Authors: Berjis Kamal Abbasi and Sara Batool
The post-war liberal international economic order has established by the United States with the spirit to promote capitalism, market economy and democracy. The capitalist system and market economy is organized by the multilateral institutions i.e. the World Bank and International Monetary Fund. Both the international financial institutions are designed to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the globe. Since its inception, the international lender is playing the significant role in the management of balance of payments difficulties of its member countries. The IMF provides economic assistance, loans and policy guide lines to develop and developing countries to deal with their financial policies and to stabilize the international monetary system. Pakistan is also a part of liberal international system and heavily dependent on IMF and the World Bank to balance the imbalance of payments.
The International Monetary Fund was conceived in July 1944 and came into existence in December 1945. It has 189 members and they contribute to a pool through a quota system. Countries suffering from a BoP crisis can draw from it, which is usually known as a bailout. The IMF mostly extend its helping hand to member countries in a case of BoP crisis. A country’s balance of payments tells you whether it save enough to pay for its imports, or whether the country produces enough economic output to pay for its growth. The BoP also means that the country is importing more than its exports and heavily relies on foreign direct investment or borrows money to make up the difference. It is widely acknowledge that a BoP crisis occurs when a country is unable to pay for imports or repay its external debt. Generally BoP crisis negatively impacts on local currency through declining steeply in value, which consequently began to add the value of external payments. The case of Pakistan is very interesting as the country has gone to IMF 21 times since its birth in August 1947. On December 8, 1958 the then military regime signed a one-year Standby Arrangement (SBA) but terminated it prematurely after nine months. Since then, Pakistan has availed 16 programs of IMF, yet the relationship has been far from smooth.
Pakistan has earned the reputation of a one-tranche nation – a veiled reference to the country’s track record of taking loans at critical times and then abandoning them prematurely, either because of a crisis of balance of payments or because further disbursements required tough policy actions. At present, Pakistani authorities and the IMF team have reached a staff-level agreement on economic policies that could be supported by a 39-month Extended Fund Arrangement (EFF) for about US$6 billion. This agreement is subject to the IMF management approval and approval by the Executive Board, subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments. Before, discussing the deal, it is necessary to probe that Would Pakistan be able to implement the structural reforms proposed by the IMF and would it be last bailout package for Pakistan from IMF?
The economy of the majority-Muslim nation with a population of over 200 million has slid deeper into crisis since Imran Khan took over as Prime Minister last year. Burgeoning fiscal and current account deficits and a dip in revenues from tax collection are at the heart of the crisis. The authorities recognizes the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty.PM Imran Khan initially appeared reluctant to approach the IMF for aid, fearing that it would impose stringent conditions on government policy. Instead, Kahn approached friendly nations to help Pakistan and secured billions of dollars from Saudi Arabia, UAE and China. But with inflation climbing to over 8%, the rupee was losing a third of its value over the past year, and foreign exchange reserves barely enough to cover two months of imports, which forced to turn to the IMF.
The IMF deal, with the austerity measures it will entail, will be a political blow to a Pakistani government that had promised to build out a new welfare state, The bailout announcement comes as discontent is already growing over measures Khan’s government has taken to fend off the crisis, including devaluing the rupee by some 30% since January 2018, sending inflation to five-years high. Khan came to power after winning a simple majority in last year’s parliamentary elections on promises to improve the country’s economy and provide jobs to people. But his critics say his government has so far not been able to honor his commitment to the masses. A government report published on Friday also noted that Pakistan’s growth rate is set to hit an eight-year low, with the country’s GDP rate likely to sink to 3.3% against a projected target of 6.2%. But some observers claim the IMF package will be beneficial to end the growing uncertainty and build investors’ confidence.
Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position. This reflects the legacy of uneven and pro-cyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses. The State Bank of Pakistan will focus on reducing inflation, which disproportionately affects the poor, and safeguarding the financial stability. A market-determine exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy. The authorities are committed to strengthen the State Bank of Pakistan’s operational independence and mandate. The IMF sets tough conditions for bailout package for Pakistan. The IMF on Friday demanded the government to give State Bank authority to decide dollar rate and make National Electric Power Regulatory Authority (NEPRA), Oil and Gas Regulatory Authority (OGRA) independent. After months of difficult negotiations, under the deal, Pakistan would give up the central bank control of the currency to adopt a market-based exchange rate and take measures to improve the functioning of loss-making state-owned firms as well as curtail subsidies, among other things.
The deal will put an end to uncertainty and improve Pakistan’s financial situation. Even though it might have some negative impacts in the form of a rise in inflation, it will produce positive results in the long run. Since the past couple of years, the economy of Pakistan is passing through critical phase. Previous governments of President Asif Zardari and PM Nawaz Sharif took ad hoc decisions to boost the economic growth through borrowing from internal and external lenders. However, they put huge burden on already collapsing economy through offering subsidy to various state owned enterprises and increased public spending. The Pakistan International Airlines, Steel Mills, Railway and WAPDA are burdening national economy. Pakistan’s inability to collect taxes from huge financial magnets and deep rooted indirect financial market is another cause of economic crisis.
The present government is on fire due to economic crisis and high inflation. But it needs to take concrete steps for structural reforms. First and foremost is to end the subsidy and increase the tax collection through widening the tax net. The tax collection and subsidy termination will add generous figures into national exchequer. The government also needs to privatize the dead horses of Pakistan; i.e. Pakistan Railway, PIA, Steel Mills, WAPDA and many others. In the meantime, the government should start a comprehensive anti-corruption campaign and recover looted money, which can ease the economic problem. The government also can enlarge its revenue through inviting local and foreign investors in the Naya Pakistan Scheme. The minimum political influence and crackdown on black money mafia and Hawalla Hundi have potential to add billions of dollars in Pakistani economy. Last but not least, Pakistan require a brave and committed leadership to overcome its crumbling crisis. The successful implementation of structural reforms can turn present bailout package into lost, otherwise there will be many more to come.
Authors are Graduate Students of International Relations, at Women University of Azad Jammu & Kashmir, Bagh Pakistan
Rebalancing Act: China’s 2022 Outlook
Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha
After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.
The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.
The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.
Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.
In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.
Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.
None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.
First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.
Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.
A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.
Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.
In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.
Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.
While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.
In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.
However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.
First published on China Daily, via World Bank
The US Economic Uncertainty: Bitcoin Faces a Test of Resilience?
Is inflation harmful? Is inflation here to stay? And are people really at a loss? These and countless other questions along the same lines dominated the first half of 2021. Many looked for alternative investments in the national bourse, while others adopted unorthodox streams. Yes, I’m talking about bitcoin. The crypto giant hit records after records since the pandemic made us question the fundamentals of our conventional economic policies. And while inflation was never far behind in registering its own mark in history, the volatility in the crypto stream was hard to deny: swiping billions of dollars in mere days in April 2021. The surge came again, however. And it will keep on coming; I have no doubt. But whether it is the end of the pandemic or the early hues of a new shade, the tumultuous relationship between traditional economic metrics and the championed cryptocurrency is about to get more interesting.
The job market is at the most confusing crossroads in recent times. The hiring rate in the US has slowed down in the past two months, with employers adding only 199,000 jobs in December. The numbers reveal that this is the second month of depressing job additions compared to an average of more than 500,000 jobs added each month throughout 2021. More concerning is that economists had predicted an estimated 400,000 jobs additions last month. Nonetheless, according to the US Bureau of Labour Statistics, the unemployment rate has ticked down to 3.9% – the first time since the pre-pandemic level of 3.5% reported in February 2020. Analytically speaking, US employment has returned to pre-pandemic levels, yet businesses are still looking for more employees. The leverage, therefore, lies with the labor: reportedly (on average) every two employees have three positions available.
The ‘Great Resignation,’ a coinage for the new phenomenon, underscores this unique leverage of job selection. Sectors with low-wage positions like retail and hospitality face a labor shortage as people are better-positioned to bargain for higher wages. Thus, while wages are rising, quitting rates are record high simultaneously. According to recent job reports, an estimated 4.5 million workers quit their jobs in November alone. Given that this data got collected before the surge of the Omicron variant, the picture is about to worsen.
