Pakistan: Strategy for Navigating FY23

Through a joint statement issued by Ministry of Finance and State Bank of Pakistan, all the stakeholders and public in general has been assured that the present trauma will ease. While one may not agree with some of the points, this is an official strategy and only wait and see stance could be adopted.

Pakistan’s problems are temporary and are being forcefully addressed

Pakistan’s foreign exchange reserves have fallen since February as foreign exchange inflows have been outpaced by outflows. The inflows mainly comprise of multilateral loans from the IMF, World Bank and ADB; bilateral assistance in the form of deposits and loans from friendly countries like China, Saudi Arabia, and the UAE; and commercial borrowing from foreign banks and through the issuance of Eurobonds and Sukuks. The paucity of inflows has happened in large part due to the delay in completing the next review of the IMF program, which has lingered since February due to policy slippages. Meanwhile, on the outflows side, debt servicing on foreign borrowing has continued as repayments on these debts have been coming due over this period.

At the same time, the exchange rate has come under significant pressure, especially since mid-June. It has been driven by general US dollar tightening, a rise in the current account deficit (exacerbated by a heavy energy import bill in June), the decline in foreign exchange reserves, and worsening sentiment due to uncertainty about the IMF program and domestic politics.

However, important developments have happened recently that will address both of these temporary issues. On July 13, the critical milestone of a staff-level agreement on completing the next IMF review was reached. As of today, all prior actions for completing the review have been met and the formal Board meeting to disburse the next tranche of US$1.2 billion is expected in a couple of weeks. At the same time, macroeconomic policies—both fiscal policy and monetary policy—have been appropriately tightened to reduce demand-led pressures and rein in the current account deficit. Finally, the government has clearly announced that it intends to serve out the rest of its term until October 2023 and is ready to implement all the conditions agreed with the Fund over the remaining 12 months of the IMF program.

In FY23, Pakistan’s gross financing needs will be more than fully met under the ongoing IMF program

The financing needs stem from a current account deficit of around US$10 billion and principal repayments on external debt of around US$24 billion.

In order to bolster Pakistan’s foreign exchange reserves position, it is important for Pakistan to be slightly over-financed relative to these needs.

As a result, an extra cushion of US$4 billion is planned over the next 12 months. This funding commitment is being arranged through a number of different channels, including from friendly countries that helped Pakistan in a similar way at the beginning of the IMF program in June 2019.

Important measures have been taken to contain the current account deficit

In addition to high global commodity prices, the large current account deficit in FY22 was driven by rapid domestic demand (growth reached almost 6 percent for two consecutive years leading to overheating of the economy), artificially low domestic energy prices due to the February subsidy package, an unbudgeted and procyclical fiscal expansion, and heavy energy imports in June to minimize load-shedding and build inventories.

To contain this deficit going forward, the policy rate was raised by 800 basis points, the energy subsidy package has been reversed, and the FY23 budget targets a consolidation of nearly 2.5 percent of GDP, centered on tax increases while protecting the most vulnerable. This will help cool domestic demand, including for fuel and electricity.

In addition, temporary administrative measures have been taken to contain the import bill, including requiring prior approval before importing automobiles, mobile phones and machinery. These measures will be eased as the current account deficit shrinks in the coming months.

These measures are working, the import bill fell significantly in July, as energy imports have declined and non-energy imports continue to moderate

Foreign exchange payments in July were significantly lower than in June. This is true for both oil and non-oil payments. Altogether, payments were a sustainable US$6.1 billion in July compared to US$7.9 billion in June.

The latest trade data indicate that non-oil imports continue to fall. Specifically, non-oil imports fell by 5.7%QoQ during Q4 FY22. They are expected to reduce further going forward.

Looking ahead, a considerable slowdown has been witnessed in LC opening in recent weeks, again for both oil as well as non-oil commodities. Based on market reports, there was an 11%MoM decline in Oil Marketing Companies sales volume in June.

After the surge in energy imports in June, a stock of diesel and furnace oil sufficient for 5 and 8 weeks, respectively, is now available in the country, much higher than the normal range of 2 to 4 weeks in the past. This implies a lower need for petroleum imports going forward.

With the recent rains and storage of water in the dams, hydroelectricity is also likely to increase and need to generate electricity on imported fuel is expected to decline going forward.

As a result of these trends, the import bill is likely to shrink going forward and should begin to manifest itself more forcefully in lower FX payments over the next 1-2 months.

Overall, imports are expected to decline in coming months due to a decline in global commodity prices, the higher oil stock, the unfolding impact of higher domestic prices of petroleum products, adjustments in electricity and gas tariffs, the removal of tax exemptions under the FY23 budget, administrative measures taken to curtail imports, and the lagged impact of the monetary and fiscal tightening that has been undertaken.

