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High Inflation Spells Predicament for Major Central Banks

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As the European bond market falls, European Central Bank (ECB) President Christine Lagarde said on June 28 that the central bank will start a bond-buying program on Friday to curb possible debt crises. The ECB is considering maintaining “flexibility” in its reinvestment allocation to its massive EUR 1.7 trillion bond-buying portfolio while launching a new program to stabilize the markets. It is also working on a new bond-buying tool to address so-called “fragmentation”. Lagarde said the tool would allow rates to rise “as far as necessary” to complement stabilizing inflation at the 2% target. The ECB’s position as the “buyer of last resort” has eased the sell-off of European bonds to a certain extent, and the yields of sovereign bonds of some highly leveraged countries have fallen.

Under the ECB’s decision to raise interest rates in July to counter inflation, its proposed bond-buying program, while easing a possible bond market crisis, is effectively contradicting its imminent monetary tightening. Researchers at ANBOUND pointed out that similar to those implemented by the Federal Reserve and the Bank of Japan (BOJ), the ECB’s monetary policy also faces challenges ahead. With high global inflation narrowing down the monetary policy space, the dilemma between inflation and employment is becoming increasingly more common. This is not good news for the global economy and capital markets, as the contradiction between economic growth and inflation will plague major central banks for a long time.

Lagarde said the ECB would remain “flexible” on reinvestment of the PEPP portfolio due on July 1. “We will ensure that the orderly transmission of our policy stance throughout the euro area is preserved,” she said. “We will address every obstacle that may pose a threat to our price-stability mandate”.

The ECB’s insistence on playing the role of the “buyer of last resort” has actually drawn lessons from the European sovereign debt crisis triggered by the 2008 financial crisis. Due to the slow decision-making of the ECB at that time and its reluctance to promote easing, the economies and financial systems of highly leveraged countries such as Greece, Italy, and Spain suffered huge losses from the debt crisis. ECB then finally launched quantitative easing in 2014 to deal with the dual threats of deflation and the sovereign debt crisis at that time, which stabilized the economic and financial systems of the relevant countries. In total, the ECB currently buys more than EUR 49 trillion of bonds, equivalent to more than one-third of the eurozone’s GDP. In the past two years, the ECB has bought more bonds than all the additional bonds issued by the 19 eurozone national governments, giving it huge leverage over the region’s borrowing costs.

As the European market is about to bid farewell to negative interest rates, after the ECB starts hiking interest rates, the increase in borrowing costs will inevitably bring new risk factors to its bond market. The consequences of rising interest rates will not only cause the economic growth of various countries facing decline, it is also likely to lead to a new round of debt defaults. Such is the price that the central bank has to pay for its measures against inflation. However, as with the Fed, market investors are equally skeptical that the ECB’s tightening policy will be effective in tackling inflation. At present, the inflation level in the eurozone has reached more than 8%, which is more than four times the 2% target of the ECB. The latest CPI data in the eurozone in June is expected to reach a record high of 8.5%. High inflation is not only the energy distortion brought about by the conflict between Russia and Ukraine, but also the constraints of supply chain adjustment.

These factors mean that the inflation level will be difficult to contain in the short term and will fall back quickly. ECB Chief Economist Philip Lane said the central bank must remain vigilant in the coming months as inflation could keep climbing and the region’s economy could slow due to consumption. Meanwhile, Morgan Stanley stated that the eurozone’s economy is expected to slip into a mild recession in the fourth quarter of this year as measures of consumer and business confidence slump due to reduced energy supplies in Russia, while inflation remains high. The eurozone’s economy is expected to contract for two quarters before returning to growth in the second quarter of next year, driven by rising investment. Despite the risks of an economic slowdown, the ECB is still expected to raise rates at every meeting for the remainder of the year, culminating in a hike to 0.75% in December, given the persistently high inflation. However, if the economic outlook deteriorates significantly, the ECB may stop raising interest rates after September. This actually shows that the central bank does not have many effective means in the face of high inflation. It can only adopt the take-one-step-at-a-time approach and adjust between inflation and recession.

Such a situation is happening in the United States and Japan as well. The Fed is also faced with the conflicting choice of inflation and recession, while the BOJ needs to consider a series of effects of changing its easing policy. The situation in Japan is somewhat similar to that of the ECB in that it is difficult for the central bank to tighten its currency by shrinking its balance sheet. After the Japanese yen continued to depreciate, the inflation level exceeded the target of 2% for a row, putting the BOJ to be in a difficult position. If the easing policy advocated by Abenomics is terminated to deal with inflation, it will bring about an increase in the yield of Japanese government bonds, in addition to the collapse of the Japanese stock market bubble. With Japan as a whole facing an unprecedented level of leverage, it is not optimistic that Japanese companies can afford the increase in interest rates. At the same time, the BOJ has accumulated a large number of sovereign bonds and risk assets. Once the balance sheet is reduced and sold, it will intensify the sell-off in the capital market, thereby causing a capital market crisis affecting both stocks and debts. This crisis, especially the debt crisis, will cause fatal shock and impact on the economy.

