Pakistan’s precarious financial situation is having unprecedented impact on the lives of various stakeholders in the economy. Different sections of society are facing glaring indifference of the political leadership and policymakers fixated on the next release by the International Monetary Fund (IMF). The ninth review remained stalled for long due to fund’s differences with Islamabad over policy actions, budget and external financing needs. Nevertheless, the reforms demanded by IMF are bound to expose poor masses to severe financial hardships with steep inflation in food and energy being most dreaded.

The middle class is already suffering from gradual erosion in its income and purchasing power. Another important constituent of the economy, the Pakistani industry is also looking shaky amid the turmoil. A combination of inflation, uncertain policy environment and volatile banking rates is making the business class depress about its prospects in the country. Recently released results of a survey by the Overseas Investors Chambers of Commerce and Industry (Oicci) reveal a grim account of businessmen’s faith in Pak industry and economy. According to the report, Overall business confidence score (Bcs) stood at negative 25 percent during the survey conducted in March-April 2023 (Wave 23). It was a sharp decline of 21 percent from the previous level of negative 4 percent seen during last such survey conducted in September-October 2022 (Wave 22). A decline of 25 percent in a matter of 6 months is indicative of the pace at which the confidence in Pak industry is waning.

The three major threats to business growth identified in the survey were high Inflation (82 percent respondents), high taxation (74 percent), and Pak rupee devaluation (72 percent). Amir Paracha, President Oicci said, “The significant drop in the overall Business Confidence was not a surprise considering the volatile and extremely challenging economic situation during the past year. The acute forex shortage has affected import and operations of many businesses, with hyperinflation, very high interest rates, and rapid devaluation of the currency negatively impacting the business environment”. The loss of confidence is said to be specifically severe for the manufacturing, retail and services sectors which are prone to multitude of miseries. Constrained by the crippling restrictions on imports, manufacturing witnessed a decline in confidence of 22 percent. Additionally, the services and retail sectors recorded figures of negative 26 percent and 35 percent, respectively.

The fall in business confidence seems to be flowing from a consistent deterioration in key economic parameters during the last six months. A halt on dividend repatriation and imposition of super tax last year also played role in lowering businesses’ faith. Ironically, the recent budget is likely to increase burden of taxes further as rise in super tax rates was announced. Last year, there were four slabs – starting with 1 percent super tax on income higher than Pkr 150 million till a maximum rate of 4 percent on income more than Pkr 300 million. The tax rates now have a maximum rate of 10 percent for income higher than Pkr 500 million.

The super tax will be topped up by a windfall tax set to be levied at a rate of up to 50 percent on extraordinary incomes. Interestingly, it will be applied retrospectively on the incomes earned during last five years. The moves are expected to have a demoralising effect on big businessmen who may chose to hold back or scale down their investment plans. According to some estimates worked out by the Pakistan Business Council, some group holding companies may effectively end up paying total taxes of 70 per cent on their incomes. The number seems scary for the investors looking at new opportunities. Compounding the problems of economic mismanagement are the ones originating from the ongoing tussle among institutions of governance in Pakistan.

In an election year marked by clashes on roads, the business environment is muddled by a lack of clarity over political direction. Frequent security incidents are also intimidating the foreign investors away. A steady requirement of investments calls for structural reforms in the country. However, it does seem likely in near future considering the surrender of Pakistan’s polity to factionalism and radicalization.

L'articolo Distressed businessmen lose confidence in Pakistan’s economy proviene da InsideOver.

Ever since the British people voted for Brexit, it has become incredibly fashionable to argue that their economy will decline while the European Union’s will power ahead. For more than five years, one economist after another lined up to predict economic doom, gloom and catastrophe.

The reality is that we were never going to know the impact of Brexit for years to come but this did not stop one professional economist after another from making increasingly speculative forecasts. The UK, we were repeatedly told, would crash and burn. It would return to be the ‘sick man of Europe’, as it was before 1973 when it joined the European Community.

The latest data on the volume of trade between the United Kingdom and European Union was seized upon by these commentators. In January, countless writers pounced on data which showed a collapse in trade with the EU.

Total UK exports to the EU fell by about 42% compared to previous years. Yet what has been much less reported on is that since then the UK’s exports to the EU have made a striking recovery, jumping by 47% in February. While they still remain slightly lower than last year’s level, they are rapidly moving in the right direction.

What these and other numbers are telling us – notes the respected analyst Wolfgang Münchau of Eurointelligence – is that even this bit of the Brexit scare stories will not come true

Several financial organizations agree, pointing to strong tailwinds behind the UK economy. The International Monetary Fund (IMF) just raised its forecast for the UK’s growth in 2021 to 5.3%, compared to 4.4%for the Eurozone and 3.6% for Germany. The UK will now almost certainly return to its pre-Covid output before the Eurozone and is tipped to go much further. In recent days, countless others have also been raising their growth forecasts for the UK – the EY Item Club, JP Morgan, UBS, the OECD, Deutsche Bank, to name only a few.

