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Europe Slipping into Economic Peril?

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The economic pressure over Europe is hard to quantify. I anticipated the Euro bloc to evade the slump of the pandemic though – admittedly – it happened rather quickly. I recently discussed in my recent article: Economic Duress Upending America’s Financial Stability?, quite a similar scenario panning out across the Atlantic as the United States faces the same oxymoronic situation – is too much progress gradually deteriorating the economy? I apply the same perspective as I analyze the economic agility of Europe. However, while the economic peril is hard to quantify, the problems and fissures relating to a particular country could certainly be utilized to portray a broader picture of the entire bloc.

Ironic how last year, the arching problem was how to skip past the pandemic with minimal economic damage. Policies were enacted and protocols were put into place across the globe to safeguard a stumbling economy. But now, the main issue is how to harness the rampant growth without actually risking the newfound stability. Complex right. Well, we’re just getting started!

Price pressures are a commonality nowadays across Europe. While one could make a fair point by emphasizing the trade bloc and its intertwined economic labyrinth throughout the continent, it still doesn’t justify the looming issue. As deeply as I have studied the European economy, it dawns on me that while financial turmoils surrounded the region, inflationary pressures were never the real foes. One more commonality explains the persistent price increase in such an expansive fashion. Supply constraints explain the problem by simply stressing the equation of demand and supply. In recent months, the shortage of raw materials (both imported and transported throughout the bloc) coupled with transportation bottlenecks have strangulated the manufacturing capability of the Euro bloc. With accumulated savings and a broadened span of time at home, the demand has surged in almost all industries. Thus, an accentuated demand in the face of a narrowed supply channel is what marks the basis of the inflationary pressures growing across the European continent: much less than the entire world.

Earlier last month Audi, Volkswagen’s biggest profit contributor, was forced to extend its summer break by a week last year; primarily due to the ‘volatile and tense’ semiconductor shortage. Many of the companies across an array of industries are facing massive shortages while the reemergence of the delta variant is resisting the labor to pump full gear into the workforce. With surging covid cases, the business confidence has further slipped in the Eurozone. The increasing threat of the pandemic exacerbated by the doubt reflected on the inoculation drives is adding more to the problems while the supply constraints continue to bloom as the world slips into uncertainty again. Consumer confidence has slipped for the first time in 2021 yet the inflationary pressures are sturdy despite reassurances of a transitory spike in selling prices by the European Central Bank (ECB).

In my opinion, the EU’s economic health is too complex to maneuver through in its entirety. However, it could be simplified by gauging the economic outlook revolving around a single country. Germany: Europe’s largest and the world’s third-largest economy. As we begin to unravel Germany’s position, Europe’s condition doesn’t appear exactly in shape. Germany’s annual Consumer Price Index (National Inflation Rate) recently peaked at 3.9% year-on-year, according to preliminary calculations. This is the most accelerated price increase in over a quarter of a century. Germany last witnessed such a speedy price increase back in December 1993 following the historic reunification of Germany. It is hard to even compare the two timelines.

While inflation raced at a rate of 4.3% after the fall of the Berlin Wall, it was on the back of a booming German economy. Today, the reality is anything but progressive and could hardly be deemed as an economic success. Germany’s Federal Statistics Office also announced that the consumer prices, adjusted to the rest of the European countries, accelerated at a befuddling rate of 3.4% year-on-year. Take your time and compare that to the hike of 3.1% registered last month. But that’s not all. Compare this off the roof price increase with the modest 2% mark set by the ECB. Shockingly, what used to be such a tedious level to achieve over the past decade was breached not once but over two consecutive months. 

Moreover, the data released shows that the surging inflation had already outpaced the German wage growth by the second quarter. If I were to weigh the possibilities at this point, I would think twice before shrugging off inflation as merely fleeting. The data shows that not only has the inflation barraged past the conservative 2% mark but is gradually eating away the consumer’s spending power while the delta threat is forcing labor delays. A sage mind would subconsciously realize that the only way out would be a wage hike to entice workers back to work. Similar to the United States, wages would be readjusted to incentivize the workers especially when labor shortages are almost certainly placing workers in the bargaining power. Thus, it’s safe to assert that as inflation is peaking, with delta surge across the world (primarily in China) and wage hike on the horizon, a deceleration in the price rise is highly implausible any time soon.