This prospect is also the reason why the ECB is still struggling to stop bond-buying even if it is determined to raise interest rates. Relatively, because of the special role of the U.S. dollar in the international currency, the Fed does not encounter greater risks when it raises interest rates while shrinking its balance sheet, and rather it is in a relatively active position. However, the Fed also faces the risk of a recession caused by accelerated policy tightening. This is similar to the situation of the ECB and the BOJ. Balancing inflation and economic stagnation would be the main challenge faced by major economies, and it is also a dilemma that the main central banks in the world have to face.

Final analysis conclusion:

Given the high level of global inflation, major central banks in the world tend to adopt tightening policies. However, the contradiction between inflation and economic growth, as well as the resulting debt problem, is becoming more and more prominent. Under these contradictions, central banks are generally facing the dilemma that while the space for monetary policy is narrowed, the policy difficulty has increased. This also means that these central banks are in the embarrassing situation of monetary policy failure, and that the global economy needs to deal with the threat of stagflation for a long time.

A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK

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Economy

Digital Futures: Driving Systemic Change for Women

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Authors: Erin Watson-Lynn and Tengfei Wang*

As digital technology continues to unlock new financial opportunities for people across Asia and the Pacific, it is critical that women are central to strategies aimed at harnessing the digital financial future. Women are generally poorer than men – their work is less formal, they receive lower pay, and their money is less likely to be banked. Even when controlling for class, rural residency, age, income, and education level, women are overrepresented among the world’s poorest people in developing countries. Successfully harnessing digital technology can play a key role in creating new opportunities for women to utilise formal financial products and services in ways that empower them. 

Accelerating women’s access to the formal economy through digital innovations in finance increases their opportunity to generate an income and builds resilience to economic shocks. The recently issued ESCAP guidebook titled, Harnessing Digital Technology for Financial Inclusion in the Asia Pacific, highlights the fact that mechanisms to bring women into the digital economy are different from those for other groups, and that tailored policy responses are important for women to fully realise their potential in the Asia-Pacific region.

Overwhelmingly, the evidence tells us that how women utilise their finances can have a beneficial impact on the broader community. When women have bank accounts, they are more likely to save money, buy healthier foods for their family, and invest in education. For women who receive Government-to-Person (G2P) payments, there is significant improvement in their lives across a range of social and economic outcomes. Access to safe, secure, and affordable digital financial services thus has the potential to significantly improve the lives of women.

Despite the enormous opportunity, there are numerous constraints which affect women’s access to financial services. This includes the gender gap in mobile phone ownership across Asia and the Pacific, lower levels of education (including lower levels of basic numeracy and literacy), and lower levels of financial literacy. This complex web of constraints means that country and provincial level diagnostics are required and demands agile and flexible policy responses that meet the unique needs of women across the region.

Already, across Asia and the Pacific, governments are implementing innovative policy solutions to capture the opportunities that come with digital finance, while trying to manage the constraints women often face. The policy guidebook provides a framework to examine the role of governments as market facilitators, market participants and market regulators. Through this framework, specific policy innovations drawn from examples across the region are identified which other governments can adapt and implement in their local markets.  

A good example of how strategies can be implemented at either the central government or local government levels can be found in Pakistan. While central government leadership is important, embedding tailored interventions into locally appropriate strategies plays a crucial role for implementation and effectiveness. The localisation of broader strategies needs to include women in their development and ongoing evaluation. In the Khyber Pakhtunkhwa province, 50,000 beneficiary committees comprising local women at the district level regularly provide feedback into the government’s G2P payment system. The feedback from these committees led to a biometric system linked to the national ID card that has enabled the government to identify women who weren’t receiving their payments, or if payments were fraudulently obtained by others.

In Cambodia and the Philippines, governments have implemented new and innovative solutions to support remittance payments through public-private-partnerships and policies that enable access to non-traditional banks. In Cambodia, Wing Money has specialised programs for women, who are overwhelmingly the beneficiaries of remittance payments. Creating an enabling environment for a business such as Wing Money to develop and thrive with these low-cost solutions is an example of a positive market intervention. In the Philippines, adjusting banking policies to enable access to non-traditional banking enables women, especially those with micro-enterprises in rural areas, to access digital products.

