Developing countries in general, and especially those which are net importers of oil are in a real fix as to how to manage macroeconomic challenges like high inflation, balance of payments concerns, and debt sustainability, on one hand, and on the other make needed development expenditures, especially in the health sector, along with providing enough stimulus, and subsidy to support people in the lower income echelons, which are many and most likely quite rapidly rising in numbers over the pandemic.- Advertisement –
War in Ukraine has made all this all the more difficult, and as Jayati Ghosh rightly pointed, requires a significant amount of support from both rich, advanced countries, and multilateral institutions. Yet this support in any significant way, has remained mostly eluded over the many months during the pandemic. On top of that, oil prices which took a nose-dive and settled to around $20 a barrel in around the later part of April 2020, saw a fast-paced rise in the later part of the same year, due to demand improvement, but sadly also significantly at the back of artificially reduced supply.
Resultantly, oil prices had already risen to above $90 a barrel before the war began, and have now seen reaching around $130 a barrel. Imagine the precarious situation in which developing countries find themselves. For how long they can manage pressures on fiscal balance on account of providing subsidies, and on the balance of payments on account of higher import costs?
Pakistan imported around 80-90 percent of its total wheat imports from Russia and Ukraine in 2020, and therefore a war has meant that the country is likely to face longer timelines, and higher prices with regard to wheat that needs to be imported.
And cutting development expenditures would mean a negative impact on growth recovery, and overall fall into stagflationary consequences. The war will likely exacerbate these pressures on macroeconomic accounts, with consequences of such rise in commodity prices already producing ripples in the political domains of developing countries in general; a repeat of similar consequences seen as the commodity prices increased as an outcome of the Global Financial Crisis of late 2000s.
Criticising this rather self-centred approach by OPEC+ group of countries, a recent Financial Times (FT) quoted the head of International Energy Agency (IEA) in an article ‘IEA ready to release more oil to ease soaring energy prices, says chief’ recently as follows: ‘The head of the International Energy Agency said the group’s members were ready to release more oil from emergency stockpiles to ease soaring energy prices, as he criticised Saudi Arabia and the United Arab Emirates for refusing to pump more crude.
Fatih Birol said the co-ordinated release last week by the US and other big energy-consuming nations of 60mn barrels was an “initial response” and that the IEA was ready to do “everything” to reduce the volatility in energy markets driven by Russia’s invasion of Ukraine.’
A global commodity supply shock had already sky-rocketed food prices, and the war will only add to it, for instance in terms of essential natured commodities like wheat and fertilizer. The same article by Jayati Ghosh pointed out in this regard ‘Before the war, Ukraine was the world’s fifth-largest wheat exporter, and also a major exporter of barley, corn, rapeseed, and sunflower oil.
The prices of these commodities in global trade have risen significantly, adding to recent increases in crop prices generally. …Crop production in developing countries could also be hit by fertilizer shortages. Russia, the world’s largest wheat exporter, is also a major fertilizer producer, and disruptions to these exports will push global food prices even higher.’
Highlighting the rising level of commodity prices, a March 3 FT published article ‘Commodity prices soar to highest level since 2008 over Russia supply fear’ indicated ‘The S&P GSCI index, a broad barometer for the price of global raw materials, has jumped 16 per cent this week, leaving it on track for the sharpest rise on records dating back to 1970, according to Refinitiv data.
It is now at its highest level since 2008. US oil prices also hit the highest level since 2008 on Thursday. Wheat futures in Chicago shot above $12 a bushel. Other commodities including aluminium and coal have also soared this week, in a move that will have profound effects on global businesses and consumers.’- Advertisement –
Similarly, another FT article ‘Food crisis looms as Ukrainian wheat shipments grind to halt’ pointed out with regard to rising food prices that ‘Russia and Ukraine supply almost a third of the world’s wheat exports and since the Russian assault on its neighbour, ports on the Black Sea have come to a virtual standstill.
