Pakistan: Central Bank Reduces Interest Rate

At its meeting on June 10, 2024, the Monetary Policy Committee (MPC) decided to reduce the policy rate by 150 bps to 20.5%, effective from June 11, 2024. The MPC noted that while the significant decline in inflation since February was broadly in line with expectations, the May outturn was better than anticipated earlier. 

The Committee assessed that underlying inflationary pressures are also subsiding amidst tight monetary policy stance, supported by fiscal consolidation. This is reflected by continued moderation in core inflation and ease in inflation expectations of both consumers and businesses in the latest surveys. At the same time, the MPC viewed some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments. Notwithstanding these risks and today’s decision, the Committee noted that the cumulative impact of the earlier monetary tightening is expected to keep inflationary pressures in check.

The MPC noted the following key developments since its last meeting. First, real GDP growth remained moderate at 2.4% in FY24 as per provisional data, with subdued recovery in industry and services partially offsetting the strong growth in agriculture. Second, reduction in the current account deficit has helped improve the FX reserves to around US$9 billion despite large debt repayments and weak official inflows. The government has also approached the IMF for an Extended Fund Facility program, which is likely to unlock financial inflows that will help in further build-up of FX buffers. Lastly, international oil prices have declined, whereas non-oil commodity prices have continued to inch up.

Based on these developments, the Committee, on balance, viewed that it is now an appropriate time to reduce the policy rate. The Committee noted that the real interest rate still remains significantly positive, which is important to continue guiding inflation to the medium-term target of 5 – 7 percent. The Committee also emphasized that the future monetary policy decisions will remain data-driven and responsive to evolving developments related to the inflation outlook.

Real Sector

Latest estimates indicate real GDP growth at 2.1% in Q3-FY24 against a contraction of 1.1% in the same quarter last year. While agriculture was already showing strong growth, industry also witnessed positive growth in Q3. Also, initial growth estimates for both Q1 and Q2 for FY24 were revised upward. Taking into account the developments in the first nine months, FY24 growth is provisionally estimated by PBS at 2.4% against a contraction of 0.2% in FY23. Almost two-thirds of this recovery was explained by improvement in the agriculture sector. These developments are in line with the Committee’s earlier expectations. For FY25, the MPC expects economic growth to remain moderate. This assessment takes into account the impact of expected moderation in agriculture output and ongoing stabilization policies.

External Sector

The current account posted a surplus for the third consecutive month in April on the back of robust growth in remittances and exports, which more than offset the uptick in imports. During July-April FY24, the current account deficit narrowed significantly to US$202 million. In the same period, exports grew by 10.6%, mainly driven by increased quantum of rice and higher value-added textile exports. Conversely, imports decreased by 5.3% during the same period due to lower international commodity prices, better domestic agriculture output and moderate economic activity. Workers’ remittances also remained robust in recent months, reaching an all-time high of US$3.2 billion in May 2024. The resultant lower current account deficit, along with improved FDI and the disbursement of SBA tranche in April, has facilitated ongoing large debt repayments and supported the foreign exchange reserves held by the central bank. Going forward, the Committee stressed that timely mobilization of financial inflows is essential to meet the external financing requirements and further strengthen FX buffers for the country to effectively respond to any external shocks and support sustainable economic growth.

Fiscal sector

Fiscal indictors continued to show improvement during July-March FY24. The primary surplus increased to 1.5% of GDP, while the overall deficit remained almost at last year’s level. A large part of this improvement reflected the impact of increase in tax and PDL rates, higher SBP profit, and lower energy sector subsidies. Considering there has been limited progress in addressing the structural weaknesses to broaden the tax base and initiate energy sector reforms, FY25 budgetary measures are also expected to be largely rate-based. In this backdrop, the Committee emphasized that fiscal consolidation through broadening the tax base and reforming loss-making public sector enterprises would help achieve fiscal sustainability on a more durable basis. This is also imperative to keep inflation on a downward trajectory and contain external account pressures.

Money and credit

The broad money (M2) growth decelerated to 15.2%YoY on May 24, 2024 from 17.1% as of end-March 2024. This reduction was primarily due to deceleration in growth of net domestic assets of the banking system. On the other hand, the growth contribution of net foreign assets in M2 remained positive.

