USD going up, up and away

Exchange rates most often impinge on the economic world when there’s big drama — China’s surprise devaluation in 2015, the crisis of confidence with EUR in 2000, the Asian currency collapses of 1997. There’s a sleeper hit developing right now with the dollar.

The Bloomberg Dollar Index, which measures the greenback against a basket of other major currencies, is heading for its biggest monthly gain since March 2020 — when global markets were in turmoil over the eruption of the pandemic and there was massive emergency demand for dollars.

On the flipside, the currencies of countries including Chile, Poland, South Africa and Turkey have tumbled in double-digit percent terms over the past six months.

USD is appreciating as investors start building in a more aggressive withdrawal of Federal Reserve monetary stimulus. San Francisco Fed President Mary Daly said on Wednesday that she’d support a faster taper if data stay strong. Some Wall Street banks raised forecasts for economic growth in the fourth quarter after a wave of robust data was released.

A rising USD would have significant consequences in particular for emerging markets, which still rely to a large extent on it for their borrowing needs. The stronger the currency is, the more expensive it is for companies and governments in developing nations to make payments on debt denominated in greenbacks.

Even as the American share of the global economy has declined over the years, the role of the dollar has in many ways strengthened — increasing the consequences of its appreciation. A Bank for International Settlements report in September showed that outstanding dollar credit to companies and other non-bank borrowers outside the US more than doubled since the financial crisis in 2008 to US$13 trillion by the end of March.

A host of emerging and developing central banks — from Chile to Russia to Pakistan — have already started increasing interest rates well ahead of counterparts in the developed world, and the prospect of their currencies weakening against the USD will only add to the pressure to extend or even strengthen those campaigns.

As the Fed moves to curtail the supply of USD, by winding down its quantitative easing program and turning at some point toward raising interest rates, conditions will only get tougher for emerging-nation borrowers. That will add further headwinds for economies struggling to match the rich nations in combating the pandemic.

“The peak in terms of the flow of liquidity’’ in USD “is behind us,” Shweta Sing, a managing director at research firm TS Lombard, wrote in a report. The big build-up in the Fed’s balance sheet since early 2020 has “meaningfully mitigated the ripple effects from a strong USD to global financing conditions,” she said. “But the risks are building up.”

Will Joe Biden succeed in reining in oil prices?

The United States is pulling out various stops in an effort to get gas prices under control at the start of a busy holiday travel season. The administration is tapping into the strategic petroleum reserve and President Biden has called on the Federal Trade Commission to investigate whether oil companies are responsible for increased prices.

But the focus on gas prices has provided fuel for Republican attacks on Biden’s handling of the economy, and his energy policies in particular, at a time when the White House is hoping to rally support for ambitious climate goals in its roughly US$2 trillion spending plan.

There was a prediction that 53.4 million people will travel for the Thanksgiving holiday, a 13% increase from 2020 when many Americans opted not to travel with coronavirus cases and deaths surging around the country.

The busy travel season to come has put a spotlight on gas prices in particular amid broader concerns about inflation, something the White House has attempted to show it has under control.

“Obviously, the president does not control the price of gasoline -- no president does,” Energy Secretary Jennifer Granholm told reporters. “But what we’re seeing right now is this global mismatch between supply and demand. Oil production is lagging behind as the rest of the economy roars back to life after the shutdown.”

“So, we, in this administration, are leaving no stone unturned as we examine the market to figure out what's behind the high prices,” she said.

The White House has shown more urgency in recent weeks in publicly messaging how it is trying to provide relief for Americans grappling with inflation, particularly after the Labor Department released statistics showing consumer prices grew far faster than expected in October and that annual inflation had hit a 30-year high. That rise was in part a result of rising energy costs, and increased costs at the gas pump.

Biden last week wrote to the Federal Trade Commission requesting the agency look into whether oil companies were unfairly spiking prices at the pump.

And on Tuesday, the administration announced it would release 50 million barrels of oil from the nation’s Strategic Petroleum Reserve in coordination with several other countries in an effort to match supply with demand.