While wages are rising, employment is no longer in the dumps. People are quitting but not to invest stimulus cheques. Instead, they are resigning to negotiate better-paying jobs: forcing the businesses to hike prices and fueling inflation. Thus, despite high earnings, the budget for consumption [represented by the Consumer Price Index (CPI)] is rising at a rate of 6.8% (reported in November 2021). Naturally, bitcoin investment is not likely to bloom at levels rivaling the last two years. However, a downfall is imminent if inflation persists.
The US Federal Reserve sweats caution about searing gains in prices and soaring wage figures. And it appears that the fed is weighing its options to wind up its asset purchase program and hike interest rates. In March 2020, the fed started buying $40 billion worth of Mortgage-backed securities and $80 billion worth of government bonds (T-bills). However, a 19% increase in average house prices and a four-decade-high level of inflation is more than they bargained. Thus, the fed officials have been rooting for an expedited normalization of the monetary policy: further bolstered by the job reports indicating falling unemployment and rising wages. In recent months, the fed purview has dramatically shifted from its dovish sentiments: expecting no rate hike till 2023 to taper talks alongside three rate hikes in 2022.
Bitcoin now faces a volatile passage in the forthcoming months. While the disappointing job data and Omicron concerns could nudge the ball in its favor, the chances are that a depressive phase is yet to ensue. According to crypto-analysts, the bitcoin is technically oversold i.e. mostly devoid of impulsive investors and dominated by long-term holders. Since November, the bitcoin has dropped from the record high of $69,000 by almost 40%: moving in the $40,000-$41,000 range. Analysts believe that since bitcoin acts as a proxy for liquidity, any liquidity shortage could push the market into a mass sellout. Mr. Alex Krüger, the founder of Aike Capital, a New York-based asset management firm, stated: “Crypto assets are at the furthest end of the risk curve.” He further added: “[Therefore] since they had benefited from the Fed’s “extraordinarily lax monetary policy,” it should suffice to say that they would [also] suffer as an “unexpectedly tighter” policy shifts money into safer asset classes.” In simpler terms, a loose monetary policy and a deluge of stimulus payments cushioned the meteoric rise in bitcoin valuation as a hedge against inflation. That mechanism would also plummet the market with a sudden hawkish shift.
The situation is dire for most industries. Job participation levels are still low as workers are on the sidelines either because of the Omicron concern or lack of child support. In case of a rate hike, businesses would be forced to push against the wages to accommodate affordability in consumer prices. For bitcoin, the investment would stay dormant. However, any inflationary surprises could bring about an early tightening of the policy: spelling doom for the crypto market. The market now expects the job data to worsen while inflation to rise at 7.1% through December in the US inflation data (to be reported on Wednesday). Any higher than the forecasted figure alongside uncertainty imbued by the new variant could spark a downward spiral in bitcoin – probably pushing the asset below the $25000 mark.
Platform Modernisation: What the US Treasury Sanctions Review Is All About
The US Treasury has released an overview of its sanctions policy. It outlines key principles for making the restrictive US measures more effective. The revision of the sanctions policy was announced at the beginning of Joe Biden’s presidential term. The new review can be considered one of the results of this work. At the same time, it is difficult to find signs of qualitative changes in the US administration’s approach to sanctions in the document. Rather, it is about upgrading an existing platform.
Sanctions are understood as economic and financial restrictions that make it possible to harm the enemies of the United States, prevent or hinder their actions, and send them a clear political signal. The text reproduces the usual “behavioural” understanding of sanctions. They are viewed as a means of influencing the behaviour of foreign players whose actions threaten the security or contradict the national interests of the United States. The review also defines the institutional structure of the sanctions policy. According to the document, it includes the Treasury, the State Department, and the National Security Council. The Treasury plays the role of the leading executor of the sanctions policy, and the State Department and the NSS determine the political direction of their application, despite the fact that the State Department itself is also responsible for the implementation of a number of sanctions programmes. This line also includes the Department of Justice, which uses coercive measures against violators of the US sanctions regime.