A poll conducted by Bloomberg revealed that the majority of the 3000 German companies surveyed expect the supply chain problems to persist through 2021. The survey also revealed that with const pilling, the companies are resorting to dumping excessive costs onto the consumers. It is quite justified, therefore, to argue the clarity of the ECB’s outlook regarding inflation given Europe’s largest economy is struggling towards price stability. It is also worth pondering that with Brexit detaching the UK as a dependable economic powerhouse followed by thorough competition from Chinese exporters, another global rebound may prove more detonating to Europe’s manufacturing sector while inflation continues to persist. 

While the service sector is performing dismally, the manufacturing industry is the flicker of hope that could reign in growth to hedge inflation. However, it is reported that China has bloomed as a major exporter to the EU: contributing a baffling share of 68.2% of all EU’s imports in 2019. Compare that to China’s share of 50.7% just two decades ago. Thus, with raging competition from China and a political shuffle on cards later this month, Germany has its palate full of unanswered questions and mounting economic and geopolitical pressures that could paralyze the European Union.  

I have my eye on the policymakers across the globe as adjustments are highly likely to affix to the monetary policy. US Federal Reserve’s Chairman, Jerome Powell, made a spectacle in Jackson Hole Economic Symposium by reiterating his commitment to Fed’s dovish stance to garner full employment before tapering or raising interest rates. Similarly, the ECB is scheduled to convene on 9th September and would be under the spotlight to either elevate its bond purchases (to further cushion the economy) or relent back (to witness a plummeting Euro). Either way, a strong decision with distinct consequences. 

While Deutsche Bundesbank, Germany’s Central Bank, stands with the view of a drop in inflation next year, I presume that inflation would mount as high as 5% year-on-year before settling low as supply bottlenecks broaden and employment picks pace. Moreover, while many economists are of the view that a wage-price spiral might not ensue, I assume a perverse position. With expanding Chinese influence in Germany’s manufacturing sector; imports ranging from pharmaceuticals to machinery, a political shift in a few weeks, and the tendency of German businesses to pass costs onto consumers, a wage-price spiral seems probable enough to sustain inflation at an elevated level – at least in the short-medium run. I could, lastly, reflect my inference on much of Europe as ECB wrestles the notion that continues to beleaguer most of the economists (even myself): is too much inflation a concern? And at what cost?

The author is an active current affairs writer primarily analyzing the global affairs and their political, economic and social consequences. He also holds a Bachelor’s degree from Institute of Business Administration (IBA) Karachi, Pakistan.

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The Economic Conundrum of Pakistan

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The State Bank of Pakistan (SBP) is due to convene on 20th September 2021. The Monetary policy Committee (MPC) will be announcing its policy rate after retaining it since March 2020. As the world deals with the uncertainty of the delta variant along with the dilemma between inflation and growth, it is a plenary to watch as Pakistani policymakers would join heads to decide the stance on the economic situation. However, the decision would be a tough one. Primarily because the mixed signals could either lead to burgeoning inflation and subsequent financial deterioration or they should guide the central bank to strangulate the growth prematurely. Either way, the policymakers would have to be cautious about the degree of inclination they lean to each side of the argument – economic contraction or growth with inflation.

A poll conducted by Topline Research shows that about 65% of the financial market participants expect status quo; the MPC to maintain the policy rate at 7% to further accommodate economic growth. Pakistan has barely mustered a 4% growth rate after the contraction of 0.4% last year. In this regard, Mr. Mustafa Mustansir, head of Research at Taurus Securities, stated: Visible signs of demand-side pressure are still quite weak. In another survey conducted by Policy Research Unit (PRU): a policy advisory board of the Federation of Pakistan Chamber of Commerce and Industry (FPCCI), 84% of the market participants believe there will be no change in the policy rate. The sentiment implies that the researchers and the business community don’t expect a rate hike in this week’s policy meeting.

However, the macroeconomic indicators paint a bleak picture for Pakistan’s economy: warranting a tougher policy response. The external trade figures released by the Pakistan Bureau of Statistics (PBS) project a debilitating situation for the national exchequer. According to the data, Pakistan’s trade deficit has increased to $7.5 billion in the first two months (July-August) of the fiscal year 2021-22. The deficit stands at $4.1 billion: 120% higher than the same period last year. Due to the accommodative policies implemented by the government of Pakistan, the trade deficit has already climbed 26% up to the annual target of $28.4 billion, set in the fiscal budget 2021-22. Despite excessive subsidies, the bi-monthly exports have only grown by 28% to stand at $4.6 billion. And while it is an increase of nearly a billion dollars compared to the same months in the preceding year, the imports have more than perforated the balance of payments.

