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
Results of the Afreximbank Annual Meetings 2019
The Afreximbank Annual Meetings 2019 and the associated Russia–Africa Economic Conference have come to a close. The events ran from 18 to 22 June in Moscow and became an important international discussion platform in the lead up to the Russia–Africa Summit and Economic Forum (23–24 October, Sochi). The events were organized by the Roscongress Foundation, African Export-Import Bank (Afreximbank), and the Russian Export Center.
The Afreximbank Annual Meetings and Russia–Africa Economic Conference were attended by over 1,500 delegates from 81 countries, including: Russia, Algeria, Angola, Belarus, Belgium, Benin, Bulgaria, Botswana, Brazil, Burkina Faso, Burundi, the United Kingdom, the (British) Virgin Islands, Gabon, Gambia, Ghana, Guinea, Germany, Djibouti, Egypt, Zambia, Zimbabwe, Israel, India, Ireland, Spain, Italy, Cameroon, Canada, Qatar, Kenya, Cyprus, China, Congo-Brazzaville, Congo-Kinshasa, Côte d’Ivoire, Lesotho, Liberia, Lebanon, Luxembourg, Mauritius, Mauritania, Madagascar, Malawi, Malaysia, Mali, Morocco and Mozambique.
The rest were Namibia, Nigeria, the Netherlands, the United Arab Emirates, Portugal, the Republic of Korea, Rwanda, Saudi Arabia, Seychelles, Senegal, Singapore, Somalia, Sudan, the United States of America, Sierra Leone, Tanzania, Togo, Tunisia, Turkey, Uganda, Finland, France, Chad, the Czech Republic, Switzerland, Sweden, Equatorial Guinea, eSwatini, Estonia, Ethiopia, the Republic of South Africa, South Sudan, and Japan Over 290 Russian and international journalists from 25 countries registered to take part in the Russia–Africa Economic Conference.
Prime Minister of the Russian Federation Dmitry Medvedev spoke at the Opening Ceremony of the 26th Annual General Meeting of Shareholders of Afreximbank. He noted that Russian and African relations have a solid historical foundation, which they can use to their advantage as they move forward and find solutions to today’s challenges.
“Another objective reason for our rapprochement is the similar tasks facing our economies. Russia and all African countries have tremendous natural resources. According to some estimates, they account for 50 percent of the planet’s resource potential. We must use these resources effectively and simultaneously expand cooperation in this and other fields,” added the Prime Minister. Dmitry Medvedev met with President and Chairman of the Board of Directors of the African Export-Import Bank Benedict Okey Oramah on the side-lines of the Afreximbank Annual Meetings.
The business programme events were attended by representatives of executive government bodies. On the Russian side, they included Russian Foreign Minister Sergey Lavrov and Minister of Industry and Trade of the Russian Federation Denis Manturov. African representatives included: Chief Minister of the Republic of Sierra Leone David Francis, Permanent Secretary of the Political and Economic Affairs Office of the Federal Republic of Nigeria Gabriel Tanimu Aduda, and Minister of Trade and Industry of the Republic of Rwanda Soraya Hakuziyaremye.
The panel sessions featured the participation of the heads of high-profile international and foreign organizations: Executive Secretary of the United Nations Economic Commission for Africa (UNECA) Vera Songwe, African Union Commissioner for Trade and Industry Albert M. Muchanga, Member of the Board and Minister in Charge of Trade at the Eurasian Economic Commission Veronika Nikishina, Chief Executive Officer of the International Islamic trade Finance Corporation (ITFC) Hani Salem Sonbol, Deputy Governor of the Central Bank of Egypt Gamal Mohamed Abdel-Aziz Negm, and African Union Commissioner for Infrastructure and Energy Amani Abou-Zeid.
A total of over 20 business events were held as part of the Afreximbank Annual Meetings and the Russia–Africa Economic Conference. Participants discussed the building of partnerships between African SMEs in the Russian market, trade between emerging markets and Africa’s integration into the global economy, the financing of trade under difficult global financial conditions, digital solutions and cybersecurity for state and municipal operations, food security, healthcare, and education.