While facilitating participation in the market can yield benefits for women, so can regulating in a way that drives systemic change. For example, in Lao People’s Democratic Republic and India, different mechanisms for targets are used to improve access to digital financial products. In Lao People’s Democratic Republic, the central government through its national strategy, introduced a target of a 9 per cent increase in women’s access to financial services by 2025. In India, their targets are set within the bureaucracy to incentivise policy makers to implement the Digital India strategy and promotions and job security are rewarded based on performance.

These examples of innovative policy solutions are only foundational. The options for governments and policy makers at the nexus of market facilitation, participation and regulation demands creativity and agility. Underpinning this is the need for a baseline of country and regional level diagnostics to capture the diverse needs of women – those who are set to benefit the most of from harnessing the future of digital financial inclusion.

*Tengfei Wang, Economic Affairs Officer

This article is the second of a two-part series based on the findings of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Policy Guidebook: Harnessing Digital Technology for Financial Inclusion in Asia and the Pacific, and is jointly prepared by ESCAP and the Griffith Asia Institute.source: UNESCAP

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Empowering women-led small businesses in Nepal to go digital

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People walk down a street of shops in Kathmandu, Nepal. (file) photo World Bank/Peter Kapuscinski

Authors: Louise Anne Sophie Lavaud and Mitch Hsieh*
Throughout the years, Laxmi Shrestha and her husband saw the opportunities that opening an online shop could bring to her family business.

“Looking at the trend of TikTok and other sites, we thought selling online could help us but we weren’t technically sound,” said Laxmi, the owner ofLaxmi Hastakala Store, in Banepa, Nepal, and part of a family of artisans.

As she learned about selling online, she picked up on how to market her shop digitally and, according to Laxmi: “It has surely given our business a push we always wanted. Recently we started selling our products online and we also receive payments online.”

Laxmi Hastakala Store is among the 1,800 women-led micro, small and medium enterprises (MSMEs) in Nepal being trained on digital and financial literacy by Sparrow Pay – one of the winners of the Women Fintech MSME Innovation Fund launched in 2019 by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Capital Development Fund (UNCDF).

Sparrow Pay has created a local digital marketplace where women-led MSMEs can offer products and services to its existing 800,000+ digital payment service users. Additionally, Sparrow Pay is supporting these women entrepreneurs in adopting digital payments and creating a payment history to support access to additional financial services.

MSMEs are a vital source of employment and a significant contributor to a country’s GDP. However, more than 45 per cent of MSMEs in Asia and the Pacific are constrained from accessing finance and other support for their businesses. Socio-cultural norms mean women-led enterprises have to overcome gender-specific barriers to access institutional credit and other financial services.

ESCAP and UNCDF aim to encourage easy access to digital finance for MSMEs in Asia and the Pacific, break the financial barriers surrounding women-led enterprises and support entrepreneur-centric growth and inclusiveness throughout the region. Initiatives by the 10 winning fintech companies are currently supporting more than 9,000 women-led MSMEs in Bangladesh, Cambodia, Fiji, Myanmar, Nepal, Samoa and Viet Nam.

Just like Laxmi, these women business owners plan on successfully growing their companies in the digital area.

The Women Fintech MSME Innovation Fund is part of a regional programme “Catalyzing Women’s Entrepreneurship: Creating a Gender-Responsive Entrepreneurial Ecosystem,” which seeks to support the growth of women entrepreneurs in Asia and the Pacific by enabling a policy environment for such business owners, providing them with access to finance and expanding the use of ICT for entrepreneurship.

*Mitch Hsieh Chief, Communications and Knowledge Management Section

UNESCAP

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Is It Possible to Lift Sanctions Against Russia? — No

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Every conflict sooner or later ends in peace. Such is the conventional wisdom that can often be heard from those who, amid the current situation of the sanctions tsunami and confrontation with the West, are trying to find hope for a return to “normality”. The logic of such wisdom is simple. At some point, the parties will cease fire and sit down at the negotiating table. The end of hostilities will lead to a gradual reduction in sanctions pressure on Russia, and our businesses will be able to return to work with Western partners.

We have to disappoint those who believe in such a prospect. Sanctions against Russia, for the most part, will not be lifted even in the event of a ceasefire in Ukraine and a peace agreement. There will be no return to “pre-February normality”. Instead of remembering a lost past, we will have to focus on creating a new future in which Western sanctions remain a constant variable.

Why is the lifting of Western sanctions on Russia extremely unlikely? There are several reasons.