During the July-August period, the imports have grown by a whopping 73% to stand at $12.1 billion: 22% of the annualized target. What’s more worrisome is the fact that despite a free-float currency mechanism, the exports have failed to turn competitive in the global market. According to the data released by PBS, Pakistan’s exports have dropped from their previous levels for three consecutive months. And despite a 39% net currency depreciation in the past three years, the exports continue to drift sluggish around the $2 billion/month mark. Yet, the imports are accelerating beyond expectation: clocking a 95% increase last month alone. Clearly, something is not working.

Moreover, while the forex reserves with the State Bank stand at a record high of around $20 billion, the rapid depreciation in the rupee is gradually damaging the financial viability of Pakistan. According to Mettis Global, a web-based financial data and analytics portal, the rupee recently slipped to its all-time low of 168.95 against the greenback. While the currency reserves are at their peak, the rupee continues its losing streak as the State bank has refrained from intervening in the forex market to artificially buoy the currency. Primarily because the IMF program stands contingent on letting the rupee float and find equilibrium. As a result, the rupee is touted to breach the 170 rupees against the US dollar mark by next month. The bankers around Pakistan have urged the State Bank for an intervention to put an end to “abnormal volatility in spite of increased reserves.” However, an intervention seems highly unlikely as the SBP Governor, Dr. Reza Baqir, already warned regarding currency devaluation in the last policy meeting: citing supply constraints, debt repayments, and increased imports as primary reasons for the temporal slump.

Nonetheless, almost 10% of the market participants, according to the survey, expect a rate hike of 50 basis points in the policy rate to hedge against inflation. Furthermore, analysts at Topline Securities expect a hike of 25 basis points to counter “vulnerabilities in the current account and control inflationary pressures.” Regardless of the prudent beliefs in the market, however, a few players actually believe that a rate cut of 50-100 basis points is plausible in the meeting. They argue that while the Consumer Price Index (CPI) – a national inflation measure – refuses to let down, the core inflation of Pakistan has dropped perpetually down to 6.3% in August. A stratum of the business community, therefore, also believes that the policy rate should be gradually brought down to 5% to match the regional dynamics.

I somehow find this notion ironic, as the government has already doled billions of dollars in subsidies, provided lucrative loans, and slashed taxes periodically. Yet, the exports have stayed relatively redundant. While it may not be the most effective time to hike the policy rate and tighten the monetary policy, in my opinion, a cut in the policy rate would be detrimental – catastrophic for the current account and incendiary for prevailing inflation.

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Global Revolution in the Crypto World: Road to Legalization

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The raging popularity of virtual currencies is hardly unheard of in today’s day and age. If not by the damning crackdown in China, price swings in cryptocurrencies – especially bitcoin – are definitely deemed perpetual and inherent: unlikely to go away. And while the volatility does bring along a unique thrill to retail investors, the experienced pundits of the financial world are expectedly skeptical. Regardless of the apparent discomfort and resistance to tap into the pool of virtual currencies, policymakers across the world are aware that the future is digital. Therefore, while digital fiat seems to be the direction of most developed economies to counter the decentralized giants, the economic gurus are preparing to harness the mania on another front as well – before the craze overtakes the globe.

The first – and most popular – cryptocurrency is undoubtedly bitcoin. In the aftermath of China’s crackdown on mining activities, bitcoin lost more than half of its valuation. However, acceptance around the world in the past few weeks has helped the currency to buoy past the slump. Bitcoin currently stands at a market cap of $863.8 billion: flirting with the $46,000 mark. Naturally, the rest of the crypto world flows in tandem as fanatics have placed bets for the currency to breach the $50,000 psychological mark again in the following months. However, the rally is largely attributed to the blooming acceptance by governments around the world; something the officials were wary of to avoid risks and uncertainty. However, I still don’t understand the change of perception given the market is more volatile than ever.