From the liability side, deposits remained the mainstay in M2 growth, while currency in circulation growth decelerated. As a result, reserve money growth observed a steep decline from 10.0% to 4.3% during the period. The MPC noted that these developments in monetary aggregates are consistent with the tight monetary policy stance and have favorable implications for the inflation outlook.

Inflation outlook

Headline inflation decelerated to 11.8% in May 2024 from 17.3% in April. Besides the continued tight monetary policy stance, this sharp reduction was also driven by a sizeable decline in prices of wheat, wheat flour, and some other major food items, along with the downward adjustment in administered energy prices. Core inflation also decelerated to 14.2% from 15.6%. The Committee noted that the near-term inflation outlook is susceptible to risks emanating from the FY25 budgetary measures and future adjustments in electricity and gas tariffs. The MPC foresees a risk of inflation to rise significantly in July 2024 from current levels, before trending down gradually during FY25. The MPC also observed that sharp wheat price reductions have historically proved to be temporary. On balance, the Committee assessed that the current monetary policy stance remains appropriate to ensure that inflation stays on a downward trajectory.

 

 

US-Saudi Arabia to sign security treaty

The Biden administration is close to finalizing a treaty with Saudi Arabia that would commit the United States to help defend the Gulf nation as part of a deal aimed at encouraging diplomatic ties between Riyadh and Israel, the Wall Street Journal reported on Sunday.

The possible deal, widely telegraphed by US and other officials for weeks, is part of a wider package that would include a US-Saudi civil nuclear pact, steps toward the establishment of a Palestinian state and an end to the war in Gaza, where months of ceasefire efforts have failed to bring peace.

Approval of the treaty, which the WSJ said would be known as the Strategic Alliance Agreement, would require a two-thirds majority vote in the US Senate, a threshold that would be difficult to achieve unless the treaty were tied to Israeli-Saudi normalization.

The draft treaty is modeled loosely on Washington's mutual security pact with Japan, the newspaper cited US and Saudi officials as saying.

In exchange for the US commitment to help defend Saudi Arabia if it were attacked, the draft treaty would grant Washington access to Saudi territory and airspace to protect US interests and regional partners, the newspaper reported.

It is also intended to bind Riyadh closer to Washington by prohibiting China from building bases in the kingdom or pursuing security cooperation with Riyadh, the WSJ quoted officials as saying.

The White House, the US State Department and the Saudi embassy in Washington did not immediately respond to requests for comment.

 

Israel: Gantz quits Netanyahu government

According to Reuters, Israeli minister Benny Gantz announced his resignation from Prime Minister Benjamin Netanyahu's emergency government on Sunday, withdrawing the only centrist power in the embattled leader's far-right coalition amid a months-long war in Gaza.

The departure of Gantz's centrist party will not pose an immediate threat to the government. But it could have a serious impact nonetheless, leaving Netanyahu reliant on hardliners, with no end in sight to the Gaza war and a possible escalation in fighting with Lebanese Hezbollah.

Last month, Gantz presented Netanyahu with a June 8 deadline to come up with a clear day-after strategy for Gaza, where Israel has been pressing a devastating military offensive against the ruling Palestinian militant group Hamas. Netanyahu brushed off the ultimatum soon after it was given.

On Sunday, Gantz said politics was clouding fateful strategic decisions in Netanyahu's cabinet. Quitting while hostages were still in Gaza and soldiers fighting there was an excruciating decision, he said.

"Netanyahu is preventing us from advancing toward true victory," Gantz said in a televised news conference. "That is why we are leaving the emergency government today, with a heavy heart but with full confidence."

Netanyahu responded in a social media post, telling Gantz it was no time to abandon the battlefront.

With Gantz gone, Netanyahu would lose the backing of a centrist bloc that has helped broaden support for the government in Israel and abroad, at a time of increasing diplomatic and domestic pressure eight months into the Gaza war.

While his coalition remains in control of 64 of parliament's 120 seats, Netanyahu will now have to rely more heavily on the political backing of ultra-nationalist parties, whose leaders angered Washington even before the war and who have since called for a complete Israeli occupation of Gaza.

This would likely increase strains already apparent in relations with the United States and intensify public pressure at home, with the months-long military campaign still not achieving its stated goals - the destruction of Hamas and the return of more than 100 remaining hostages held in Gaza.