Stressing the importance of the further development of multilateral cooperation, Advisor to the President of the Russian Federation, Executive Secretary of the Organizing Committee for the Russia–Africa Summit in the Russian Federation in 2019 and other Russia–Africa events Anton Kobyakov said, “Under current conditions, multilateral cooperation with rapidly growing African economies is of primary importance in Russia–Africa relations. At the fore is demand for scientific and technological progress, comprehensive integration, and application of Russian innovative developments in sectors of the African economy such as agriculture, green energy, healthcare, and municipal management. Proof thereof is the heightened interest of experts, businessmen, and heads of African government agencies, who have come to Moscow for the Afreximbank Annual Meetings.”
During his speech, Chief Executive Officer of the Russian Export Center Andrey Slepnev expressed his confidence that Russia has met all of the conditions to strengthen its position in the region through investment in existing and developing economic chains, which would allow the country to secure a longer-term presence in Africa.
“We have every reason to talk about the sustainable growth of Russian exports to Africa. Since 2015, we’ve seen a 23% annual increase in exports on average. Africa currently has enormous potential as a sales market. Today’s economic modernization is paving the way for serious infrastructure changes, which means that the need for high quality, competitive products is growing. Consequently, African countries are our strategic trade partners. Our research has shown, that Russian products in a number of industries are fairly competitive in Africa. It’s vital that Russian businesses have the necessary skills to successfully enter this fast-growing market, and the REC is creating all of the conditions to make that possible,” said Slepnev.
Key events on the side-lines of the Afreximbank Annual Meetings included: the Meeting of the Board of Directors of Afreximbank, the launch of the Afreximbank Strategy for Export Trading Companies, the launch of the 2019 African Trade Report, and the Annual General Meeting of Shareholders of Afreximbank.
A number of documents were signed during the economic conference, including:
• A Memorandum of Understanding between the African Export-Import Bank (Afreximbank) and Sinara-Transport Machines JSC (STM);
• A Memorandum of Understanding between the African Export-Import Bank (Afreximbank), Transmash Holding JSC, and Russian Export Center JSC;
• A Memorandum of Understanding between the African Export-Import Bank (Afreximbank), Avelar Solar Technology LLC, and Russian Export Center JSC;
• A Memorandum of Understanding between the African Export-Import Bank (Afreximbank), Chelyabinsk Pipe Plant PJSC, and Russian Export Center JSC;
• A Memorandum of Understanding between the African Export-Import Bank (Afreximbank), Kolon World Investment, and Opaia SA;
• A Cooperation Agreement between the Roscongress Foundation, the African Export-Import Bank (Afreximbank), and Russian Export Center JSC.
In addition to a packed business programme, the organizers of the Afreximbank Annual Meetings and the Russia–Africa Economic Conference arranged a rich tour and cultural programme for guests and delegates.
Armenia’s historic vision for responsible mining
Armenia, named country of the year by the Economist Magazine in 2018, has led a peaceful transition of power, introducing significant reforms in an inclusive and democratic manner. Nikol Pashinyan, MP and opposition leader, was elected Prime Minister on May 8, 2018. The new administration has identified anti-corruption efforts, free and fair parliamentary elections, and greater equity as its priorities.
Armenia’s economy is gaining strength, growing at over 5.2% in 2018. The growth has been supported by global recovery and a strong rebound in domestic demand. However, the country remains plagued by the twin evils of high unemployment and poverty. The fruits of growth are not shared across the nation.
A country rich in natural resources, particularly copper, molybdenum, gold and dimension stones, Armenia has 27 metal mines. These mines employ 9,000 people in rural areas, while metals and gems represent over 60% of total exports. Indeed, copper ore alone accounts for over a third of all exports. While Armenia has the accurate regulatory and legal framework in place to support the sector in a way that benefits its citizens, enforcement is far from ideal.