Last week’s headlines were all about El Salvador and its adoption of bitcoin as a legal tender. The fiasco that followed was hardly a surprise. Though the incident bolstered the crypto critics, the event projected nothing that was a mystery before the launch. A glitch in the virtual wallet, called “Chivo Wallet,” was one of the countless impediments that had already been warranted as risky by economists around the globe. While the problem was resolved in a matter of hours, the price of bitcoin nosedived by 19% from the 4-month high of $53,000. President Nayib Bukele boasted about “buying at a dip” yet overlooked a crucial aspect from a broader perspective. He failed to realize that a minor glitch in his small nation was significant enough to send the currency spiraling; that in mere hours, billions of dollars were wiped from the global market. All because the app couldn’t appear on the designated platforms for a few hours.

What happened in El Salvador is a vital example to analyze. The resulting confusion is exactly why a passage of regulation is being placed. If the domestic and international markets are to rely upon cryptocurrencies in the near future, then the need for a detailed framework becomes even more amplified.

Recently, Ukraine became the fifth country in weeks to legalize bitcoin. However, while the Ukrainian parliament adopted a bill to legalize the cryptocurrency, regulations are put into place to handle its precarious and volatile nature. Unlike the loose move by El Salvador, Ukraine did not facilitate a rollout of bitcoin as a form of payment. Moreover, the parliament has refrained from placing bitcoin on an equal footing with Hryvnia – Ukraine’s national currency. Primarily because adding another currency prone to unprecedented and wild swings in value could prove complex in policymaking matters including drafting fiscal budgets and taxation planning. And while Kyiv is pushing to lean further into bitcoin to gain more access to global investment, the authorities are prudent. Therefore, unlike the brazen entry by El Salvador, the Ukrainian authorities are underscoring a strategy to learn about the crypto world before bitcoin is etched into Ukrainian law forever.

Meanwhile, the United States is proving rather stringent against the rise of bitcoin – and the crypto world – as nightmares of another financial crisis are caging a progressive adoption. The lawmakers are already vigilant to put braces on the market before it blooms beyond control. The Infrastructure Bill recently passed by the senate provides a hint of direction being adopted by the US legislators. The tax provision, estimated to collect $28 billion over a decade, has been placed as a regulation of the crypto market that stands at a valuation of $2 trillion. The Treasury directives are driven to mobilize the Internal Revenue Service (IRS) to tax crypto brokers while monitoring mandated reporting requirements. The goal is obvious: gradually tighten the screws before regulating the uncharted territory as any other capital market. However, the bill is purposefully vague regarding market actors deemed as brokers under the new law. Naturally, the frenzy follows as miners are left scrambling to define the meaning of a broker in an extremely complex and unorthodox market mechanism. It is clear that prominent lawmakers, like Senator Elizabeth Warren, are the main driving forces to put a leash on the emerging market.

Furthermore, the US Security and Exchange Commission (SEC) has been vocal about Treasury’s long-awaited intervention in the crypto market. Allegedly the virtual currencies have come across as a key tool for tax evasion in the United States. Therefore, much of the lobbying to amend the tax provision in the infrastructure bill is to limit the strictness of application rather than simplifying the vague terminologies. Moreover, the Treasury Department has also been active in discussing the financial stability of Stablecoin – crypto assets pegged to the US dollar and other fiat currencies. While extreme volatility is not a risk in this scenario, the Federal agencies – particularly the Financial Stability Oversight Council (FSOC) – have been keen to set tougher regulations over the market with more than $120 billion in circulation. The move has been swift since the tax provision made its way into the Senate debate. The main intent to regulate stablecoin – particularly Tether – is to harness the market, primarily because the sector acts as an unregulated money market mutual fund holding massive amounts of corporate debt. A plunge in price is enough of a spark to send ripples through the fixed income markets: posing a financial threat to the entire market. Thus, the FSOC is touted to be mobilized soon to probe and regulate the market as it continues to grow.

The crypto world has been cited by global lenders such as IMF as a haven for money laundering and tax frauds. Such tags could lead to negative credit ratings and ineligibility to gain investment and aid packages, especially when debt-ridden countries like El Salvador dabble along without any fixed legal framework. However, with broader regulation, like the steps taken by the US and Ukraine, the risk could be minimized. Another area is to initiate with experienced investors before gradually easing market restrictions for retail investors. A prime example is Germany which recently allowed institutional investors to invest as much as 20% of their holdings in bitcoin and other crypto-assets. While the portion still congregates to billions of dollars, such deft institutional investors are trained enough to manage and monitor trillions of dollars in a vast array of capital markets. Moreover, such large-scale institutional investment firms already have strict regulatory requirements and thus, by default, are bound to consciously maintain conservative holdings.