The Rupee has overshot temporarily but it is expected to appreciate in line with fundamentals over the next few months

Around half of the Rupee depreciation since December 2021 can be attributed to the global surge in the US dollar, following historic tightening by the Federal Reserve and heightened risk aversion.

Of the remaining half, some is driven by domestic fundamentals, in particular, the widening of the current account deficit, especially in the last few months. As noted above, the deficit is expected to narrow going forward as the temporary surge in the import bill is brought under control. As this happens, the Rupee is expected to gradually strengthen.

The remaining depreciation has been overdone and driven by sentiment. The Rupee has overshot due to concerns about domestic politics and the IMF program. This uncertainty is being resolved, such that the sentiment-driven part of the Rupee depreciation will also unwind over the coming period.

Where the market has become disorderly, the State Bank has continued to step in through sales of US dollars to calm the markets and will continue to do so, as needed in the future. Strong steps to counter any speculation have also been taken, including close monitoring and inspections of banks and exchange companies. Further additional measures will be taken as situation warrants.

Rumors that a particular level of the exchange rate has been agreed with the IMF are completely unfounded. The exchange rate is flexible and market-determined, and will remain so, but any disorderly movements are being countered.

Going forward, as the current account deficit is curtailed and sentiment improves, we fully expect the Rupee to appreciate. Indeed, this was the experience during the beginning of the IMF program in 2019, when the Rupee strengthened considerably after a period of weakness in the lead-up to the program.

Clearly, the Rupee can overshoot temporarily as it has done recently. However, it moves both ways over time. We expect this pattern to re-assert itself in the coming period. As a result, the Rupee should strengthen in line with improved fundamentals in the form of a smaller current account deficit as well as stronger sentiment.

Beirut silo collapses ahead of blast anniversary

Part of the grain silos at Beirut Port collapsed on Sunday just days before the second anniversary of the massive explosion that damaged them, sending a cloud of dust over the capital and reviving traumatic memories of the blast that killed more than 215 people. There were no immediate reports of injuries.

Lebanese officials warned last week that part of the silos - a towering reminder of the catastrophic August 04, 2020 explosion - could collapse after the northern portion began tilting at an accelerated rate.

"It was the same feeling as when the blast happened, we remembered the explosion," said Tarek Hussein, a resident of nearby Karantina area, who was out buying groceries with his son when the collapse happened. "A few big pieces fell and my son got scared when he saw it," he said.

A fire had been smoldering in the silos for several weeks which officials said was the result of summer heat igniting fermenting grains that have been left rotting inside since the explosion.

The 2020 blast was caused by ammonium nitrate unsafely stored at the port since 2013. It is widely seen by Lebanese as a symbol of corruption and bad governance by a ruling elite that has also steered the country into a devastating financial collapse.

One of the most powerful non-nuclear blasts on record, the explosion wounded some 6,000 people and shattered swathes of Beirut, leaving tens of thousands of people homeless.

Ali Hamie, the minister of transport and public works in the caretaker government, told Reuters he feared more parts of the silos could collapse imminently.

Environment Minister Nasser Yassin said that while the authorities did not know if other parts of the silos would fall, the southern part was more stable.

The fire at the silos, glowing orange at night inside a port that still resembles a disaster zone, had put many Beirut residents on edge for weeks.

The government took a decision in April to destroy silos, angering victims' families who wanted them left to preserve the memory of the blast. Parliament last week failed to adopt a law that would have protected them from demolition.

Citizens' hopes that there will be accountability for the 2020 blast have dimmed as the investigating judge has faced high-level political resistance, including legal complaints lodged by senior officials he has sought to interrogate.

Prime Minister-designate Najib Mikati has said he rejects any interference in the probe and wants it to run its course.

However, reflecting mistrust of authorities, many people have said they believed the fire was started intentionally or deliberately not been contained.

Divina Abojaoude, an engineer and member of a committee representing the families of victims, residents and experts, said the silos did not have to fall.

"They were tilting gradually and needed support, and our whole goal was to get them supported," she told Reuters.

"The fire was natural and sped things up. If the government wanted to, they could have contained the fire and reduced it, but we have suspicions they wanted the silos to collapse."

Earlier this month, the economy minister cited difficulties in extinguishing the fire, including the risk of the silos being knocked over or the blaze spreading as a result of air pressure generated by army helicopters.

Fadi Hussein, a Karantina resident, said he believed the collapse was intentional to remove "any trace of August 04, 2020".

