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The World to save developing countries from recession caused by COVID-19 : Hafeez

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ISLAMABAD :Adviser to the Prime Minister on Finance and Revenue Dr Abdul Hafeez Shaikh Tuesday expressed the hope that financial and other forums of the world would be able to come up with a plan, enabling developing countries like Pakistan to meet their international obligations and provide relief to the population adversely effected by COVID-19 pandemic.

Talking to Ambassador of China, Yao Jing, who called on him here, he said keeping in view the present circumstances, the World Bank (WB), International Monetary Fund (IMF) and G-20 countries were talking about debt relief, without which developing countries would be worst affected.

He said Pakistan looked forward to Chinese support in dealing with this unprecedented situation arising because of this pandemic.

The advisor welcomed the ambassador and thanked the Chinese government for all the assistance it had provided so far to Pakistan in dealing with the COVID-19 pandemic.

He also shared with the ambassador the details of the economic relief package given by the government to the people whose lives and businesses were affected by the pandemic.

He said during this difficult time, the government had three major priorities including provision of healthcare and safety to its people, cash assistance to the most vulnerable and keeping the wheel of the economy moving in slow but steady pace.

The government, he said, had come up with a comprehensive relief package of worth Rs1.2 trillion, which included, Rs200 billion assistance for workers and labourers, Rs100 billion for supporting SME and agriculture sector, Rs107 billion as sales tax refunds and Rs50 billion income tax refunds from 2014 onward.

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Moreover, Ehsaas Programme, through its urgent cash disbursement, was taking care of the most vulnerable in the country.

He said the reduction in petrol and diesel prices and deferment of payment of bills were some other significant steps. Incentivizing the construction sector was also an opportunity for those who were in need of work.

The adviser also discussed with the ambassador about the effect of the coronavirus pandemic on the overall growth of the economy of the country as exports and remittances would both suffer as the global economies were in recessionary phase.

He said different economies had different levels of strength to deal with the economic losses and the developing countries would be the worst hit by the impact of this slow down.

China

Stronger Contractionary Monetary Policy Needed to Achieve ‘Stabilizing Expectations’ for China

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The escalation to war in Ukraine and the series of sanctions against Russia by Europe and the United States has acerbated the volatility of the global financial and energy markets. The increased geopolitical risks have also had a serious impact on the global economy. International institutions such as the IMF and the World Bank have issued warnings one after another that China’s economy will face new challenges as energy supply and demand fluctuate and supply chain distortions intensify. This change in the situation has already affected

China’s domestic capital market. Recently, the common stock market (A-shares) has been volatile, reflecting investors’ gloomy outlook on the capital market and China’s economy. According to the theory of behavioral economics, changes in expectations will affect future economic activity.

This is not only an issue of economic confidence but it also affects the behavior of residents and enterprises in the future on economic activities such as consumption and investment, which will have a substantial impact on the micro and macroeconomy. ANBOUND researchers believe that China will need to adjust and respond to macroeconomic policies, especially to promote further easing of monetary policy in taming market concerns and provide substantial support for “steady growth”.

At The Two Sessions this year, the government’s Work Report put forward the goal of achieving economic growth of 5.5% this year, and at the same time emphasized increasing macro-policy to support the economy. According to the current market reaction, some scholars and research institutions believe that the economic growth target of 5.5% has fallen significantly compared to last year’s economic growth rate of 8.1%.

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However, due to the chaos brought about by the COVID-19 pandemic, the average growth rate in the past two years was only 5.1%. Therefore, when the impact of the pandemic is removed and the economy returns to “normal”, it is challenging to achieve the economic growth target of 5.5% this year. The further formation of endogenous power is needed and it also requires macro-policy support to stabilize demand.

Some researchers have mentioned that the current target of 5.5% has a positive effect on enhancing market confidence and expectations, but to achieve the economic growth target, the main path is to build infrastructure to support the economy and wait for the real estate market to stabilize.

It is anticipated that the pandemic control measures might be reduced, allowing consumption to rebound. However, the market emphasis point remains primarily dependent on whether the real estate market is improving, and there is little “enthusiasm” about the expansion infrastructure. Under this situation, the “stabilizing expectation” effects of positive fiscal policy are still limited. Judging from the latest CPI and PPI data, the consumer price level continues to be depressing while the production price level has risen.

