea, and land sectors.”

Ghasemi pointed to the existing problems in the railway fleet and also the incompleteness of the country’s railway corridors and said, "Conditions in the railway sector are not favorable, the average life of the road transportation fleet is high and in the sea sector, despite high capacities, the capacity of the country’s ports has not been used well."