"We are not worried for ourselves, but for our children, from the pollution," resulting from the silos' collapse, he said, noting that power cuts in the country meant he was unable to even turn on a fan at home to reduce the impact of the dust.

Nancy Pelosi sets off on Asia tour

According to South China Morning Post, US House Speaker Nancy Pelosi has begun her anticipated trip to Asia, with her office naming four destinations but making no mention of Taiwan. 

This comes amid more stormy warnings from Beijing amid heightened tensions over her planned visit to the island.

Pelosi, No 3 in the line of US presidential succession, is leading a six-member congressional delegation to Singapore, Malaysia, South Korea and Japan, according to a statement released by her office on Sunday.

The statement skipped any mention of Taiwan, after days of intense speculation about a likely stop there fuelled tensions, with Beijing calling it a provocation and warning Washington against playing with fire.

“In Singapore, Malaysia, South Korea and Japan, our delegation will hold high-level meetings to discuss how we can further advance our shared interests and values, including peace and security, economic growth and trade, the Covid-19 pandemic, the climate crisis, human rights and democratic governance,” the statement quoted Pelosi as saying.

“America is firmly committed to smart, strategic engagement in the region, understanding that a free and flourishing Indo-Pacific is crucial to prosperity in our nation and around the globe,” the 82-year-old Democratic lawmaker said.

Beijing regards Taiwan to be a breakaway province, to be reunited by force if necessary, and warns against any official exchange with the self-governed island.

It earlier said Pelosi’s planned trip to Taiwan was a move to support Taiwan independence, in violation of one-China policy, followed by the United States.

On Thursday, Biden and China’s Xi Jinping spoke on the phone for over two hours. During the call, Biden tried to reassure Xi that US policy towards Taiwan has not changed.

“On Taiwan, President Biden emphasized that US policy has not changed and that the US strongly opposes unilateral efforts to change the status quo or undermine peace and stability across the Taiwan Strait,” an official readout on the White House website said.

After the leaders’ phone call, China’s Foreign Ministry quoted Xi as telling Biden that those who play with fire will perish by it and that they hoped the United States will be clear-eyed about this.

However, Pelosi indicated on Friday that she will be on a trip to Asia, but did not mention Taiwan. “I am very excited if we were to go to the countries that you will hear about along the way,” she said, Reuters reported.

White House spokesman John Kirby said, “Where she (Pelosi) is going to go and what she is going to do is up to the speaker to speak to.”

However, he added that the United States has not observed any signs of a specific military threat from China. “(We have) seen no physical, tangible indications of anything untoward with regard to Taiwan,” Kirby said.

  

United States remains adamant at not releasing frozen Afghan assets

Please allow me to begin my today’s blog with the Iranian indictment, “United States is the biggest terrorist in this world”. The United States is often accused of killing of hundreds and thousands of people every year in proxy wars or through direct assaults. 

It played ‘the game of death’ in Afghanistan for four decades. After facing the defeat in August last year, it may have pulled its troops from Afghanistan but it is still making lives of Afghans miserable on one or the other pretext.

It is a fact that the United States has neither recognized the Taliban government nor allows other countries to recognize their government is Afghanistan. On top of all it has frozen Afghan foreign exchange reserves. The acts of United States tantamount to worst kind of aggression against Afghans, as the country find it almost impossible to import even basic necessities due to non-availability of foreign exchange.

To maintain the US hegemony in Afghanistan, Secretary of State Antony Blinken has launched the US-Afghan Consultative Mechanism (USACM), which would enable Afghan citizens to communicate directly with American policymakers.

Addressing the launching ceremony, the top US diplomat said that besides Pakistan, the Organization of Islamic Cooperation, Qatar and Turkey, and others were also backing US efforts to convince the Taliban to reverse their decision to keep Afghan girls out of school.

The new platform — USACM — is aimed at bringing together Afghan women, journalists, and at-risk ethnic and religious communities with the representatives of the US State Department. It will facilitate regular engagement with the US government on issues ranging from human rights documentation to women in Islam.

With USACM’s launch, “We are taking these relationships to the next level. That’s why I’m so pleased about today,” Secretary Blinken said. He identified the group’s priorities as supporting income-generating activities for Afghan women; strategizing ways to help Afghan human rights monitors safely document abuses, and devising new methods to promote religious freedom.

The United States has discussed with Taliban officials the possible release of Afghan central bank’s assets frozen after the fall of Kabul in August last year. The two sides discussed ongoing efforts to enable the US$3.5 billion Afghan central bank reserves to be used for the benefit of the Afghan people.

However, in nearly one year, the US administration has failed in addressing the urgent humanitarian situation in Afghanistan.

