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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

Analysis

US Trade Representative Katherine Tai Criticizes China for Filing WTO Complaint Regarding Electric Vehicle (EV) Subsidies

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US Trade Representative Katherine Tai has denounced China for filing a complaint with the World Trade Organization (WTO) over electric vehicle (EV) subsidies. Tai has accused China of using “unfair, non-market policies and practices to undermine fair competition and pursue the dominance of the PRC’s manufacturers.” Beijing has objected to a US law that it says provides “discriminatory” subsidies for EVs.

Katherine Tai speaks out against China's WTO complaint on EV subsidies

Tai’s remarks come as tensions between the US and China continue to escalate, with both countries accusing each other of unfair trade practices. The US has previously accused China of stealing intellectual property and engaging in forced technology transfers, while China has accused the US of unfairly targeting its companies with sanctions and export controls.

The dispute over EV subsidies is just the latest in a series of trade disputes between the two countries, and it remains to be seen how it will be resolved. However, Tai’s strong words suggest that the US is prepared to take a tough stance against China’s trade practices, and that the dispute is unlikely to be resolved quickly or easily.

US Trade Representative Katherine Tai’s Statement

Katherine Tai condemns China's WTO complaint on EV subsidies

Denouncement of China’s WTO Complaint

US Trade Representative Katherine Tai has denounced China for filing a complaint with the World Trade Organization (WTO) over what it calls “discriminatory” subsidies for electric vehicles in the United States. Tai stated that “China continues to use unfair, non-market policies and practices to undermine fair competition and pursue the dominance of the PRC’s manufacturers”.

Tai’s statement comes after China filed a complaint with the WTO on March 22, 2024, alleging that a US law provides “discriminatory” subsidies for electric vehicles. The law in question, the Electric Vehicle Tax Credit, provides a tax credit of up to $7,500 for the purchase of a new electric vehicle. China argues that this tax credit is only available to US-made electric vehicles, and therefore discriminates against foreign-made electric vehicles, including those made in China.

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Criticism of China’s Non-Market Policies

Tai’s statement also criticized China’s non-market policies, which she says are designed to give Chinese companies an unfair advantage in the global marketplace. These policies include subsidies for domestic companies, restrictions on foreign investment, and intellectual property theft.

Tai’s denouncement of China’s WTO complaint is the latest in a series of moves by the Biden administration to confront China on trade issues. The administration has also taken steps to address China’s human rights abuses, including sanctions on Chinese officials and companies involved in the repression of Uyghur Muslims in Xinjiang province.

Overall, Tai’s statement reflects the US government’s commitment to fair competition and a level playing field for all companies, regardless of their country of origin.

China’s Objections to US EV Subsidies

US Trade Rep denounces China's WTO complaint over EV subsidies

Allegations of Discriminatory US Law

China has accused the US of providing “discriminatory” subsidies for electric vehicles (EVs) through a tax credit system that only applies to domestically produced vehicles. The US law in question, known as the Electric Vehicle Tax Credit, provides a tax credit of up to $7,500 for the purchase of a new EV. However, the credit is only available for EVs produced by manufacturers that have not yet sold 200,000 qualifying vehicles in the US. This has led to accusations that the law unfairly benefits US automakers, while discriminating against foreign manufacturers such as those from China.

China’s WTO Complaint Filing

China has filed a complaint with the World Trade Organization (WTO) over the US law, arguing that it violates WTO rules by providing “discriminatory subsidies” to US automakers. In response, US Trade Representative Katherine Tai has denounced China’s complaint, stating that “China continues to use unfair, non-market policies and practices to undermine fair competition and pursue the dominance of the PRC’s manufacturers.” Tai has also accused China of “continuing to use unfair trade practices to gain an unfair advantage in the global marketplace.”

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The US has countered China’s complaint by arguing that the Electric Vehicle Tax Credit is not discriminatory, as it applies equally to all automakers that meet the eligibility criteria. The US has also argued that the tax credit is intended to promote the adoption of EVs in the US, and is therefore consistent with WTO rules that allow for certain types of subsidies to promote environmental protection.

Overall, the dispute between the US and China over EV subsidies highlights the ongoing tensions between the two countries over trade policy, and the challenges of balancing domestic priorities with international trade obligations.

Implications for US-China Trade Relations

US Trade Rep denounces China over WTO complaint on EV subsidies

The recent filing of a WTO complaint by China over US subsidies for electric vehicles has the potential to further strain the already tense trade relations between the two nations. The US Trade Representative, Katherine Tai, has denounced China’s actions, stating that they are using “unfair, non-market policies and practices to undermine fair competition and pursue the dominance of the PRC’s manufacturers”.

This latest development is not the first time that the US and China have been at odds over trade policies. The two nations have been engaged in a trade war since 2018, with each imposing tariffs on the other’s goods. The dispute has had far-reaching effects, with both nations suffering economic losses as a result.