In my opinion, the crypto market is the financial future of the technological utopia we aspire to build. The smart choice, therefore, is to learn the system down to its spine. Correct the loopholes and irregularities while monitoring experienced professionals participating in an open market. Sketch and amend the legalities and a financial framework along the way. And gradually let the market settle as second nature.

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CPEC: Challenges & Future Prospects

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Global economy paradigm is shifting from the West to the East while China is torch bearer in this context with it’s master stroke OBOR project. The beauty of this unique project is that it provides a new trade corridor and a new route to at least 60 countries. If we make an educated guess, then about 80% of the world population would get benefit from this project. This project can be divided into “Silk Road economic belt” and Maritime silk road”. For disbursement of funds, five financial institutions are opened so that the complete burden should not fall on China. Now it has been a proven fact that the US, few Western countries and India are lobbying and conspiring against the OBOR project.  

The most important project of this initiative is CPEC as it gives China access to the most important geo-strategic location of Gwadar that had always been dream of Russia and NATO for their strategic, military and economic interests in the region. The only project which gives landlocked countries access to the sea. CPEC certainly can be game changer due to its potential of creating mass industrial productivity, exports, and job creation not only for Pakistan but for entire South Asian region.  

Due to various factors, there are always chances that mistrust may prevail among Pakistan and China, which can have a direct impact on Pakistan’s economy. The economy plays a fundamental role in the development and strengthening of any country, but unfortunately, Pakistan was unable to stabilize this sector for decades. As soon as the situation becomes better, another incident of unrest happens. Attacks like the Dasu hydropower plant in Khyber Pakhtunkhwa or like Serena Hotel Quetta are preplanned efforts of our enemies like India to destabilize the project. Although, it has been accepted by Chinese think tanks on various occasions that the security situation has improved in Pakistan during the recent few years. 

Luckily, due to the US withdrawal from Afghanistan, Indian investment is also dying. There is no doubt that the economic stability that Pakistan will achieve after the completion of CPEC cannot be digested by an eternal enemy like India. India is intensifying its covert operations against CPEC, as its discomfort is growing day by day with the cozying Pak-China relations. Modi’s government believes that once operational, CPEC will reduce its sphere of influence in Central Asia, IIOJ&K, and Afghanistan.  The terrorist network formulated in Afghanistan to create unrest in Pakistan under the garb of diplomatic activities has also been jeopardized. As CPEC passes through Gilgit-Baltistan which India claims as a disputed territory but their claim was rejected out rightly by Pakistan and China. Now India may try to reinstate its sleeper cells inside Pakistan to disrupt CPEC.

CPEC in particular offers a win-win situation for participating nations and it has a strong component of social development, poverty alleviation, and demographic uplift, unlike similar programs offered by other international donors. CPEC would not impact its balance of payments of Pakistan at any stage. The payment schedule is very relaxed. It’s about geo-economics and the establishment of a non-exploitable economic system. Another point is that CPEC is a transparent project with all its details present on its websites. The projects of CPEC are not only confined to specific areas but its network is present in the whole of Pakistan. 

Although, it’s correct that Pakistan has a risky security environment, but Pakistan has taken various positive steps in this regard like raising two “Security Divisions” in Pakistan Army, incorporating special paramilitary forces, increasing intelligence apparatus, and improving local police networks.  

There are eight main core areas linked with CPEC which are ‘integrated transportation system’, ‘information network infrastructure’, cooperation in ‘energy related’ fields, ‘trade and industrial parks’, ‘agricultural development and poverty alleviation, ‘tourism’, ‘social development and non-government exchanges’ and lastly ‘financial cooperation’. CPEC is now attracting other countries around the world who are also expressing their desire to join it. 

In present circumstances, the CPEC projects must be completed as soon as possible so that Pakistan’s geographical location can be truly exploited. Our narrative building part is weaker in International media as India and other lobbies are floating a huge bulk of anti-CPEC stories with fake facts and figures, we have to give proper rebuttal and our side of the story must be backed with verified facts and figures. Another point to be focused on is that a prosperous Balochistan would strengthen CPEC’s foundation. This is a real game-changer and we have to engage maximum countries of the world in this project to get moral, social, and financial support. 

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