To further complicate the situation a meeting, involving Special Representative for Afghanistan Thomas West and Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson, took place on Wednesday in Tashkent. The meetings took place after the conclusion of the Tashkent Conference on Afghanistan that Uzbekistan hosted on July 26.

Media reports on the meeting claimed that the talks had made some progress and the US and Taliban officials had exchanged proposals for unfreezing the assets. But some differences remained unresolved.

One of the key differences was over the Taliban’s refusal to replace the bank’s top political appointees, “one of whom is under US sanctions as are several of the movement’s leaders,” one of the reports added.

Iran aspires to become a gas hub with Russian support

Iran is currently under sanctions and involved in nuclear deal discussions with the United States and the West. It is also positioning itself to work with China and Russia.

The investment by Gazprom in Iran’s National Iranian Oil Company was announced during a recent visit by Russian President Vladimir Putin to Iran. This creates hope that Russian investment could help Iran become a regional gas hub.

Analyst and energy expert Habibollah Zafarian was quoted in an article at Iran’s Fars News arguing that the country could become a gas hub based on gas trade with neighboring countries. “Iran's gas reserves and privileged geographical location allow the country to play an influential role in the gas trade of the region.” 

Zafarian said “Iran's strategy should be defined in such a way that it buys the surplus gas of the countries of the region as much as possible and exports gas to the requesting countries at a higher price.”

Those like Zafarian, quoted in Iran pro-government media, are part of a push for the Islamic Republic to get out from under the West’s shadow and increase energy independence. 

Iran is well positioned to trade with Qatar, Azerbaijan and Turkmenistan, which have a surplus of gas, the article said, adding that gas is currently being exported by various countries to Armenia, Turkey, Iraq, Kuwait and the Persian Gulf countries – especially the UAE – and Oman, Pakistan and Afghanistan. 

“Everyone wants to import gas,” Zafarian said. “As a result, there is a great opportunity for Iran to become a regional gas hub with gas trade between exporting and importing countries.” 

Iran wants to take advantage of the war in Ukraine and the global economic crisis to work closely with Qatar and also improve its gas fields and its liquefied natural gas (LNG) infrastructure

“Also, in the recent developments of the gas market, Russia has minimized gas exports to Europe, and America is trying to increase its LNG exports in order to replace a part of Russian gas in the European market,” an expert told Fars News.

Iran can now purchase Russian gas and then export it. There could even be an export pipeline. Gas could be exported to Turkey, Armenia, Georgia and Syria.

"In return, we can also help Russia and buy Qatar gas, which is one of the most serious options to replace Russian gas in the European market, and sell it to our destination markets."  

Clearly Iran is plotting to take advantage of the global crises, openly saying what it wants to do. The regime has been trying to develop north-south rail and transport lines for years so that it can hook up Turkey with southern Iran and also develop links to Central Asia and Pakistan or even India.  

Supporters of Iraqi cleric Sadr storm Baghdad Green Zone

Storming Baghdad twice in a week by supporters of Moqtada al-Sadr and chanting anti-Iran slogans can fuel turmoil in the country. Iraqis linked neither to Sadr nor to his opponents say are they caught in the middle of the political gridlock.

Analysts have reasons to suspect the riots are being sponsored and supported by the elements who don't want any reduction in animosity between Iran and Saudi Arabia. Lately, Iraq has played a key role in bringing Iran and Saudi Arabia closer.  

Thousands of supporters of populist cleric Moqtada al-Sadr stormed Baghdad’s fortified government zone on Saturday for the second time in a week, escalating a political stand-off that is hitting ordinary Iraqis hardest.

Protesters rallied by Sadr and his social-political Sadrist Movement tore down concrete barriers and entered the Green Zone, which houses government buildings and foreign missions, heading for Iraq’s parliament, a Reuters witness said.

The scenes followed similar protests on Wednesday, although this time several protesters and police officers were hurt as Sadr’s supporters threw stones and police fired teargas and stun grenades, according to security officials and medics.

Sadr’s party came first in a general election in October but he withdrew his lawmakers from parliament when he failed to form a government which excluded his rivals, mostly groups backed by Iran.

Sadr has since made good on threats to stir up popular unrest if parliament tries to approve a government he does not like, saying it must be free of foreign influence and the corruption that has plagued Iraq for decades.

The Sadrists chanted against Sadr’s political rivals who are now trying to form a government. Iraq has been without a president and prime minister for a record period because of the deadlock.

Sadr maintains large state power himself because his movement remains involved in running the country — his loyalists sit in powerful positions throughout Iraqi ministries and state bodies.

Iraqis linked neither to Sadr nor to his opponents say are they caught in the middle of the political gridlock.