As a result, wheat prices have soared to record highs, overtaking levels seen during the food crisis of 2007-08. …The surge in prices will fuel soaring food inflation – already at a seven-year high of 7.8 per cent in January – and the biggest impact will be on the food security of poorer grain importers, warned analysts and food aid organisations.
’ As per the same article, Pakistan imported around 80-90 percent of its total wheat imports from Russia and Ukraine in 2020, and therefore a war has meant that the country is likely to face longer timelines, and higher prices with regard to wheat that needs to be imported.
Courtesy : PT
The End of U.S. Dollar Dominance? Not So Fast
With the outbreak of the war in Ukraine, Western countries have imposed all-rounded sanctions on Russia. This, in turn, has had an impact on the global economic, trade, and financial systems, raising concerns in the market and academic circles about the adjustment of the global financial system. One of the main issues being debated is the status of the U.S. dollar.
Gita Gopinath, First Deputy Managing Director of the International Monetary Fund (IMF) warned that financial sanctions against Russia by the West could gradually weaken the U.S. dollar’s role in the world, leading to further fragmentation of the international monetary system. Analysts such as Goldman Sachs economist Cristina Tessari said the actions of the United States and its allies to freeze Russia’s central bank’s foreign exchange reserves have sparked fears that countries may begin to ditch the dollar due to concerns about the power that the United States could muster thanks to the dominance of the currency.
Kenneth Rogoff, a Harvard University economics professor, said in an interview with Bloomberg that the dominance of the dollar could end within 20 years. The reason is that the U.S. and its allies have launched sanctions due to the Russia-Ukraine war, restricting Russia’s access to the dollar-dominated global financial system. This “weaponization of the dollar” will instead stimulate the acceleration of alternative solutions. Rogoff believes that the U.S. blockade or freezing of the foreign exchange reserves of the Russian central bank is undoubtedly a historic development. The preeminence of financial sanctions on Russia by the U.S.-led Western world could accelerate changes in the international financial system to compete with the U.S. dollar. While this certainly would not happen overnight, what could have taken 50 years may now only take 20 years to realize, said Rogoff.
This narrative appears to be supported by data changes in the dollar’s position in global markets. According to the IMF’s most recent Currency Composition of Official Foreign Exchange Reserves (COFER) data, the American currency’s global dollar-denominated foreign exchange reserves were USD 7,087 billion in the fourth quarter of 2021, with a market share of 59.15% in the third quarter, which had dropped to 58.81%. The dollar’s share of the global reserve currency was as high as 72% around the turn of the century. According to SWIFT’s worldwide payment data, the payment share of the U.S. dollar has declined to 38.85% in 2022.
Is the outlook for the dollar’s prospect as pessimistic as these academics and institutions predict?
ANBOUND’s founder Chan Kung holds the exact opposite view. He believes that if the global situation continues with the current development trend, the U.S. dollar will stand out in the world. If there are no exchange rate swings caused by inflation or emergency, the U.S. dollar will be in a unique position when compared to the world’s major currencies.
This begs the question, why would the future of the U.S. currency be diametrically opposed to what many feels is happening while a significant game-changing geopolitical event, especially the conflict in Ukraine, is ongoing?
The difference lies mainly in the variety of opinions on the impact of the geopolitical event of the war in Ukraine. Professor Rogoff believes that the dollar has been reduced in terms of market scale, and new currency substitutes will emerge, thereby weakening the dollar’s status. However, Chan Kung believes that the alternatives to the U.S. dollar cannot succeed, because the market of these alternatives is weak, while their social economy is turbulent, and some are even still in war zones. For these reasons, the U.S. dollar will remain strong, even becoming the sole stable international currency in circulation. All in all, geopolitical factors play an important role in global currencies, and the dollar will be supported by it.
