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Lessons for Pakistan from Sri Lanka

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Sri Lanka defaulted on its external debt of $51bn on April 12, and the country is now grappling with the economic consequences of insolvency. Access to foreign capital markets to raise much-needed loans to finance imports has been cut-off. The country’s finance ministry has asked international creditors, including foreign governments, to capitalize any interest payments or receive repayments in Sri Lankan rupees. Meanwhile widespread protests continue across the country against power blackouts and acute shortages of food, medicine and fuel.

Pakistan does not presently face the grim meltdown seen in Sri Lanka, but policymakers would be unwise to ignore the lessons to be learnt from the island economy.  As the international institutional investor, Mattias Matterson of Tundra Funds noted, “Sri Lanka tried to defy economic realities, maintain a fixed exchange rate, refuse IMF support and instead chose capital controls. The result was pent up demand for US dollars, scarcity of essential goods, which caused havoc in the society and the local currency to plummet.” He observed that Pakistan has so far handled the situation better than Sri Lanka.

However, the delinking of the petroleum prices from the international market rates on February 28 this year harmed the stabilization process that the previous Pakistani government had been following until then. The PKR10 per litre cut in petrol prices and announcement of other subsidies, led to the Extended Fund Facility (EFF) program agreed upon with the International Monetary Fund (IMF), being put on hold. The Oil and Gas Regulatory Authority (OGRA) has proposed to reverse the cuts and raise petroleum product prices by PKR21 to PKR50 per litre, but Prime Minister Shehbaz Sharif rejected the proposal on Friday. He appears wary of the “mountain of inflation” that could as a result be unleashed on the public, which may also erode the political capital of the newly formed government. Ironically, while in opposition, senior members of his party, the Pakistan Muslim League (PMLN), criticized the fuel price cuts as being fiscally irresponsible.

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Irrespective of OGRA’s recommendation being politically unpalatable, the government is likely to eventually comply with them in order to impose the fiscal discipline required for renewing the EFF program. With foreign exchange reserves depleting and more than USD50bn of external financing required over the next couple of years, support from IMF and bilateral loans from friendly countries, as well as access to international debt markets is vitally important.

Although the Pakistani Rupee has appreciated in the last couple of weeks from a low of almost 189 against the US dollar back to around 180, the perception of default risk in the international money markets persists. Credit Default Swap (CDS) premium for Pakistan – an instrument that is indicative of the risk of a country defaulting – that had risen from around 4 percent to 10 percent with the submission of a no-confidence motion, further increased to 12 percent soon after the formation of the new government.

With CDS at an all-time high, the implied rating by the international bond markets for Pakistan is at CC/Ca or two notches below the official rating of B-/B3, and only two notches above D default. Most institutional investors in the international money markets, including many hedge funds, are mandated not to invest in “hooks”, that is, countries with ratings that are CCC or lower. As things stand, Pakistan is effectively shut out of the international debt markets and in dire need of the support of allied countries.

The new government would be well advised to avoid raising public servant salaries and pensions, and providing other sops to the public that are not only unsustainable, but also likely to worsen public finances.

Pakistan must complete the EFF program in order to access international credit markets. The new government may want to seek better terms in the seventh review with the IMF, but it should avoid trying to depart from the broad outlines already agreed upon. Since timing is of essence, any extended period of negotiations would worsen Pakistan’s external position.

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The Fund has indicated its support for Pakistan in pursuing policies that provide inclusive and sustainable growth, and are consistent with the EFF program. These include fuel price increases as proposed by OGRA, but so far rejected by the PM; power tariffs hike of 5 rupees per unit as agreed with IMF in the last review; no tax cuts; avoidance of imposition of import duties to control imports; and a firm commitment to continued SBP autonomy and a policy of inflation targeting. The new government would be well advised to avoid raising public servant salaries and pensions, and providing other sops to the public that are not only unsustainable, but also likely to worsen public finances.

The measures that need to be taken to move ahead with the EFF program may be politically difficult, but are necessary for Pakistan to avert the dire consequences of defaulting on external debt. There must be consensus across the Pakistani political spectrum to reject short-term political expediency in favour of policies that are based on robust economic fundamentals.

Via ArabNews

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Analysis

Understanding the Israel-Hamas Conflict: A Closer Look at the ICJ’s Recent Ruling

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In recent developments concerning the ongoing conflict between Israel and Hamas, the International Court of Justice (ICJ) has issued a significant order directing Israel to cease its offensive in Rafah. This ruling comes in response to South Africa’s request to halt the fighting in Gaza, highlighting the dire conditions in the southern city and deeming them as ‘disastrous’. Let’s delve deeper into the complexities of this conflict and the implications of the ICJ’s decision.

The Israel-Hamas Conflict: A Historical Perspective

The conflict between Israel and Hamas is deeply rooted in historical, political, and territorial disputes. Stemming from conflicting claims to the land of Israel, the struggle for control over Gaza and the West Bank has led to decades of violence, bloodshed, and humanitarian crises. The ongoing clashes between Israeli forces and Hamas militants have resulted in a cycle of retaliation, airstrikes, rocket attacks, and civilian casualties, exacerbating tensions in the region.