Goldman Sachs also just predicted that the UK economy will grow by 7.8% this year, faster than America. If it meets this figure, then it would be the sharpest rate of growth in peacetime since 1870. EY ITEM Club says that it will expand by close to 7%, the fastest pace since 1941. UBS, Bank of America and Barclays have also raised their forecasts, largely because of the UK’s successful vaccination rollout, which was the first serious test since Brexit – and one that it passed with flying colours.

This really does matter, not least because a sharp rebound from Covid-19 will disguise any short-term friction that followed Brexit. A year or two from now, it will be incredibly hard to make a convincing case to the British people that Brexit has been an economic disaster when they are looking at growth rates of 7%.

Some argue that Brexit could still undermine the longer-term growth of the UK. For example, some banks estimate that even with a strong 2021 the longer-term impact of Brexit could be to reduce the UK’s gross domestic product (GDP) by about 3.5% over the next few years.

Yet even if this does materialise, it will have to be considered alongside two facts. The first is that the performance of any economy is always relative. When weighing up the benefits and costs of Brexit, the British people will now routinely compare their economic performance with the Eurozone, which will continue to diverge between the more affluent north and the left behind and heavily indebted south.

The second is that even if a long-term economic squeeze from Brexit does emerge, we should remember that this is, ultimately, secondary to why people voted for Brexit in the first place.

For the 52% of voters who ticked ‘Leave’, the vote was as much about reclaiming national sovereignty, independence and control over immigration as capturing the economic advantages that will come from diverging from the EU model. Any economic gains are an additional bonus, not the underlying rationale.

As Münchau and others argue, one fundamental problem over the last five years is that many of the forecasts about Brexit were always based on shaky foundations. They were either produced by anti-Brexit economists who put politics ahead of objectivity, or relied on models that were based heavily on long-term trade flows while ignoring other areas, like data, in which the UK excels and is one of the fastest growing sectors.

In short, when future historians judge the contribution of economists to the Brexit debate, they will not be kind. And by the time they are writing I suspect that the real impact of Brexit in Europe will be visible for all to see.

L'articolo Brexit has disproved all the economists’ scenarios proviene da InsideOver.

The bad performance of the current president of Argentina, Macri, in the open primaries raises many doubts about the future of Argentina. Mostly about its economy and the relationship with foreign investors.

Argentina’s debt from the default in 2001 was only entirely settled in 2016. Although 100% of it has been paid, the prolonged restriction of access to international credit markets has made a mark on the Argentinian economy. After all, without the access to outside credit, Argentina’s economy didn’t have the monetary means necessary to finance development.

New debt ($56 billion loan from IMF) can also become a problem if Argentina will return to any financial policies implemented pre-Macri.

The current direction of enacted economic policies in Argentina has produced both quantitative and qualitative positive outcomes.

The sharpest turn for the better has been observed through the increase of labour wages in Argentina. Just at the start of Macri’s term, at the beginning of 2016, the average wage in Argentina was 17,500 pesos (in the private sector). In April of 2019, the average wage in Argentina had risen to 40,911 pesos per month. An almost 3 times rise in average wages is an important achievement, because of its power to contribute to better lives of consumers and to increase living standards.

Inflow of foreign investments has grown by 373.1% or $8.902B in 3 years. This rise in FDI net inflows shows just how much impact some simple legal changes and a welcoming environment can make to inflows of foreign capital. Foreign direct investments not only contribute to the gross domestic product numbers, but also bring know-how and create jobs. These positive impacts are very much needed for Argentina, which has been coping with record unemployment numbers.

President Macri has raised interest rates to lure foreign investments. The increase in interest rates was also initiated to get rid both of a high unemployment rate, and growing inflation numbers. The raised interest rates were supposed to take care of 3 problems through one action.

Higher interest rates have been successful in increasing sales of Argentina’s bonds. They have been less successful in reducing high unemployment and growing inflation.

In its basic form, Philips curve tells that there is a trade-off between unemployment and CPI (consumer price index). In the short run, higher unemployment leads to lower inflation, and vice versa. However, Argentina’s case seems to defy conventional economic theory: the higher interest rates did not manage to lower inflation, but the growing inflation did not contribute to lower unemployment. This situation leads to the conclusion that Argentina could have a problem with structural unemployment.

President Macri also emphasized austerity in his election campaign, and implemented some austerity-focused policies. These include reducing the number of ministries and contributions to social security. They have contributed to decreased government spending, but they have been unable to stave off the peso crisis.

Positive qualitative outcomes of the current president’s presidency include growing foreign investor confidence, fluctuating, but stable consumer confidence, and dismantled capital controls.

The current president of Argentina also worked to remove legal import barriers. The easing of legal procedures included standard information now only having to be submitted once, instead of separate submissions to all import-related agencies. Although this reduction in legal procedures only applies to large importing companies, it still is a step in the right direction. Moreover, 60 days have beet added to the deadline of customs document submission.