Experts have questioned whether either move will do much to meaningfully bring down prices immediately, and they cautioned other factors, like the course of the pandemic, are more likely to affect the trajectory in the months to come.

That has led some conservatives to question whether the White House’s actions on gas prices were more of a political maneuver as poll after poll has shown voters souring on Biden, particularly over his handling of the economy, with his approval ratings dropping into the low 40s.

“This is being done in order to use every tool at the president's disposal to lower the price of gas for the American people,” White House press secretary Jen Psaki said when asked if tapping into the strategic reserve was being done for political purposes.

Republicans have gone on offense over inflation for the last few weeks, and the Biden administration’s decision to release oil from the strategic reserve provided more fodder for attacks on its energy policies.

Former President Donald Trump and GOP lawmakers argued the Biden administration’s desire to shift away from fossil fuels and toward clean energy industries has led to problems at the pump.

“Today’s announcement is nothing more than a gesture. If the president and his administration wanted to make a real, long-term impact, they would work to maximize domestic production and expedite energy infrastructure like pipelines—not close federal lands to drilling and add a federal tax to methane,” Sen. Shelley Moore Capito, ranking member on the Senate Environment and Public Works Committee, said in a statement.

Sen. John Barrasso, the top Republican on the Senate Energy and Natural Resources Committee, accused Democrats of “waging a war on American energy.

Even Sen. Joe Manchin, who has opposed some climate initiatives in Biden’s Build Back Better agenda, called the release of oil from the reserves an “important policy Band-Aid for rising gas prices” while criticizing the administration's energy policy as “shortsighted.”

Biden in remarks Tuesday sought to assure the public that the US economy was on the upswing and a rise in prices would not be a long-term concern.

“I also want to briefly address one myth about inflated gas prices: They are not due to environmental measures. My effort to combat climate change is not raising the price of gas or increasing its availability,” Biden said in prepared remarks, arguing investments in electric vehicles, solar panels and other sectors would spur job creation and innovation.

“Let’s beat climate change with more extensive innovation and opportunities,” he added. “We can make our economy and consumers less vulnerable to these sorts of price spikes when we do that.”

Israel airstrikes Syria, once again

At least four people were killed and seven injured in an alleged Israeli airstrike that reportedly targeted sites belonging to Hezbollah in Homs in western Syria, according to Syrian media and reports.

According to SANA, the airstrikes were carried out from northeastern Beirut. The report claimed that most of the missiles were shot down by Syrian air defenses. Two civilians were killed and another was injured in the strikes.

A Syrian anti-aircraft missile launched at what was allegedly an Israeli aircraft crashed into the Mediterranean Sea, but preliminary estimates say it went over Lebanon and did not cross into Israeli airspace, according to reports.

According to the opposition-affiliated Halab Today TV, about 10 members of Hezbollah were injured after a site the movement uses as a military headquarters and to store logistical equipment was targeted in the airstrikes.

According to Al-Araby Al-Jadeed, at least 10 missiles hit positions belonging to Syrian regime forces west of the city of Homs, causing casualties among civilians, Syrian soldiers and Iran-backed militants. One of the sites targeted was located in the Syrian Gas Company, according to the report.

The two civilians were reportedly killed by a missile that hit a civilian area near a gas station west of Homs.

The airstrikes come exactly a week after the IDF fired two missiles from the Golan Heights toward an empty building south of Damascus.

One of the missiles was shot down and no losses were caused, according to the report. It is unclear whether the missiles were fired from an aircraft or were surface-to-surface ones.

A week before that strike, two Syrian soldiers were injured and material damage was caused in an alleged Israeli airstrike targeting sites in the Homs area.

Over the past year, while Israeli strikes have intensified in Syria, the response time by Syrian air defense batteries has become quicker, leading the Israel Air Force to change how it acts during such operations – including by having larger formations so that more targets can be struck at once during an operation instead of having jets return to the same target.

Iran has begun deploying advanced anti-aircraft missile batteries to the region in an attempt to challenge Israeli jets.

US getting ready to confront with Russia

The Biden administration is considering sending military advisers and new weapons to Ukraine in the face of a Russian military buildup near the border between the two countries, CNN reported Tuesday.

