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Three Policy Priorities for a Robust Recovery

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We must work together to end the pandemic, navigate monetary tightening and shift focus to fiscal sustainability.

When the Group of Twenty finance ministers and central bank governors gather in Jakarta, in person and virtually, this week, they can take inspiration from the Indonesian phrase, gotong royong, “working together to achieve a common goal. This spirit is more important than ever as countries are facing a tough obstacle course this year.

The good news is that the global economic recovery continues, but its pace has moderated amid high uncertainty and rising risks. Three weeks ago, we cut our global forecast to a still-healthy 4.4 percent for 2022, partly because of a reassessment of growth prospects in the United States and China.

Since then, economic indicators have continued to point to weaker growth momentum, due to the Omicron variant and persistent supply chain disruptions. Inflation readings have been higher than expected in many economies; financial markets remain volatile; and geopolitical tensions have sharply increased.

That is why we need strong international cooperation and extraordinary agility. For most countries, this means continuing to support growth and employment while keeping inflation under control and maintaining financial stability—all in the context of high debt levels.

Our new report to the G20 shows just how complex this obstacle course is and what policymakers can do to get through it. Let me highlight three priorities:

First, we need broader efforts to fight ‘economic long-Covid’

We project cumulative global output losses from the pandemic of nearly $13.8 trillion through 2024. Omicron is the latest reminder that a durable and inclusive recovery is impossible while the pandemic continues.

But considerable uncertainty remains about the path of the virus post-Omicron, including the durability of protection offered by vaccines or prior infections, and the risk of new variants.

In this environment, our best defense is to move from a singular focus on vaccines to ensuring each country has equitable access to a comprehensive COVID-19 toolkit with vaccines, tests, and treatments. Keeping these tools updated as the virus evolves will require ongoing investments in medical research, disease surveillance, and health systems that reach the “last mile” into every community.

Upfront financing of $23.4 billion to close the ACT-Accelerator funding gap will be an important down payment on distributing this dynamic toolkit everywhere. Going forward, enhanced coordination between G20 finance and health ministries is essential to increasing resilience—both to potential new SARS-CoV-2 variants, and future pandemics that could pose systemic risks.

Ending the pandemic will also help address the scars from economic long-COVID. Think of the profound disruptions in many businesses and labor markets. And think of the cost to students worldwide, estimated at up to $17 trillion over their lives due to learning losses, lower productivity, and employment disruptions.

School closures have been especially acute for students in emerging economies where educational attainment was much lower to begin with—threatening to compound the dangerous divergence among countries.

What can be done? Strong policy action. Scaling up social spending, reskilling programs, remedial training for teachers and tutoring for students will help economies get back on track and build resilience to future health and economic challenges.

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Second, countries need to navigate the monetary tightening cycle

While there is significant differentiation across economies and high uncertainty going forward, inflation pressures have been building in many countries, calling for a withdrawal of monetary accommodation where necessary.

Going forward, it is important to calibrate policies to country circumstances. It means withdrawal of monetary accommodation in countries such as the United States and the United Kingdom, where labor markets are tight and inflation expectations are rising. Others, including the euro area, can afford to act more slowly, especially if the rise in inflation relates largely to energy prices. But they, too, should be ready to act if economic data warrants a faster policy pivot.

Of course, clear communication of any shift remains essential to safeguard financial stability at home and abroad. Some emerging and developing economies have already been forced to combat inflation by raising interest rates. And the policy pivot in advanced economies may require additional tightening across a wider range of nations. This would sharpen the already difficult trade-off countries face in taming inflation while supporting growth and employment.

So far, global financial conditions have remained relatively favorable, partly because of negative real interest rates in most G20 countries. But if these financial conditions tighten suddenly, emerging and developing countries must be ready for potential capital flow reversals.

To prepare for this, borrowers should extend debt maturities where feasible now , while containing a further buildup of foreign currency debts. When shocks do come, flexible exchange rates are important for absorbing them, in most cases, but they are not the only tool available.