Against this backdrop and recognizing that extractive industries can drive economic growth and poverty reduction, the Prime Minister at the time, Hovik Abrahamyan, announced on July 28, 2015 the government’s commitment to make Armenia become compliant with the globally recognized transparency standard in the extractives sector, the Extractive Industries Transparency Initiative (EITI). The government met with both the mining industry and civil society, inviting them to participate in the process by presenting nominees for a Multi-Stakeholder Group. Such a group had never been created before to agree a joint approach to the mining sector.
With issues of trust from civil society and apprehensions from industry, it appeared that the EITI process might fail to engage all parties. Following a stalemate of many months, the World Bank, funded by the Extractives Global Programmatic Support (EGPS) Multi-Donor Trust Fund, organized a workshop which brought together government, industry and non-governmental organizations for the first time. Stakeholders agreed to create a multi-stakeholder group to implement the EITI standard, with equal voting power for each party. Armenia’s first EITI report was approved and published in January 2019, covering 2016-2017 fiscal years.
The multi-stakeholder group chose to go beyond the remit of transparency and sought to develop a common vision for responsible mining that would shape the future of every mine across the country. With the help of the EGPS Multi-Donor Trust Fund, government, industry and civil society groups are now working together to develop a Mineral Sector Policy, a policy framework to guide mining operations. The policy will outline the country’s vision for the mining sector and articulate what responsible and sustainable mining looks like.
The Policy will be based upon the results of two ongoing assessments of the sector: an economic assessment and an environmental and health analysis. The economic assessment will assess the mining sector’s contribution to local, regional and national development, and the potential to develop stronger economic linkages along the supply chain. The environmental and health analysis will assess the health and safety of communities and workers, and examine the existing standards, capacity and institutions to effectively address these issues through a Mineral Sector Policy.
Alongside these assessments are ongoing consultations across government representatives, mining companies, civil society organizations and affected communities, which will be used to inform the creation of the Mineral Sector Policy.
The assessments and consultations will help to build a shared and inclusive vision of Armenia’s future mining sector.
Armenia is one of the few EITI countries to have a fully electronic reporting system up and running, receiving reports from government and companies. Given paper-based reporting has prevailed to date, this marks a significant step forward, minimizing technical errors in reports, decreasing required time for collection of reports and their reconciliation and creating a unique system of searching and downloading open data for users by applying appropriate filters.
The impact of US-China Trade war
It is highly unlikely, that any tangible solution to the Trade war between Beijing and Washington will emerge in the short run. In May 2019, Trump increased the tariffs on commodities worth 200 Billion USD, from 10% to a whopping 25%. So far, US has imposed tariffs of about 250 Billion USD on China. While China, has retaliated with tariffs on US goods estimated at well over 100 Billion USD (110 Billion.)
It would be pertinent to point out, that trade disputes have not been restricted only to Washington and Beijing. Imposition of tariffs has been a bone of contention with US allies including Japan.
Off late, trade issues have resulted in major differences between New Delhi and Washington. Even though there are convergences between both countries on numerous strategic issues, resolving the differences between both sides on trade related matters is likely to be an onerous responsibility.
In response to tariffs imposed by Washington, New Delhi retaliated, and has imposed tariffs, estimated at 200 Million USD, on 29 commodities (including Apples, Almonds and Chickpeas). India’s decision was a response to US’ decision to impose tariffs, of 10% and 25% on Aluminium and Steel in May 2018. Last year, New Delhi refrained from imposing tariffs, but did raise import taxes on a number of US goods to 120%, after Washington declined to exempt New Delhi from higher steel and aluminium tariffs. The key propelling factor for India’s recent imposition of tariffs was the US decision to scrap the Generalized System of Preferences (GSP) for India from June 5, 2019. India benefitted immensely from this scheme, as it allowed duty-free exports of upto $5.6 billion from the country.
Pressure on Trump
Even though no solution is in sight, there are a number of lobbies in the US, especially Trade groups and US businesses which have been repeatedly urging the Trump Administration to find a solution to the current impasse with China.