This represented the fact that the development of China’s domestic consumer demand and investment needs is continually diminished, while the pressure on business expenses from PPI stays constant. Coupled with the recent continuous fluctuations in the A-share market, various situations show that changes in market expectations still reflect the contradictions on the demand side.

This means that China’s overall economic growth will still be a process of “drilling the bottom”. Although fiscal spending will expand this year, in terms of China’s current economic size, its intensity is still in the “steady” category, and the support and coordination of monetary policy are still needed to unleash the effectiveness of the easing policy.

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At the same time, ANBOUND also pointed out that the Russia-Ukraine crisis has further worsened the international geopolitical environment and increased the uncertainty of the global economy. Changes in the current economic situation show that the market still has an urgent need for macroeconomic policies, especially monetary policy support. Therefore, researchers at ANBOUND believe that it is still necessary to further ease monetary policy at present to help the economy achieving a “soft landing” as soon as possible by releasing policy space.

Since the fourth quarter last year, monetary policy has turned to ease and has provided substantial support for economic stability through comprehensive reduce moderately the Required Reserve Ratio (RRR) and interest rate.

However, following China’s Spring Festival, the rate of this continual easing decreased and market liquidity was recycled. On the one hand, the market needs to digest the impact of the easing policy and improve the effectiveness of the policy; on the other hand, it is also a signal for the policy to remain stable, to avoid misleading the market causing “waterfall”.

However, in terms of the forward-looking, precise, and sustainable monetary policy, considering the new situation and changes in market expectations, monetary policy needs to be adjusted promptly, seize the time window, and further reduce market interest rates to stabilize short-term market expectations and prevent panic in the capital market that would cause chain reaction.

Judging from the current changes in the capital market, the RMB exchange rate still shows a strong tendency to appreciate despite the intensified international geopolitical risks and the rebound of the U.S. dollar index. This may be the case though the Federal Reserve may end its balance sheet reduction and start raising interest rates in March. Appropriately lowering the interest rate level will not have a significant impact on the RMB exchange rate under the turbulent international situation.

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Promoting further easing of the currency will help release the pressure of RMB appreciation and increase the profitability of Chinese export enterprises. Increasing currency liquidity and reducing financing costs are also beneficial to the domestic capital market, helping to stabilize asset prices and improve corporate profitability.

With the stability of China’s economic fundamentals, the stable income of its domestic capital market will remain attractive to international capital. Under such circumstances, the impact of changes in the international policy environment on China is still manageable.

Most crucially, by releasing signals to consolidate the macroeconomy through monetary policy changes, the capital market and economic principals can turn their bearish expectations around. According to China’s existing conditions and stages, this will be the crucial key.

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China

China moves closer to Russia, but wary on Ukraine

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China and Russia set off alarms in the West this month with the most robust declaration of their friendship in decades but Beijing has signalled it would not back Vladimir Putin if he sent troops in to invade Ukraine.

The February 4 joint statement by the neighbours included unprecedented support from Beijing for Moscow’s opposition to the expansion of NATO, and came as Washington and its allies were warning of full-scale Russian military action against Kyiv.

It was “quite a quantum shift from what has been a steady intensification, elevation of the content of Russia-China declarations over the last 20 years”, former Australian prime minister Kevin Rudd said during an online discussion co-hosted by the Atlantic Council think tank and the Asia Society.

“It is China becoming a global security actor in a way that I personally have not seen before.”

China’s unusually direct position on NATO and support for Moscow’s “reasonable” security concerns have, however, placed it on a diplomatic tightrope, forcing it to balance its close Russia ties with major economic interests in Europe.

With more than 150,000 troops massed on the border with Ukraine, Russia has demanded guarantees that Kyiv will never be allowed to join NATO — a position in stark contrast to China’s long-standing stated foreign policy red line: no interference in other countries’ internal affairs.

When asked if there was a contradiction, Chinese Foreign Minister Wang Yi told the Munich Security Conference via video link Saturday that the sovereignty of all nations should be respected.

“Ukraine is no exception,” he said.

That position was tested in just two days.

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Russian President Putin on Monday recognised two “republics” in Ukraine held by pro-Moscow separatist rebels, and ordered the deployment of troops there.

The United States and its allies blasted Russia for violating the sovereignty of Ukraine at an emergency UN Security Council meeting, but China was circumspect, urging restraint by “all sides”.