The Role of the International Court of Justice

As the principal judicial organ of the United Nations, the ICJ plays a crucial role in resolving disputes between states and upholding international law. In the case of the Israel-Hamas conflict, the ICJ’s intervention underscores the gravity of the situation and the need for a peaceful resolution. By ordering Israel to halt its offensive in Rafah, the court aims to mitigate the humanitarian crisis and prevent further escalation of violence in the region.

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South Africa’s Appeal and the ICJ’s Response

South Africa’s appeal to the ICJ to intervene in the conflict reflects growing international concern over the situation in Gaza. The ICJ’s ruling in favor of South Africa’s request highlights the court’s commitment to upholding human rights, protecting civilians, and promoting peace and stability in conflict zones. By deeming the conditions in Rafah as ‘disastrous’, the ICJ underscores the urgent need for humanitarian assistance and a cessation of hostilities.

Implications of the ICJ’s Decision

The ICJ’s decision to order Israel to halt its offensive in Rafah carries significant implications for the Israel-Hamas conflict and the broader Middle East region. By calling for an immediate cessation of hostilities, the ICJ seeks to create space for diplomatic negotiations, humanitarian aid delivery, and efforts to address the root causes of the conflict. This ruling underscores the importance of international law, human rights, and multilateral cooperation in resolving complex conflicts and promoting peace.

Moving Forward: A Call for Dialogue and Diplomacy

In light of the ICJ’s ruling and the ongoing violence in Gaza, it is imperative for all parties involved to prioritize dialogue, diplomacy, and peaceful solutions. The Israel-Hamas conflict has taken a heavy toll on civilians, infrastructure, and prospects for peace in the region. By heeding the ICJ’s call to halt hostilities and engage in constructive dialogue, Israel and Hamas can pave the way for a sustainable ceasefire, humanitarian assistance, and long-term peacebuilding efforts.

Conclusion

The ICJ’s recent ruling ordering Israel to halt its offensive in Rafah marks a significant development in the Israel-Hamas conflict. By highlighting the dire conditions in Gaza and calling for an immediate cessation of hostilities, the ICJ underscores the urgency of addressing the humanitarian crisis and working towards a peaceful resolution. As the international community continues to monitor the situation in Gaza, it is essential for all stakeholders to uphold the principles of international law, human rights, and diplomacy in seeking an end to the violence and a path towards lasting peace in the region.

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Analysis

The Uncertain Future of Rishi Sunak in the Summer UK Election Gamble

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In the realm of British politics, the upcoming summer election poses a significant challenge for Rishi Sunak, the current Chancellor of the Exchequer. Despite the formidable reputation of the Conservative Party, internal divisions threaten to undermine their electoral prospects. As Sunak strives to navigate these turbulent political waters, the outcome of the six-week campaign remains uncertain. This article delves into the complexities of the situation, examining the factors at play and the potential implications for Sunak and the Conservative Party.

The Conservative Party’s Internal Struggles

The Conservative Party, a longstanding powerhouse in British politics, is currently grappling with internal discord that could have far-reaching consequences. Factionalism and differing ideological perspectives have created a rift within the party, complicating Sunak’s efforts to present a united front to voters. The challenges of managing these internal tensions while projecting a cohesive image to the electorate pose a formidable task for Sunak and his team.

Sunak’s Political Strategy

As the face of the Conservative Party in the upcoming election, Rishi Sunak faces the daunting task of steering the party through a period of uncertainty and division. Despite his efforts to reshape the political landscape and garner support for the party’s agenda, Sunak has encountered resistance and scepticism from both within and outside the party. His ability to effectively communicate his vision and policies to the electorate will be crucial in determining the election outcome.

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The Changing Political Climate in the UK

The UK’s political climate is in flux, with shifting public opinion and evolving priorities shaping the electoral landscape. Sunak’s challenge lies in adapting to these changing dynamics and effectively addressing the concerns and aspirations of the electorate. The ability to resonate with voters and offer compelling solutions to pressing issues will be key to Sunak’s success in the summer election.

Sunak’s Leadership and Vision

As a prominent figure in British politics, Rishi Sunak’s leadership style and vision for the country will be under scrutiny during the election campaign. His ability to inspire confidence, articulate a clear vision for the future, and demonstrate effective governance will be critical in winning over voters. Sunak’s capacity to navigate the complexities of the political landscape and offer credible solutions to the challenges facing the UK will be closely observed by both supporters and critics.

The Path Ahead for Sunak and the Conservative Party

In the lead-up to the summer election, Rishi Sunak faces a formidable challenge in steering the Conservative Party to victory amidst internal discord and a shifting political climate. The outcome of the election remains uncertain, with Sunak’s ability to unite the party, connect with voters, and offer a compelling vision for the future playing a decisive role. As the campaign unfolds, the political fortunes of Sunak and the Conservative Party will be closely watched, with the potential for unexpected twists and turns shaping the outcome.