In the event of high volatility, foreign exchange interventions may be appropriate, as Indonesia successfully did in 2020. Capital flow management measures may also be sensible in times of economic or financial crisis: think of Iceland in 2008 and Cyprus in 2013. And countries can take macroprudential measures to guard against risks in the non-bank financial sector or where property markets are surging. Of course, all these measures may still need to be combined with macroeconomic adjustments.

In other words, we need to ensure that all countries can move safely through the monetary tightening cycle.

Third, countries need to shift their focus to fiscal sustainability

As countries emerge from the grip of the pandemic, they need to carefully calibrate their fiscal policies. It’s easy to see why: extraordinary fiscal measures helped prevent another Great Depression, but they have also pushed up debt levels. In 2020, we observed the largest one-year debt surge since the second world war, with global debt—both public and private—rising to $226 trillion.

For many countries, this means ensuring continued support for health systems and the most vulnerable, while reducing deficits and debt levels to meet their specific needs. For example, a faster scaling back of fiscal support is warranted in countries where the recovery is further ahead. This in turn will facilitate their shift in monetary policy by reducing demand and thus helping to contain inflationary pressures.

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Others, especially in the developing world, face far more difficult trade-offs. Their fiscal firepower has been scarce throughout the crisis, which has left them with weaker recoveries and deeper scars from economic long-Covid. And they have little scope to prepare for a post-pandemic economy that is greener and more digital.

For example, the IMF last year described how green supply policies, including a 10-year public investment program, could raise annual global output by about 2 percent compared to the baseline on average over 2021-30.

All these policy actions can help us find new modus vivendi for a more shock-prone world. But they may be hampered by debt. We estimate that about 60 percent of low-income countries are in or at high risk of debt distress, double 2015 levels. These and many other economies will need more domestic revenue mobilization, more grants and concessional financing, and more help to deal with debt immediately.

That includes reinvigorating the G-20 Common Framework for debt treatment. This should start with offering a standstill on debt service payments during the negotiation under the framework. Quicker and more efficient processes are needed, with clarity on the steps to go through, so that everyone knows the road ahead—from formation of creditor committees to an agreement on debt resolution. And make the framework available to a wider range of highly indebted countries.

The IMF’s role

The IMF plays an important role in this area by providing macroeconomic frameworks and debt sustainability analyses. And we encourage greater debt transparency: by requesting greater disclosure of what a member country owes and to whom when it seeks IMF financing, and by working with our members through the IMF-World Bank Multi-Pronged Approach to debt vulnerability.

We also need to build on the historic allocation of Special Drawing Rights of $650 billion. As well as holding the new SDRs as reserves, some members have already begun to put them to good use. For example: Nepal for vaccine imports; North Macedonia for health spending and pandemic lifelines; and Senegal to boost vaccine production capacity.

To magnify the impact of the allocation, we encourage channeling of new SDRs through our Poverty Reduction and Growth Trust, which provides concessional financing to low-income countries, and the new Resilience and Sustainability Trust.

With its cheaper rates and longer maturities, the RST could fund climate, pandemic preparedness, and digitalization policies that would improve macroeconomic stability for decades to come. The G20 has given its strong backing to the RST, and we aim to have it fully operational this year.

As countries face up to multiple challenges, the IMF will support them with calibrated policy advice, capacity development, and financial assistance where needed. The key is to bring agility into all aspects of policymaking—but even that is not enough.

We also need to follow the spirit of Indonesia’s motto, Bhinneka Tunggal Ika—”Unity in Diversity.” Together we can get through the obstacle course to a durable recovery that works for all.

Courtesy : IMF Blog

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The End of U.S. Dollar Dominance? Not So Fast

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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.

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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.

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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.

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Ahsan Iqbal reviews the Ministry of Planning, Development and Special Initiatives Work on Projects

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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.

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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.

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Pakistan’s trading partners

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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.

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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.

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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.

Via BR

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