The removal of administrative barriers (paperwork for receiving dollars for pesos), and many forex-related restrictions, have been the actions taken to end currency controls in Argentina.

After M.Macri took office in 2016, the CCI of Argentina stayed stable until November of 2017. In December of 2017, the index experienced a sharp drop of 15.12%. However, after this sharp drop, the index rose quickly from May 2018 to May 2019. Although the CCI of Argentina fluctuated through Macri’s term, it has stayed mostly stable, and shown quick growth.

Dismantlement of capital controls was brought to life through the removal of import limits. Capital controls were also dismantled by ending the holding period (120 days) for repatriation of funds from Argentina (for foreign investors).

The positive qualitative outcomes achieved through the presidency of the member of the PRO show that Argentina has been put on path of freer trade and a better state for consumers.

But a closer look shows that these outcomes have been achieved only through the removal of older policies. The removal of previously instated policies has been a move which paid off. Yet, if own ideas were added from the side of Mauricio Macri, the positive qualitative outcomes could have been even better.

Without a doubt, there are many areas in the current state of Argentina’s economy that need improvement. The problematic areas include dependency on commodity prices and particularly, soybeans as a cash crop; and peso’s fall in value.

Lower commodities demand (and then prices), created weaker growth in Argentina. The decrease in demand for soybeans has been recognized by many as one of the most important factors in the start of Argentina’s economic downturn.

The return to a managed peso, and the subsequent devaluation of it, has prompted Argentina’s government to turn to IMF for support. Argentina got a $56 billion loan for the stabilisation of the peso–dollar exchange rate. The loan will also contribute to countering the depreciation of peso.

This move by Macri has been met with a very negative response from the Argentinian society. Protests followed, and the remembrance of the disastrous ending of a collaboration of IMF and Argentina in 2001 reignited old memories.

The International Monetary Fund’s and Argentina’s relationship is certainly complex and complicated. It’s the relationship which made Argentina default on its foreign debt, and contributed to growing poverty. The dissatisfaction of society with the outcomes of the relationship with IMF made itself known through the elections of two Justicialist (Peronist) presidents– Mr. and Mrs. Kirchners.

Argentina has also have been one of the countries censured by IMF after failing to provide reliable statistics on its economy.

Turning for help to the International Monetary Fund, at the first sing of hardship, shows just how easily the Argentinian economy can become destabilized by internal influences. The lack of other mechanisms for financial support during difficult times is a concerning problem.

Macri’s promise to reduce social spending didn’t materialize in his term. The promise to reduce social spending, which was raised by Kirchner, actually manifested itself in raised welfare benefits. After the recent defeat in primaries, Macri announced income tax cuts and increases in welfare subsidies.

Although not directly related to welfare spending, the temporary (90 days) freeze on petrol prices is in a way a welfare benefit. However, this decision also shows how the Argentinian government still prefers to take away from businesses, in order to please the consumers. Since petrol stations in Argentina are privately owned, this means that the freeze of petrol prices could lead to lower incomes of petrol station owners.

How would the most likely opponent of Macri (Fernandez) impact the Argentina’s economy and investors?

If Fernandez with his running mate, Kirchner, will get elected on October’s elections, it will mean a turn to moderate Peronist policies.

Poverty rates have only been minimally improved through the term of M.Macri. If Fernandez will get elected as a president of Argentina, his 4 year term could be marked with actions to decrease poverty and the number of people receiving welfare.

Relations with foreign investors will likely suffer the most damage if Fernandez will get elected in October (or November). His running mate, Kirchner, and her 8 year presidential term, has been marked with a decline in the positive treatment of foreign investors and their capital. Macri had to reverse many of Kirchner’s policies, including import limits and the holding period for repatriation of funds from Argentina.

Since Fernandez’s views on investor relations and foreign capital in Argentina are more pragmatic, it is only rational to expect a return to a milder version of anti-foreign capital environment.

If Fernandez will be able to assert his moderate Peronist position, then a more positive scenario could develop. Alberto Fernandez has criticised the former president Kristina Kirchner in the past. A more moderate position and the ability to see faults in the previous isolationist policies, could mean that the Argentina’s economy wouldn’t return to more extreme economic policies.

Support for free trade has been the main, and the most needed, step for a creating a strong and stable Argentina and its economy. The removal of taxes on exports and the decline of protectionist policies have been the strongest contribution to a more powerful economy of Argentina.

Yet, the support for free trade didn’t last long. President Macri later reimposed agricultural export taxes.

After the announcement of the victory of Fernandez in Argentina’s presidential primaries, Merval index lost 31% of its value in one day. Argentina’s largest companies saw their share values decrease.

This steep loss shows that Argentina’s economy is far from stable. Just the news from primary elections have the power to bring uncertainty into the markets. This means that Argentina’s economy experienced far less movement into stability and resilience from negative news, than it could be expected with the 4 year term of an austerity proponent. Unsolved past problems and inevitable future challenges can’t create a certain future.

L'articolo Why Argentina’s Economic Future Looks Uncertain proviene da InsideOver.