In conclusion, the summer UK election gamble presents a significant test for Rishi Sunak and the Conservative Party, with internal divisions and a changing political climate adding complexity to the electoral landscape. Sunak’s leadership, vision, and ability to navigate these challenges will be crucial in determining the outcome of the election. As the campaign progresses, the political fortunes of Sunak and the Conservative Party hang in the balance, with the potential for both triumph and defeat on the horizon.

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Analysis

Mainland Chinese Forces Launch ‘Blockade’ Drills Around Taiwan: A Show of Force or a Warning?

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Introduction

In a move that has sent ripples across the Taiwan Strait, mainland Chinese forces have begun conducting “blockade” drills around Taiwan, just three days after the inauguration of William Lai Ching-te as the new Taiwanese leader. The drills, which involve the PLA army, navy, air force, and rocket forces, are aimed at testing joint combat capabilities and have been seen as a show of force by Beijing. This development comes on the heels of Lai’s first speech as Taiwanese leader, which was met with fury in Beijing. In this article, we will delve into the details of the drills, the context in which they are taking place, and what they might mean for the future of Taiwan-China relations.

The Drills: A Display of Military Might

The drills, which are scheduled to last for two days, are being conducted in the Taiwan Strait and involve a range of military assets, including warships, fighter jets, and missile systems. The exercises are designed to test the PLA’s ability to blockade Taiwan, a move that would effectively cut off the island from the rest of the world. The drills are being seen as a demonstration of the PLA’s military might and its ability to project power in the region.

The Context: Lai’s Inauguration and Beijing’s Fury

The drills come just three days after William Lai Ching-te was inaugurated as the new leader of Taiwan. Lai, who is known for his pro-independence stance, used his inaugural speech to reiterate his commitment to Taiwan’s sovereignty and democracy. The speech was met with fury in Beijing, which sees Taiwan as a renegade province that must eventually be reunited with the mainland. Lai’s speech was seen as a provocation by Beijing, which has long been wary of Taiwan’s moves towards independence.

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Beijing’s Response: A Warning or a Threat?

The drills can be seen as a response to Lai’s speech and a warning to Taiwan not to pursue its independence agenda. Beijing has long used military exercises as a way to signal its displeasure with Taiwan’s actions, and the current drills are no exception. However, the scale and scope of the exercises suggest that Beijing may be going beyond a simple warning and is instead making a more explicit threat.

Implications for Taiwan-China Relations

The drills have significant implications for Taiwan-China relations, which have been tense for decades. The exercises are a reminder of the military imbalance between Taiwan and China, with the PLA boasting a significantly larger and better-equipped military. The drills also underscore the risks of a military conflict between Taiwan and China, which would have far-reaching consequences for the region and the world.

Regional Reactions

The drills have drawn reactions from across the region, with many countries expressing concern about the escalation of tensions between Taiwan and China. The United States, which has a long-standing commitment to Taiwan’s defence, has been particularly vocal in its criticism of the drills. Japan and South Korea, both of which have their territorial disputes with China, have also expressed concern about the exercises.

Conclusion

The “blockade” drills conducted by mainland Chinese forces around Taiwan are a significant development in the ongoing tensions between Taiwan and China. While the drills can be seen as a show of force by Beijing, they also underscore the risks of a military conflict between the two sides. As the situation continues to evolve, it remains to be seen how Taiwan and China will navigate their complex and often fraught relationship.

Timeline of Events

  • May 20, 2024: William Lai Ching-te is inaugurated as the new leader of Taiwan.
  • May 20, 2024: Lai delivers his inaugural speech, reiterating his commitment to Taiwan’s sovereignty and democracy.
  • May 23, 2024: Mainland Chinese forces begin conducting “blockade” drills around Taiwan.
  • May 23, 2024: The drills draw reactions from across the region, with many countries expressing concern about the escalation of tensions between Taiwan and China.
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Key Players

  • William Lai Ching-te: The new leader of Taiwan, known for his pro-independence stance.
  • The People’s Liberation Army (PLA): The military forces of mainland China, which are conducting the “blockade” drills around Taiwan.
  • The United States: A long-standing ally of Taiwan, which has expressed concern about the escalation of tensions between Taiwan and China.
  • Japan and South Korea: Countries in the region that have their own territorial disputes with China and have expressed concern about the exercises.

Key Terms

  • Blockade: A military tactic in which a country’s ports or borders are closed off to prevent the movement of goods or people.
  • Joint combat capabilities: The ability of different branches of the military to work together seamlessly in combat situations.
  • PLA army, navy, air force, and rocket forces: The different branches of the People’s Liberation Army, which are participating in the “blockade” drills around Taiwan.

Sources

  • “Mainland Chinese forces start ‘blockade’ drills around Taiwan 3 days after Lai speech.” South China Morning Post, May 23, 2024.
  • “Taiwan’s new leader William Lai vows to defend democracy and sovereignty.” BBC News, May 20, 2024.
  • “China launches military drills around Taiwan in response to new leader’s inauguration.” The Guardian, May 23, 2024.
  • “US expresses concern over China’s military drills near Taiwan.” Reuters, May 23, 2024.
  • “Japan and South Korea express concern over China’s military drills near Taiwan.” Nikkei Asia, May 23, 2024.
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