While Baghdad earns record income from its vast oil wealth, the country has no budget, regular power and water cuts, poor education and healthcare, and insufficient job opportunities for the young.

Indian Army Chief visits Bangladesh

The chief of army staff of India, General Manoj Pande completed his Bangladesh visit recently (from July 18 to July 20) as part of the outstanding bilateral defense relations between Bangladesh and India.

General Manoj Pande was on his first trip abroad since taking over the post. First day of his visit, the army chief laid a wreath at Shikha Anirban to honor the valiant souls who made the ultimate sacrifices during the Liberation War of 1971.

Indian Army chief General Manoj Pande received a Guard of Honour at a convention centre of Bangladesh Armed Forces.

Indian Army Chief General Manoj Pande paid a courtesy call on his Bangladesh counterpart General SM Shafiuddin Ahmed at the Army Headquarters in Dhaka.  The two discussed ways to enhance and strengthen bilateral defense cooperation.

Manoj Pande met with senior members of the security establishment several times throughout the day to discuss defense-related topics. In Dhanmondi, at the Bangladesh’s Father of the Nation Bangabandhu Sheikh Mujibur Rahman Memorial Museum, he also paid respects. He met with Bangladesh PM Sheikh Hasina on Tuesday and focused on strengthening bilateral ties.

The army chief spoke the Defense Services Command and Staff College, Mirpur, professors and students on the second day of his visit.

He met with staff at the Bangladesh Institute of Peace Support and Operation Training, a prestigious institution in Bangladesh that prepares peacekeepers for work in a variety of UN peace operations, and engaged in conversation with them. After that, he visited the Bangabandhu Military Museum in Mirpur.

Manoj Pande’s visit has strengthened relations between the two armies on a bilateral level and served as a catalyst for improved coordination and collaboration between the two nations on a variety of strategic problems.

In South Asia, Bangladesh is an important ally of the India. The two nations work closely together on problems like climate change, counterterrorism, and regional security. This visit may serve to cement bilateral defense ties. Defense cooperation between nations could strengthen bilateral ties.

Both India and Bangladesh are essential to the region. Despite some bilateral issues, both countries are greatly interested in further solidifying their bilateral ties, which was made clear by this visit.

This could assist in bolstering bilateral ties and reflecting better bilateral understanding. This visit is highly important for Bangladesh and India in the region. Bangladesh and the India must work together as reliable partners to address some shared issues. Through this visit, India and Bangladesh have further reinforced their defense ties.

India played a significant role in the Bangladesh War of Liberation in 1971, helping the then-East Pakistan transform into the new country of Bangladesh, which permanently altered the dynamics of South Asia. India and Bangladesh agreed to a “Treaty of Friendship and Cooperation” that would last for 25 years.

Given the numerous cultural, diplomatic, economic, and security linkages that exist between India and Bangladesh today, the two nations’ bilateral ties are now stronger than ever. Bangladesh occupies a special place in India’s heart as a close neighbor and an essential part of the country’s “Neighborhood First Policy.”

In March this year, two Indian naval ships—INS Kulish and INS Sumedha—visited Bangladesh’s Mongla Port, making it the first naval visit India had made in the previous 50 years.

Bangladesh is still India’s “closest neighbor,” and relations with it are at a “golden age.” India wants to strengthen its relationship with Bangladesh just as the US wants to engage with it more strategically. Of sure, both nations would benefit from the situation.

In recent years, India and Bangladesh’s defense and security relations have improved. The 50th anniversary of Bangladesh’s Liberation was in 2021. Both India and Bangladesh have highly trained, experienced military, and they work together to keep the Eastern region peaceful.

The Bangladeshi and Indian militaries are increasingly collaborating on defense. Through a variety of initiatives, such as joint training and drills and defense discussions, the two countries’ armed forces have been working together more and more.

In order to achieve self-sufficiency in defense manufacturing in Bangladesh, India will assist Bangladesh in setting up manufacturing and service facilities for the defense platforms that both nations currently possess. Additionally, India will offer the Bangladesh military specialized training as well as technical and logistical support. India also gave a neighboring nation, Bangladesh, its first ever line of credit for defense-related purchases, in the amount of US$500 million.

India’s determination to combat terrorism in all its manifestations was echoed by Bangladesh’s resolute stance against terrorism. India is aware of Bangladesh’s efforts to prevent terrorist organizations from using space to conduct activities against India. In response, India should keep up its efforts to stop any terrorist group from using its territory to harm Bangladeshi interests.

India had encountered challenging circumstances in some of the States bordering Bangladesh, but since Prime Minister Shiekh Hasina’s government came to office in 2009, it has provided all assistance.