Polls have shown Gantz, a former army commander and defence minister, to be the most formidable political rival to Netanyahu, whose image as a security hawk was shattered by the October 07, 2023 attack by Hamas on Israel.

Warning that the conflict in Gaza could take years, he urged Netanyahu to agree on an election date in the autumn, to avoid further political infighting at a time of national emergency.

Gantz joined a unity government soon after October 07 as part of Netanyahu's inner war cabinet where he, Netanyahu and Defence Minister Yoav Gallant alone had votes.

On Sunday, Gantz described Gallant, who has sparred with Netanyahu and some ultra-nationalists ministers, as a brave leader and called on him 'to do the right thing,' though he did not elaborate on what that meant.

Far-right National Security Minister Itamar Ben-Gvir demanded Gantz's now vacant seat at the war cabinet soon after the resignation was announced.

Finance Minister Bezalel Smotrich said in a statement Gantz was giving Israel's enemies what they want.

Asked whether he was worried about his departure impacting Israel's standing abroad, Gantz said Gallant and Netanyahu both know "what should be done."

"Hopefully they will stick to what should be done and then it will be okay," he said.

 

Iran: Candidates for Presidential Election

Iran’s Guardian Council has approved six candidates for the upcoming presidential election scheduled for June 28, 2024. Qualified candidates will now have two weeks to campaign before the voting.

These include former Parliament Speaker Mohammad Bagher Ghalibaf and former nuclear negotiator Saeed Jalili, two high-profile conservative political figures.

Other candidates in the race include former lawmaker Masoud Pezeshkian, former minister Mostafa Pourmohamadi, Tehran Mayor Alireza Zakani, and former lawmaker Amir Hossein Ghazizadeh Hashemi.

The candidacy of former Vice President Eshaq Jahangiri, who was expected to be the top reformist contender, was rejected by the election supervisory body. Ali Larijani, a former Parliament Speaker believed to have the backing of the reformist camp, also failed to make the cut.

Both Jahangiri and Larijani were disqualified by the 12-member council in the 2021 presidential election when Abdolnasser Hemmati was the lone reformist challenger to Ebrahim Raisi.

Hemmati, who was again in the running this year, also had his candidacy rejected.

The candidacy of former President Mahmoud Ahmadinejad was also rejected by the Guardian Council.

Speculation is rife that Ghalibaf, who was re-elected as a parliament speaker late last month, will be the main conservative figure after the presidential debates, as he enjoys strong support from lawmakers.

Among reformists, Pezeshkian is likely to be the main contender.

The snap presidential vote is scheduled for June 28 following the death of President Raisi in a helicopter crash on May 19 in northwestern Iran.

Bangladesh apparel export to US takes a dip

Bangladesh suffered the highest negative growth among competitor countries in exporting readymade garments to the United States in the January-April period of 2024.

According to the US Department of Commerce’s Office of Textiles and Apparel data released on Thursday, the country’s apparel exports to the United States, the largest export destination for Bangladesh, in the first four months of 2024 declined by 14.44% to US$2.31 billion compared with those of US$2.70 billion in the same period of 2023.

At the same time, apparel imports by the US from Vietnam grew by 0.31%, while those from China declined by 4.42%, according to the OTEXA data.

The data showed that Vietnam overtook China to become the largest readymade garments exporter to the US in the January-April period of 2024.

Exporters observed that despite a recent increase in US demand for apparel, Bangladesh failed to capture a larger market share due to factors such as longer shipment times and higher production costs.

They said that buyers had been placing more orders with Vietnam and China recently, due primarily to shorter delivery times.

The data showed that the US apparel imports from China decreased to US$4.32 billion in January-April 2024, down from US$4.52 billion in the same period the previous year.

Garments imports from Vietnam increased to US$4.38 billion in the four months of 2024, up from US$4.37 billion in the corresponding period of the previous year.

The data also showed that the total US imports of readymade garments from the world in January-April of 2024 decreased by 6% to US$23.69 billion compared with those of US$25.20 billion in the same period of 2023.

Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association, said that despite an uptick in apparel demand in the US market, Bangladesh struggled to capitalize on this increased demand.

He identified prolonged shipment times a key factor hindering Bangladesh’s ability to seize a larger share of the growing demand.

According to Hatem, Bangladesh’s shipment times have been steadily lengthening due to issues such as customs-related delays at ports and production slowdowns caused by gas and electricity shortages.