The first reason is the complexity of the conflict between Ukraine and Russia. It has every chance of being prolonged for a long time. There may be pauses in active hostilities. The parties may conclude temporary truces. However, such truces are unlikely to remove the political contradictions that gave rise to the conflict. Currently, there are no parameters for a political compromise that would suit all parties. Even if an agreement between Moscow and Kiev is reached, its sustainability and feasibility are not guaranteed. The experience of Minsk-2 shows that the mere appearance of agreements does not automatically resolve political problems and does not lead to the lifting or easing of sanctions. The Ukrainian problem can smoulder and flare up again for decades, partly because both sides are limited in the possibilities of a decisive military victory and complete surrender of the enemy. Relations between Russia and Ukraine are at risk of entering the ranks of long-term conflicts, similar to relations between India and Pakistan, or North and South Korea. The complexity and longevity of the conflict guarantee Western sanctions for the long term.

The second reason is the stable nature of the contradictions between Russia and the West. The conflict in Ukraine is part of a larger Euro-Atlantic security palette. An unstable system of asymmetric bipolarity has formed in Europe, in which the security of Russia and NATO can hardly be indivisible. Russia has no way to crush the West without doing unacceptable damage to itself. However, the West, despite its colossal superiority, cannot crush Russia without incurring unacceptable losses. Containing Russia is the best strategy for the West. Ukraine is doomed to remain one of the areas of containment. For Russia, the strategy of asymmetric balancing of Western superiority remains optimal. It is possible that part of such a strategy will be a course towards a radical territorial redistribution of Ukraine, tearing away from it the eastern and southern parts. But in itself, such a redistribution will not remove the problems of Western sanctions.

The third reason is the institutional features of the sanctions policy of the initiating countries. Experience shows that sanctions are relatively easy to impose but very difficult to lift. Thus, with regard to Iran, a whole “web of laws” has formed in the United States, which significantly limits the administration’s ability to lift sanctions. Even if the sanctions are not enshrined in law, their cancellation or mitigation still requires political capital, which not every politician is ready to spend. In the US, such steps will cause criticism or even opposition in Congress, and in the EU – disagreements among member states. Of course, individual restrictions are lifted or relaxed in the interests of the initiating countries themselves. The experience of sanctions pressure on the Republic of Belarus shows the existence of the “sanction remissions” when restrictions are eased. However, the legal mechanisms of sanctions themselves remain and can be used at any time.

The fourth reason is the quick reversibility of the sanctions. Often, their abolition is accompanied by political demands, the implementation of which is a complicated process. For example, the Iranian nuclear deal required several years of complex negotiations and significant technological decisions. However, the return of sanctions can be carried out overnight. There is an asymmetry in the fulfilment of obligations. Fulfilling the requirements of the initiators requires significant changes, while the return of sanctions requires only a political decision. Rapid reversibility breeds distrust among target countries. It is easier for them to continue to live under sanctions than to make extensive concessions and risk receiving new sanctions. Historical experience shows that the initiators of sanctions tend to play the game of “finishing” the opponent. After the concessions come new, more radical political demands and the threat of new sanctions. The “Pompeo 13 Points” – a list of US demands on Iran beyond the limits of fulfilling the terms of the nuclear deal – have already become a textbook example. The Iranian lesson, apparently, was well learned in Moscow. Iran itself is actively working to achieve its goals in the field of nuclear arms. Ultimately, this shows the ineffectiveness of sanctions in terms of influencing the political course of the target country. But questionable effectiveness does not negate the fact that sanctions continue to be applied and enforced.

The fifth reason is the ability to adapt. Without a doubt, Russia will suffer enormous damage from the restrictive measures which have been introduced. However, the possibility of it adapting to the sanctions regime remains high. Russia has the chance, first, to partially make up for the shortfall in supplies from abroad with the help of its own industry, although this will require political will and the concentration of resources. Second, it has access to non-Western markets, as well as alternative sources of goods, services and technology. The key conditions for solving this problem will be the creation of reliable channels for financial transactions that are not related to the US dollar, the Euro, or Western financial institutions. Such a task is feasible both technically and politically, although it will also require time and political will. Iran’s experience shows that sanctions have seriously hit the country’s development opportunities. However, they did not interfere with the development of agriculture, industry and technology. The modernisation of the Soviet Union also proceeded under severe Western sanctions. The ability to adapt reduces the motivation for concessions to the demands of the initiating countries, especially given the risk of playing for “finishing”.

These reasons make the prospect of lifting or significantly reducing sanctions pressure on Russia extremely unlikely. The US, EU and other initiators have already introduced the most severe restrictions on Moscow. But the upward wave of sanctions escalation has not yet been exhausted. In addition, the achievement of the ceiling of the applied measures is unlikely to mean the abolition of those already introduced. However, the sanctions also do not mean the “end of history” of the Russian economy. It found itself in new conditions that will require adaptation and the search for new opportunities for development and growth.

From our partner RIAC

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