The proposed lethal aid package could include mortars, air defense systems such as stinger missiles and new Javelin anti-tank and anti-armor missiles, multiple sources familiar with the deliberations told the outlet.

Sources also said the Pentagon has pressed for some equipment that would have gone to Afghanistan to instead be sent to Ukraine, like Russian-made Mi-17 helicopters. The US military has halted sending such equipment to Afghanistan with the end of its mission there in August.

US officials have also talked with European allies about forming a new sanctions package that could go into effect should Russia invade Ukraine, the sources said. 

The discussions are taking place as Ukraine has begun to warn the US and allies that a Russian invasion could happen as soon as January. 

Kyiv earlier this month noted the unusual Russian troop movements, but after discussions between US and Ukrainian officials — and an estimated 92,000 Russian troops now placed close to the border — the warnings have grown. 

US and NATO intelligence now fear Moscow’s troop buildup is preparation for a military operation over Ukraine’s eastern border from multiple locations, much like when Russia invaded Crimea in 2014. 

“Our concern is that Russia may make the serious mistake of attempting to rehash what it undertook back in 2014, when it amassed forces along the border, crossed into sovereign Ukrainian territory and did so claiming — falsely — that it was provoked,” Secretary of State Antony Blinken said last week.

Asked about the possible military package, a State Department spokesperson told The Hill that they had nothing to preview or confirm. 

They did note, however, that the administration has “demonstrated that the United States is willing to use a number of tools to address harmful Russian actions and we will not hesitate from making use of those and other tools in the future.”

"We continue to have serious concerns about Russian military activities and harsh rhetoric towards Ukraine, and call on Moscow to de-escalate tensions," they added.

Russian officials, meanwhile, have maintained that the troops and military units are in the area as part of exercises and a response to threats from NATO. They also have called reports that they may soon invade Ukraine “false.”

Asked on Tuesday about the possibility that the US will send additional assistance to Ukraine, Russia spokesman Dmitry Peskov on Tuesday suggested that should it happen, it could lead “to a further aggravation of the situation on the border line.”

 

50 million barrels crude oil to be released from Strategic Petroleum Reserve

The Department of Energy will release 50 million barrels of oil from the nation's Strategic Petroleum Reserve, the White House announced Tuesday, as the Biden administration seeks ways to control rising costs at the pump.

Of the 50 million barrels, 32 million will eventually be returned to the strategic reserve over the years ahead once fuel prices come down in a bid to ensure the reserve remains stocked, officials said. 

Another 18 million barrels will be released as an acceleration of an oil sale Congress had already authorized.

Tuesday's announcement was made in concert with China, India, Japan, South Korea and the United Kingdom, which will also tap into their own strategic reserves.

The Biden administration had reportedly discussed the strategic reserve option in recent weeks to increase supply as consumers faced higher gas prices amid broader concerns about inflation as the economy rebounds from the coronavirus pandemic.

The Labor Department earlier this month released statistics showing consumer prices grew far faster than expected in October and that annual inflation had hit a 30-year high.

The consumer price index, which tracks inflation for a range of staple goods and services, rose 0.9 percent last month and 6.2 percent in the 12-month period ending in October. The rise in prices was driven largely by a 4.8 percent increase in energy costs for the month, including a 1.6 percent increase in gasoline prices.

In a bid to rein in gas prices as inflation contributed to sinking poll numbers, Biden last week asked the head of the Federal Trade Commission to investigate whether oil companies are illegally increasing prices.

Sen. John Barrasso (R-Wyo.), the ranking member of the Senate Energy and Natural Resources Committee, said on Tuesday that Biden's own policies were to blame for needing to tap into the strategic reserve.

“We are experiencing higher prices because the administration and Democrats in Congress are waging a war on American energy," Barrasso said in a statement, arguing Tuesday's announcement would not fix the problem alone.

"Begging OPEC and Russia to increase production and now using the Strategic Petroleum Reserve are desperate attempts to address a Biden-caused disaster," Barrasso added. "They’re not substitutes for American energy production."