He said that while major apparel manufacturing countries like China and Vietnam had experienced negative export growth globally in recent times, most other countries, except Bangladesh, had begun to narrow this gap.

Hatem pointed out that Vietnam had already shifted to a positive trajectory in exporting RMG to the US market.

“In Bangladesh, our factories are operating up to 70% capacity utilization due to energy shortages, prompting buyers to redirect orders to China and Vietnam for quicker deliveries,” he said.

Hatem also claimed that many factories struggled to accept orders at the prices offered by buyers due to rising utility costs and increased workers’ wages.

The OTEXA data showed that India’s readymade garments exports to the US market in the four months of 2024 declined by 5.02% to US$1.66 billion compared with those of US$1.75 billion in the same period of the previous year.

Readymade garments imports by the US from Indonesia in the four months of 2024 decreased by 8.46% to US$1.38 billion compared with those of US$1.51 billion in the same period of 2023.

The US apparel imports from Cambodia in January-April of 2024 increased by 7.92% to US$1.03 billion compared with those of US$951.93 million in the same period of 2023, the data showed.

 

India: Modi sworn in PM for third term

Narendra Modi sworned in as India's prime minister on Sunday for a third term, after a shock poll setback that will test his ability to ensure policy certainty in a coalition government in the world's most populous nation.

President Droupadi Murmu administered the oath of office to Modi at a ceremony at the Rashtrapati Bhavan, the president's palace in New Delhi, attended by thousands of dignitaries, including the leaders of seven regional countries, Bollywood stars and industrialists.

"Honoured to serve Bharat," Modi posted on X, minutes before he was sworn in, referring to India's name in Indian languages.

Supporters cheered, clapped and chanted "Modi, Modi" as the name of the 73-year old leader, dressed in a white kurta tunic and blue half jacket, was called to take his oath.

Modi was followed by senior ministers in the previous government: Rajnath Singh, Amit Shah, Nitin Gadkari, Nirmala Sitharaman, Subrahmanyam Jaishankar, and Piyush Goyal, among others. Their portfolios are expected to be announced after the swearing-in.

Modi, who started as a publicist of the Hindu nationalist Rashtriya Swayamsevak Sangh (RSS), the ideological parent of his Bharatiya Janata Party (BJP), is only the second person after independence leader Jawaharlal Nehru to serve a third straight term as prime minister.

Modi secured the third term in elections that concluded on June 01, 2024 with the support of 14 regional parties in his BJP-led National Democratic Alliance (NDA), unlike in the previous two terms when his party won an outright majority.

The outcome is seen as a big setback to the popular leader as surveys and exit polls had predicted BJP would secure even more seats than in 2019.

Modi delivered world beating growth and lifted India's global standing but appeared to have missed a step at home as a lack of enough jobs, high prices, low incomes and religious faultlines pushed voters to rein him in.

When Modi was the chief minister of the western state of Gujarat from 2001 to 2014, BJP enjoyed strong majorities, allowing him to govern decisively.

Modi's new term as prime minister, therefore, is likely to be fraught with challenges on building consensus on contentious political and policy issues in the face of different interests of regional parties and a stronger opposition, analysts say.

Some analysts worry that the fiscal balance in the world's fastest growing economy could also come under pressure due to demands for higher development funds for states ruled by the NDA's regional partners and a possible push by BJP to spend more on welfare to woo back voters it lost in this year's election.

While the broad focus on building infrastructure, manufacturing and technology could continue, "contentious reforms could be delayed", said Samiran Chakraborty, Chief Economist, India at Citi Research.

"The BJP’s major coalition partners are politically unpredictable, sometimes working with the BJP and sometimes working against them," added Rick Rossow, the Chair in US-India Policy Studies at the Center for Strategic and International Studies in Washington.

"The larger parties that will be a part of his coalition are mostly agnostic on national-level issues and should not be applying a brake on economic reforms or security ties with the United States, Japan, and other key partners," he said.

Modi, whose election campaign was marked by religious rhetoric and criticism of the opposition for allegedly favouring India's 200 million minority Muslims has adopted a more conciliatory tone since the shock result.

"We have won the majority ... but to run the country it is unanimity that is crucial ... we will strive for unanimity," he said on Friday after the NDA formally named him coalition head.