Chan Kung noted in his article Bracing the Era of Economic Shortage, that during a period of economic uncertainty, the Anglo-American axis countries might be safer havens in the face of geopolitical turbulence. He believes that once the geopolitical war in Europe is resolved, the maritime countries and economy of the American continent would re-emerge. From the perspective of the world’s spatial pattern, conflicts and competitions are most intense in the continental region of the world, that is, the continental region where Europe, Russia, the Middle East, Central Asia, China and India are located. It would be difficult to establish buffer zones between them, hence there are direct collisions with each other. Conflicts and competitions are unavoidable and often have existed since time immemorial. The deep mutual hostility has long been recorded in the chapters of history, and the only thing lacking is often a reason for the actual friction to take place in reality.
In contrast, the geographical location of the Anglo-American axis is in the middle of the ocean. The Atlantic and Pacific routes connect the American continent and a large number of island countries and regions of different sizes, and there are often oceanic divisions between them. Historically and relatively speaking lesser enmities exist between these parts of the world, and they are mutually dependent in trade relations. Therefore, while the continental regions are experiencing violent upheaval, the Anglo-American axis, the maritime states, and the Americas have more prominent opportunities for development and enjoy greater prosperity than before.
Ahsan Iqbal reviews the Ministry of Planning, Development and Special Initiatives Work on Projects
Federal Minister for Planning Development & Special Initiatives Professor Ahsan Iqbal directed to hold Turn Around Pakistan (TAP) Conference in order to address key challenges of the country and to find their solutions through short-term and mid-term measures. The decision was taken on Wednesday while chairing a first ministerial meeting which was attended by Deputy Chairman, Planning Commission, Secretary, Additional Secretary, Members and all Chiefs of the sections.
“Invite all the stakeholders from across the Pakistan in TAP Conference to find ways to kick off the economy by taking immediate remedial measures,” said newly-appointed minister for Planning Development & Special Initiatives while chairing a high level meeting. “The prime objective of the conference is to engage all the relevant stakeholders from across the country and take their input in order to put the country’s economy on track which unfortunately has been thrown in dire condition, said the minister.
While referring to the stakeholders Conference held in 2013 for preparation of vision 2025, the minister said that no policy can be successful without stakeholders ownership. There is rich talent in academia and private sector which must be harnessed. “There is a dire need to develop the economy on cluster based approach and Planning Commission must play its role as development think tank of the country,” he added.
The minister further said that every section chief should be a knowledge leader in his/her field, while stressing the government officials to take the decisions with confidence as (he) will stand behind them. “Your work is not just to clear PC-1s of the projects but to develop and shape development agenda of the country and to implement it,” said the minister. The minister further said that in 2013 Planning Commission was part of the Finance Division and nobody knew about it but it was granted autonomous status by PMLN government and it developed and implemented 2025 vision very successfully.
During 2013-18 more than Rs 700 billion were saved through rationalisation and scrutiny of development schemes by Planning Commission. Same spirit and professionalism should be revived. Prime Minister wants to see Pakistan Speed in every sector, he added. During the meeting, officials of various section shared their opinion which was appreciated by the minister and reiterated that it will be taken in TAP Conference to be held soon.
Pakistan’s trading partners
There have been questions raised on the extent to which foreign policy of Pakistan should reflect its trading relationships with individual countries, regions, and groups of countries which are members of international organizations? This requires determination of which are the major destinations of the country’s exports, and which are the major origins of our imports? What is the regional and country-wise pattern of our trade surpluses and deficits? And which are the major countries to which our exports have shown faster growth?
The analysis has been undertaken with trade data made available by the SBP in its economic data website. For earlier years, the relevant information has been obtained from the SBP publication, Handbook of Statistics on Pakistan Economy.
The top four export markets of Pakistan in 2020-21 are the EU countries combined, the USA, UK, and China. It is significant that the major destinations of Pakistan’s exports are mostly in Europe and North America. Pakistan has been granted GSP plus status by the European Union with some preferential tariff treatment. Pakistan also has a free trade agreement with China which has been implemented in steps from 2006 onwards.