Only recently for instance, 600 companies, including Walmart in a letter to the U.S. President Donald Trump urged him to resolve trade disputes with China, stating that tariffs were detrimental to the interests of American businesses and consumers. The letter was sent as part of the ‘Tarriffs Hurt the Heartland’ campaign.
To underscore the detrimental impact of trade wars on the American economy some important estimates were provided. The letter stated that tariffs of upto 25% on 300 billion USD worth of goods, could lead to the loss of 2 million jobs. Costs for an average American family of 4 would also rise to an estimated 2000 USD, if such tariffs were to be imposed.
Reports indicating the challenges to the US economy and FDI from Chinese companies in US
A number of surveys and reports illustrate the profound challenges which the US economy is facing as well as a drop in FDI from China.
The University of Michigan’s consumer sentiment index also revealed a drop in consumer sentiment from 100 in May to 97.9 in June. This was attributed to trade wars between China and the US.
According to a survey released by the China General Chamber of Commerce USA, investment by Chinese companies in the United States has witnessed a significant decline since 2016 ( including a sharp drop in 2018 and early 2019)
A number of important events have been held recently, where efforts were made to draw more Chinese investments to the US. One such event was the Select USA Summit. Speaking at the Summit, US Commerce Secretary Wilbur Ross stated:
‘We welcome investment from any place as long as it’s investment that poses no challenges for national security,”
US states and FDI
What was clearly visible at the Select USA Summit was the fact, that a number of US states pitched for expanding economic ties with China, and drawing greater Foreign Direct Investment.
The state of North Carolina sought to attract investments in areas like IT, Aviation and biotech. The US headquarters of Lenovo are in the state of Carolina. Trump’s trade wars have hit the state in a big way, and one of the sufferers have been Soy bean farmers. As a result of a 25 percent imposition of tariffs the price of a bushel of Soy bean has dropped to 8 USD, from 10 USD in 2018.
Other US states brought to the fore the impact of tariffs on their respective economies. According to a senior official from the state of Louisiana for instance, Don Pierson, secretary of Louisiana Economic Development the state it has suffered immensely as a consequence of the imposition of tariffs. Agricultural commodities from Middle America to China are imported through export terminals in Louisiana. Pierson said that the agricultural economy of the state, as well as the logistics economy of the state have taken a hard hit as a consequence of the trade wars. Pierson also spoke about the possibility of exporting LNG from Louisiana to China. Major investments in the state of Louisiana include Yuhuang Chemical Group (Shandong’s) decided to invest US$1.85 billion in a methanol production complex (this was one of the largest Chinese direct investments in US). Wanhua Chemical Group invested over 1 Billion (1.2) USD in a chemical manufacturing complex in South Eastern Louisiana
A number of Chinese companies have also begun to realise, that there is need to adopt a nuanced approach too are still tapping certain US states for investment.
Another important event was the Select LA Summit. The Los Angeles Mayor Eric Garcetti, and Lenny Mendonca, chief economic adviser to the California governor assured overseas investors of all possible support from the town of LA, as well as the state of California.
Impact of trade disputes and Washington’s stance vis-à-vis Huawei
US States and Chinese Provinces have been at the forefront of improving economic ties between both countries. Both are likely to suffer as a consequence of not just the trade war between both countries, but also the US ban on Huawei. The tech company, according to a report published in 2016, contributes 7% of the GDP of the town of Shenzhen (Guangdong Province). Affiliates of Huawei provide employment to an estimated 80,000 people while a research facility in a nearby city of Dongguan, provides employment to well over 3,000
In conclusion, it is important for all stakeholders, not just businesses from both countries, to play their role in resolving economic and technological disputes between China and the US. It is also important for Chinese Provinces as well as US states to play a pro-active role in reducing tensions. Both governments while realising the importance of federating units have set up official dialogues and set up other mechanisms for sub-national exchanges. It is important that these platforms now contribute towards reducing the divergences between both countries. While all eyes are on the political leadership of both countries, it is important to realise that the stakeholders in the US-China relationship are not restricted to Beijing and Washington DC.
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