Courtesy: Reuters

 

India: Rahul Gandhi likely leader of opposition

Congress leader Rahul Gandhi is likely to be the Lok Sabha’s leader of the Opposition (LoP) after the Congress Working Committee (CWC), the highest executive forum of the party, passed a resolution on Saturday urging him to do so.

Gandhi, who has won from Wayanad in Kerala as well as Rae Bareli in Uttar Pradesh and remained the biggest draw for the party in the 2024 Lok Sabha elections, told the committee that he will consider the proposal and decide in the next few days.

For the past 10 years, the Congress, which is the largest Opposition party in Parliament, did not meet the criteria to get the LoP status in the Lower House. This time, with 99 seats, the party is entitled to get the LoP post, which has the status of a cabinet minister.

“In a resolution, the CWC unanimously requested Rahul Gandhi to take the LoP post in the Lok Sabha. All participants, in their view, were unanimous that Rahul Gandhi should become the LoP,” Congress general secretary KC Venugopal said after the CWC meeting.

“In this election, we raised burning issues such as unemployment, price rise, women’s issues, Agniveer and social justice. These issues have to be continued in a greater manner inside Parliament as well. Rahul Gandhi is the best person to lead this campaign in the Lok Sabha. In the current scenario, for a better, stronger and vigilant Opposition and those who want to protect the Constitution, it should be safe under Rahul Gandhi as LoP,” Venugopal added.

According to three CWC members, party veteran Digvijaya Singh was the first to suggest Gandhi’s name as the LoP. Both Singh and Gaurav Gogoi, the party’s deputy leader in the Lok Sabha, argued that as the LoP, Gandhi would be best suited to amplify the Congress’s ideology and key issues raised during the elections.

Punjab leader Partap Singh Bajwa is said to have told Gandhi, “I know you don’t like positions, but this is a responsibility.”

He also pointed out that some of the NDA allies are not comfortable with certain schemes such as Agniveer and MSP issues and Gandhi could build more pressure on the government. “You would be working on your election guarantees even when sitting in the Opposition,” he said.

After other speakers also urged Gandhi, Congress president Mallikarjun Kharge reminded him that after the CWC has passed a resolution, Gandhi has to accept the post. “Rahul Gandhi smiled and told the CWC that he will consider and take his decision in a few days,” said a senior member of the panel.

Even as Congress parliamentary party Chief Sonia Gandhi remained silent, general secretary Priyanka Gandhi Vadra lauded her brother’s role in the election. Priyanka mentioned that at times, she had doubts if the party would be able to revive but Rahul “was the only one who had unflinching faith in the Congress’s ability to bounce back”.

In his speech, Rahul Gandhi took a dig at those who have left the Congress and said, “Whoever had to leave, have left. Those who are here are warriors.”

Gandhi also heaped praise on Kharge, 81, for undertaking such extensive campaign across the country at his age. He also praised the party’s communication on its 25 guarantees and said, “This time we didn’t allow anyone to derail our narrative.”

He argued that the party’s communication on the Constitution, social justice and the guarantees had been strong and “the BJP couldn’t match us on these issues. In this election, our party and people of India fought together. Earlier people said many things about us. But now it is clear that nobody can destroy the Congress party.”

The main resolution of the CWC also praised Gandhi for his role in the 2024 Lok Sabha campaign.

“Former Congress President Shri Rahul Gandhi has to be singled out largely because of the Bharat Jodo Yatra and the Bharat Jodo Nyay Yatra that he designed and led. Both these Yatras that reflected his own thinking and personality were historic turning points in our nation’s politics and instilled hope and confidence in lakhs of our workers and crores of our voters,” the resolution said.

“Shri Rahul Gandhi’s election campaign was single-minded, sharp and pointed and more than any other individual it was he who made the protection of our republic’s Constitution the central issue in the 2024 elections. The Paanch Nyay-Pachees Guarantee programme which resonated so very powerfully in the election campaign was the outcome of Rahulji’s yatras in which he listened to the fears, concerns and aspirations of all people, especially the youth, women, farmers, workers, Dalits, Adivasis, OBCs and minorities,” it added.

In the 16th Lok Sabha (2014-19), Kharge was the Congress floor leader before he shifted to the Rajya Sabha. Adhir Ranjan Chowdhury was the party’s floor leader in the Lok Sabha during 2019-2024.

Courtesy: Hindustan Times