Putin has “denied the territorial independence and sovereignty — indeed, the very existence — of Ukraine”, Ivo Daalder, former US ambassador to NATO, wrote on Twitter.

“Both were core… (tenets) of China’s approach to the crisis. Putin has blown both to bits.”

This is not the first time China has had to strike a delicate balance between its interests and a major international escalation by its strategic partner Russia.

When Moscow annexed Crimea in 2014, China did not join Russia’s veto of a UN Security Council resolution on the issue, instead abstaining and mainly offering economic support.

Eight years later, experts say there are again limits to what Beijing can — or wants to — do for Moscow.

Among the key factors are trade and financial links with Europe. Overt backing of any Russian belligerence could also threaten the major investment deal Beijing is trying to seal with the bloc.

Further, some analysts say China may not want to escalate already high tensions with the United States.

“The Ukraine crisis… carries significant risk of the bottom falling out of (China’s) relationships with the EU and the US,” wrote Bill Bishop in the Sinocism China Newsletter.

“I do not believe that Xi and his team want to see Russia invade Ukraine, as they understand the risks from the expected reaction to any invasion.”

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Others said that, with its support for Moscow’s concerns about NATO, Beijing may be looking to its own future security interests.

By implicitly siding with Moscow, Beijing gains “considerable diplomatic leverage” and “presumes that Russia will act likewise when China finds itself in a critical security situation”, Richard Ghiasy, an expert at the Hague Centre for Strategic Studies, told AFP.

Despite Beijing’s guarded language on Ukraine, observers say the China-Russia joint announcement is still a stark challenge to the United States and its allies beyond the current crisis.

The statement contained challenges to the definitions of democracy and human rights, which Moscow and Beijing have been accused of violating by the West for years.

This prompted scathing criticism in Europe, with some accusing two authoritarian regimes of trying to redefine universal concepts to suit their agenda.

“It’s an act of defiance,” EU foreign policy chief Josep Borrell said at the Munich Security Conference on Sunday.

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Oil breaks $90/bbl for the first time since 2014 on Russia tensions

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NEW YORK: Oil touched $90 a barrel for the first time in seven years on Wednesday, supported by tight supply and rising political tensions in Russia that raised concerns about further disruption in an already-tight market.

Brent crude rose $2.02, or 2.3%, to $90.22 by 11:21 a.m. EST (1621 GMT), the first time the global benchmark has broken $90 since October 2014. US West Texas Intermediate (WTI) crude was up $2.09, or 2.4%, to $87.69.

US President Joe Biden said on Tuesday he would consider personal sanctions on President Vladimir Putin if Russia invades Ukraine. On Monday, Yemen’s Houthi movement launched a missile attack on a United Arab Emirates base.

“World inventories have continued to decline as producers have struggled to restore production to pre-pandemic levels,” said Andrew Lipow, president of Lipow Oil Associates in Houston. “Mix that in with geopolitical tensions between the United States and Russia over Ukraine and prices have continued their march upward.”

Oil broadly stable as tight supply counters falling US markets

The tensions have only added to worries about the various factors contributing to an already tight market. OPEC+ is having trouble meeting monthly production targets as it restores supply to markets after drastic cuts in 2020, and the United States is more than a million barrels short of its record level of daily output.

At the same time, demand remains strong, suggesting that inventories may continue to decline.

“Historically, markets led higher by tightening product and crude inventories are difficult to solve absent a demand destruction event or an injection of supply. Neither appear on the horizon, currently,” wrote Michael Tran, commodity strategist at RBC Capital Markets, in a note.

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The Organization of the Petroleum Exporting Countries and allies, known as OPEC+, meets on Feb. 2 to consider another output increase.

Inventories in the United States rose in the most recent week, with crude stocks up by 2.4 million barrels, against expectations for a modest decline in stocks. Gasoline inventories rose to their highest levels in almost a year – a needed salve for the market.

US refined product supplied – a measure of demand – surged again, putting the four-week moving average at 21.2 million barrels per day, ahead of pre-pandemic trends. The increases have been led by consumption of distillates like diesel, as gasoline use has fallen off modestly in recent weeks.

Investors across the markets are awaiting the coming policy update from the US Federal Reserve at 2 p.m. EST. The Fed is expected to signal plans to raise interest rates in March as it focuses on fighting inflation.

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