The combined exports to the 27 EU countries aggregated to $6.4 billion in 2020-21. This represents a share of 25 percent of Pakistan’s total exports. The second largest value of exports is to the USA of $5.0 billion, equivalent to 20 percent of total exports of Pakistan.
The other two relatively large destinations of the country’s exports are the UK and China. Combined, the share of Pakistan’s four major export markets is over 62 percent of total global exports. This highlights the extreme regional concentration of the country’s exports. The share of SAARC countries is only 8 percent, despite presence of the SAFTA free trade agreement. It was somewhat higher when there was trade directly with India.
Turning to the regional distribution of the country’s imports, the sources are more diversified. China is by far the dominant exporter to Pakistan. Imports from China aggregated to $13.2 billion in 2020-21, equivalent to over 25 percent of total imports. The other major exporting countries to Pakistan include the OPEC countries with a share of 24 percent, followed by the EU countries and the USA. Overall, the combined share of these countries is close to 55 percent in total imports of Pakistan.
What has been the growth rate of exports to the major destinations? Between 2012-13 and 2018-19, the fastest cumulative increase over the six years is to the UK of 33 percent, followed by a 32 percent increase to Germany and of 11 percent to the USA. The big declines are to China of 27 percent, to Afghanistan of 37 percent and to the UAE of as much as 57 percent.
By far the largest increase in imports has been from China, which has taken full advantage of the free trade agreement with Pakistan. Between 2012-13 and 2018-19, the cumulative increase has been as much as 133 percent. Now China alone accounts for 30 percent of total imports of Pakistan.
The overall trade deficit of Pakistan was very large in 2020-21 at $26.5 billion, with imports over twice the level of exports. Therefore, the likelihood is high that Pakistan will carry a significant deficit with most of its major trading partners. The country-wise balance of trade is given in the table below.
======================================================================== Table 1 ======================================================================== Pakistan's Trade Balance with Major Trading Partners, 2020-21 ($ billion) ======================================================================== Exports to Imports from Balance of Trade ======================================================================== China 2.0 13.2 -11.2 USA 5.0 2.4 3.6 EU Countries 6.5 3.7 2.8 Major OPEC Countries 1.9 9.4 -7.5 Others 10.2 28.7 -18.5 ======================================================================== Total 25.6 52.1 -26.5 ========================================================================
Pakistan has a very large trade deficit with China, equivalent to 42 percent of its global deficit. The deficit has been growing rapidly. Pakistan’s exports to China have been declining while imports have shown fast growth. Today, China’s exports to Pakistan are six times its imports from Pakistan. The time has come for a review of the implementation of the 2006 Trade Agreement between Pakistan and China. Pakistan needs to seek more quid pro quo from China.
The trade surplus with two major trading partners – the USA and the EU countries – is of $3.6 billion and $2.8 billion, respectively. These are the bigger markets, especially for textile products. The trading relationship with these countries needs to be preserved and built upon.
Pakistan has preferential access to the EU market through the GSP plus programme since 2014. This allows a large share of Pakistan’s exports to enter EU countries free of duty. Two criteria must be met for continuation of this facility. First, GSP-covered imports should be less than 2 percent of EU’s imports from all GSP beneficiaries. The share currently of Pakistan is 1.6 percent. Second, the seven largest GSP covered products must account for at least 75 percent of Pakistan’s total GSP covered exports to the EU. The share currently of these products is 94 percent.
Further, Pakistan has had to ratify 27 core international conventions and subscribe to binding commitments to implement them effectively. These are mainly UN and ILO conventions and other conventions on environment. The GSP status of Pakistan is periodically reviewed by the EU. Weak areas of implementation by Pakistan relate to gender inequality, workers’ rights, and the presence of child workers.
There has been some focus recently on Pakistan’s trading relationship with Russia. The current volume of trade between the two countries is small with $163 million of exports and $593 million of imports. The imports are largely of wheat. Now with the international trade sanctions on Russia following the invasion of Ukraine, new sources of wheat will have to be found when the quantity required could rise to almost 5 million tons given the failure of the current wheat crop.
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