The filing of the WTO complaint by China is likely to escalate tensions even further. The complaint alleges that a US law providing subsidies for electric vehicles is discriminatory, and violates WTO rules. The US has denied these allegations, and has stated that the subsidies are intended to promote the use of electric vehicles, and are not discriminatory in any way.

The outcome of this dispute remains to be seen, but it is clear that it will have significant implications for US-China trade relations. If the WTO rules in China’s favor, it could lead to further trade restrictions and tariffs being imposed by the US. On the other hand, if the US is successful in defending its subsidies, it could embolden the nation to continue its current trade policies, further straining relations with China.

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Analysis

The US Faces a Market Shock: An Analysis of the Soaring Debt and Its Impact on the Economy

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Introduction

The US economy is facing a significant challenge as the national debt continues to soar, reaching unprecedented levels. The independent Congressional Budget Office (CBO) has warned that the fiscal burden is on an ‘unprecedented’ path, echoing concerns raised by the UK’s former Chancellor, Liz Truss, who faced a similar market shock due to her government’s debt management strategies. This article aims to provide a well-researched and analytical perspective on the current state of the US economy, comparing it with other countries, and discussing potential debt management strategies.

1: The State of the US Economy
The US economy has been experiencing a period of significant growth, with the GDP expanding at an annual rate of 2.6% in the fourth quarter of 2023. However, this growth has been accompanied by a surge in the national debt, which has reached $31.4 trillion, or 126% of GDP. This is the highest debt-to-GDP ratio since the end of World War II. The CBO has projected that the debt will continue to grow, reaching $36.5 trillion by 2033.

2: Comparison with Other Countries
The US is not alone in facing a debt crisis. Many other countries, including the UK, Japan, and Italy, are also grappling with high levels of debt. However, the pace at which the US debt is growing is particularly concerning. As of 2023, the US has the highest total public debt of any country in the world. This is partly due to the large stimulus packages implemented during the COVID-19 pandemic, which have contributed to a significant increase in government spending.

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3: Impact on the US Economy
The soaring debt has several potential negative impacts on the US economy. Firstly, it could lead to higher interest rates, as investors demand higher returns to compensate for the increased risk of lending to the US government. This could slow down economic growth and potentially trigger a recession. Secondly, the debt could lead to a loss of confidence in the US dollar, as investors may perceive it as a less safe investment compared to other currencies. Lastly, the debt could lead to a decline in the US’s credit rating, making it more expensive for the government to borrow money.

4: Debt Management Strategies
To mitigate the negative impacts of the soaring debt, the US government could implement several debt management strategies. These include:

  1. Fiscal consolidation: Reducing government spending and increasing taxes to reduce the deficit and lower the debt-to-GDP ratio.
  2. Structural reforms: Implementing reforms to increase economic growth and reduce the burden of the debt on future generations.
  3. Debt restructuring: Negotiating with creditors to restructure the debt, potentially reducing the interest rate or extending the repayment period.
  4. Inflation targeting: Managing inflation to ensure that the real value of the debt does not increase too rapidly.

Conclusion
The US economy is facing a significant challenge due to the soaring national debt. This debt can potentially impact the economy negatively, and the government must implement effective debt management strategies to mitigate these risks. By comparing the US situation with other countries and analyzing the potential impacts of the debt, this article provides a comprehensive perspective on the current state of the US economy.

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Analysis

Unraveling the Political Turmoil: The Call for Change in Israel – Analysis of Netanyahu’s Leadership Amidst International Pressure”

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Introduction:

In recent times, the political landscape in Israel has been tumultuous, with growing international pressure on Prime Minister Binyamin Netanyahu to step down. This article delves into the complexities surrounding this situation, examining the implications of America’s stance, the criticisms faced by Netanyahu, and the potential risks and opportunities associated with his exit.

America’s Push for Change:

The rift between Israel and America has widened, particularly concerning Israel’s handling of civilian provisions in Gaza. Key figures like Chuck Schumer and Joe Biden have openly criticized Netanyahu, calling for early elections. Explore the significance of America’s influence on Israeli politics and the implications of their support for a leadership change.

Netanyahu’s Leadership Under Scrutiny:

Analyze the accusations leveled against Binyamin Netanyahu, focusing on his alleged tolerance of civilian casualties in Gaza and its impact on global perceptions of Israel. Examine how these criticisms have affected his standing both domestically and internationally.

The Dangers of Transition:

Discuss the potential risks involved in Netanyahu’s departure, considering factors such as political instability, security concerns, and the implications for Israel’s foreign relations. Evaluate the challenges that may arise during a leadership transition and how they could impact the country’s future.

Opportunities for Change:

Highlight the opportunities that a change in leadership could bring to Israel, including potential shifts in policies, diplomatic relations, and public perception. Explore how a new leader could navigate the current challenges facing the nation and work towards rebuilding international support.

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Conclusion:

In conclusion, the call for Binyamin Netanyahu to step down reflects a critical juncture in Israeli politics, with far-reaching implications for both domestic governance and international relations. As the pressure mounts for change, it remains to be seen how Israel will navigate this period of uncertainty and what lies ahead for its leadership and people.

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