Interestingly, the Department of Commerce is not mentioned among the institutions. The review focuses only on a specific segment of the sanctions policy that is implemented by the Treasury. However, it is the Treasury that is currently at the forefront of the application of restrictive measures. A significant part of the executive orders of the President of the United States and sanctions laws imply blocking financial sanctions in the form of an asset freeze and a ban on transactions with individuals and organisations. Decrees and laws assign the application of such measures to the Treasury in cooperation with the Department of State and the Attorney General. Therefore, the institutional link mentioned in the review reflects the spirit and letter of a significant array of US regulations concerning sanctions. The Department of Commerce and its Bureau of Industry and Security are responsible for a different segment of the sanctions policy, which does not diminish its importance. Export controls can cause a lot of trouble for individual countries and companies.
Another notable part of the review concerns possible obstacles to the effective implementation of US sanctions. These include, among other things, the efforts of the opponents of the United States to change the global financial architecture, reducing the share of the dollar in the national settlements of both opponents and some allies of the United States.
Indeed, such major powers as Russia and China have seriously considered the risks of being involved in a global American-centric financial system.
The course towards the sovereignty of national financial systems and settlements with foreign countries is largely justified by the risk of sanctions.
Russia, for example, is vigorously pursuing the development of a National Payment System, as well as a Financial Messaging System. There has been a cautious but consistent policy of reducing the share of the dollar in external settlements. China, which has much greater economic potential, is building systems of “internal and external circulation”. Even the European Union has embarked on an increase in the role of the euro, taking into account the risk of secondary sanctions from “third countries”, which are often understood between the lines as the United States.
Digital currencies and new payment technologies also pose a threat to the effectiveness of sanctions. Moreover, here the players can be both large powers and many other states and non-state structures. It is interesting that digital currencies at a certain stage may present a common challenge to the United States, Russia, China, the EU and a number of other countries. After all, they can be used not only to circumvent sanctions, but also, for example, to finance terrorism or in money laundering. However, the review does not mention such common interests.
The text does propose measures to modernise the sanctions policy. The first one is to build sanctions into the broader context of US foreign policy. Sanctions are not important in and of themselves, but as part of a broader palette of policy instruments. The second measure is to strengthen interdepartmental coordination in the application of sanctions in parallel with increased coordination of US sanctions with the actions of American allies. The third measure is a more accurate calibration of sanctions in order to avoid humanitarian damage, as well as damage to American business. The fourth measure is to improve the enforceability and clarity of the sanctions policy. Here we can talk about both the legal uncertainty of some decrees and laws, and about an adequate understanding of the sanctions programmes on the part of business. Finally, fifth is the improvement and development of the Treasury-based sanctions apparatus, including investments in technology, staff training and infrastructure.
All these measures can hardly be called new. Experts have long recommended the use of sanctions in combination with other instruments, as well as improved inter-agency coordination. The coordination of sanctions with allies has escalated due to a number of unilateral steps taken by the Trump Administration, including withdrawal from the Iranian nuclear deal or sanctions against Nord Stream 2. However, the very importance of such coordination has not been questioned in the past and has even been reflected in American legislation (Iran). The need for a clearer understanding of sanctions policy has also been long overdue. Its relevance is illustrated, among other things, by the large number of unintentional violations of the US sanctions regime by American and foreign businesses. The problem of overcompliance is also relevant, when companies refuse transactions even when they are allowed. The reason is the fear of possible coercive measures by the US authorities. Finally, improving the sanctioning apparatus is also a long-standing topic. In particular, expanding the resources of the Administration in the application of sanctions was recommended by the US Audit Office in a 2019 report.
The US Treasury review suggests that no signs of an easing are foreseen for the key targets of US sanctions. At the same time, American business and its many foreign counterparties can benefit from the modernisation of the US sanctions policy. Legal certainty can reduce excess compliance as well as help avoid associated losses.
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