Congress is negotiating a roughly $2 trillion reconciliation package that is the cornerstone of Biden's agenda and features billions of dollars in investments in programs to combat climate change, with investments in renewable energy, electric cars and more.

The White House insisted Tuesday's announcement was not at odds with Biden's goals to shift away from fossil fuels in the years to come.

"Today’s announcement reflects the President’s commitment to do everything in his power to bring down costs for the American people and continue our strong economic recovery," the White House said in a statement.

"At the same time, the Administration remains committed to the President’s ambitious clean energy goals, as reflected in the historic Bipartisan Infrastructure Law signed last week and the House-passed Build Back Better Act that together represent the largest investment in combating climate change in American history and is a critical step towards reaching a net-zero emissions economy by 2050 and reducing our dependence on foreign fossil fuels."

Israel about to separate West Bank from Jerusalem

Israel has reached the final stage of separating the West Bank from Jerusalem, European Union Representative to the Palestinian Authority Sven Kuhn von Burgsdorff warned on Sunday. He was talking to The Jerusalem Post along with the representatives from more than 20 European and like-minded countries at the site of the former Kalandia airport.

He voiced concern over two Israeli projects which they fear would destroy any prospects for a future Palestinian state. The first is the construction of close to 3,500 settlement homes in an unbuilt area of the Ma’aleh Adumim settlement, known as E1.

The project has been largely frozen for decades, but former Prime Minister Benjamin Netanyahu advanced the project during the last elections and allowed for the deposit of its building plans with the Higher Planning Council for Judea and Samaria.

The council is now in the process of hearing objections to the projects, with the next hearing date set for December 13, 2021, the last obstacle to the E1 project’s final approval.

The second project of concern to the EU is the pending construction of 9,000 homes in the Atarot area of east Jerusalem on the site of what was once the Kalandiya airport, which opened in 1924 and closed in 2000. It is presumed to be designated mostly for Jewish Israelis.

The Jerusalem District Planning Committee is scheduled to hold a December 6, 2021 hearing on the matter.

Burgsdorff and his delegation visited both sites, where they were briefed by the left-wing NGO Ir Amim. They paused to speak to reporters in Atarot. Behind the delegation was the construction site for a new bypass road with a tunnel that will go underneath the projected homes.

To the delegation’s left stood the security barrier that separated Atarot from apartment buildings in the east Jerusalem Palestinian neighborhood of Kafr Akab.

“We are here at the very last stage of completely cutting off Jerusalem from the West Bank, which makes it impossible to discuss between the parties a future, independent, contiguous, viable Palestinian state with Jerusalem as the capital of both, based on negotiations on that matter,” he said.

He told reporters that the plans run contrary to statements the Israeli government has made about shrinking the conflict and maintaining the status quo.

“The current Israeli government clearly said we do not want to jeopardize the status quo, but the things we are seeing on the ground seem to suggest something else,” Burgsdorff said.

“Israeli settlements are in clear violation of international law and constitute a major obstacle to a just, last[ing] and comprehensive peace between Israelis and Palestinians,” he explained. The EU can’t “close its eyes” to such actions, he added.

The EU and much of the international community believe in a two-state resolution to the Israeli-Palestinian conflict based on the pre-1967 lines with Jerusalem as the divided capital of the states.

Israel has been blunt about its belief that Jerusalem must remain the united capital of the Jewish state and that projects like those in Atarot and the E1 area play an important role in protecting a united Jerusalem under Israeli sovereignty.

It has also been argued that such projects, which provide access roads that would improve traffic flow, do not cut off Palestinians from the West Bank.

Jerusalem Deputy Mayor Fleur Hassan-Nahoum said that “Jerusalem is a living, breathing, growing capital city of the State of Israel.”

Due to work already done in the area of Atarot, the municipality had turned Atarot into a thriving industrial zone with it’s first-ever [shopping] mall for aast Jerusalemites, with factories and workplaces providing hundreds of jobs.

“The housing project will provide thousands of much-needed housing units,” Hassan-Naboum said. “The European Union should stop talking in the language of the past and join the development of the future catering for Jews and Arabs alike and providing opportunity and not empty rhetoric and false hopes.”

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.