Aurelia Butler

Pakistan and the IMF concluded negotiations last week on the resumption of the bailout programme, following which the lender stressed the need to end unfunded subsidies which were costing the cash-strapped country billions per month.Minister Miftah Ismail said petrol and diesel prices for consumers have been increased by 17% at the pumps starting on Friday, up 30 Pakistani rupees each per litre.The new price for petrol will be 209.86 Pakistani rupees ($1.06) per litre and diesel 204.15 per litre, he said. Last week, the country raised prices by around 20%.According to a Pakistani source directly involved in talks in Qatar, the IMF and Islamabad had reached a deal to release over $900 million in funds once Pakistan removed the fuel subsidies.Ismail said on Thursday there now remained a subsidy of about 9 Pakistani rupees per litre. The price hike has been the main issue between Pakistan and the IMF to reduce the fiscal deficit before the annual budget is presented later this month.Ousted Prime Minister Imran Khan had given the subsidy in his last days in power to cool down public sentiment in the face of double-digit inflation, a move the IMF said deviated from the terms of the 2019 deal.Consumer Price Index inflation rose to 13.8% in May, year-on-year, the highest in two-and-a-half years. The country’s central bank said earlier this week it expected inflation to remain elevated in the wake of removing the fuel and power subsidies. More

All of a sudden, everyone on Wall Street is talking about the weather.With the war in Ukraine and policy tightening by the US Federal Reserve making financial forecasting harder than usual, JPMorgan Chase chief executive Jamie Dimon has focused on the heavens by employing meteorological metaphors to make sense of the economic turbulence.The head of the largest US bank by assets kicked off the discussion last week when he said at the company’s investor day that he saw “big storm clouds” on the economic horizon that had yet to reach hurricane strength.“They may dissipate. If it was a hurricane, I would tell you that,” Dimon said, adding: “They may not dissipate, so we’re not wishful thinkers . . . We can handle all of that.”By Wednesday, Dimon’s forecast appeared to have grown gloomier.“I said they’re storm clouds, they’re big storm clouds here. It’s a hurricane,” he said at a conference organised by Autonomous Research. “That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy . . . and you better brace yourself.”Bank of America chief executive Brian Moynihan picked up the theme hours later on Wednesday when he was asked at the same conference whether he was on “hurricane watch in terms of the economy”.“We’re in North Carolina,” said the leader of the Charlotte-based bank. “You’ve got hurricanes that come every year. So, we’re always prepared . . . we don’t have a choice.”On Thursday, Goldman Sachs president John Waldron took on the severe storms question without prodding when asked for his view of the macroeconomic backdrop.“I’m going to try not to use any weather analogies,” he said to laughter from the crowd, before adding: “This is among, if not the most complex dynamic environment I’ve ever seen in my career . . . The confluence of the number of shocks to the system, to me, is unprecedented.”Bill Demchak, a former JPMorgan banker who is now chief executive of PNC, a US bank with about $540bn in assets, told the conference he had “no weather forecasts” but was also bearish about the economy.“I don’t see any possible outcome other than a recession,” he said. “I don’t think it’s going to be the hurricane. I think we’re going to have a slowdown.”

Mike Mayo, Wells Fargo banking analyst, said Dimon’s comments were surprising for their “extra negativity” in the space of just over a week. Mayo said the remarks added to his doubts that JPMorgan would soon be able to hit a roughly 17 per cent return on tangible common equity, a measure of profitability. Dimon said last week there was “a very good chance” the bank could reach that target this year.“To us, the new comments seem like hedging on this 17 per cent level only one week after putting it on the table at investor day,” Mayo wrote in a note to clients.JPMorgan said in a statement: “Jamie’s views are consistent with his investor day comments that there is a wide range of potential economic scenarios.” More

Once again, it is the world’s poor who risk becoming collateral damage. As war thunders on in Ukraine, the most deprived people in the Middle East, central Asia and much of Africa will get caught in the crossfire as the price of food escalates and its availability dwindles. In 2021, almost 700mn people, or 9 per cent of the world’s population — nearly two-thirds of them in sub-Saharan Africa — lived on below $1.90 a day, the World Bank’s definition of extreme poverty. Any substantial rise in food prices could send millions more tumbling back into this category. A report by Standard & Poor’s predicts the food crisis will last through 2024 and possibly beyond. It warns that it could affect social stability, economic growth and sovereign ratings. The International Rescue Committee has alerted the world to an impending “hunger fallout” in which 47mn more people — mostly in the Horn of Africa, the Sahel, Afghanistan and Yemen — could be pushed into acute hunger. Before Russia’s invasion of Ukraine, the two countries were, either separately or as a pair, among the top three exporters of wheat, maize, rapeseed, sunflower seeds and sunflower oil. Together they accounted for 12 per cent of all traded food calories. Russia is the largest producer of fertiliser. Rising energy costs are affecting everything.In Ghana, inflation is nudging 25 per cent, eating away at purchasing power. In Nigeria, the central bank surprised markets by raising rates a hefty 150 basis points. This week, Kenya increased interest rates for the first time in almost seven years, citing supply chain disruption and rising commodity prices. It doesn’t take a particularly paranoid leader to sense trouble ahead. Many recall the origins of the Arab spring, which started, at least symbolically, in 2010 with the self-immolation of a Tunisian vegetable vendor. Rising food prices in 2007 and 2008 sparked riots worldwide. The Sudanese protests that swept longtime dictator Omar al-Bashir from power in 2019 were triggered by unaffordable daily bread. Leaders sense the urgency. This week, Macky Sall, president of Senegal and chair of the African Union, announced he was travelling to Moscow. There, presumably, he will petition Vladimir Putin on the consequences of Russia’s blockade of the Black Sea port of Odesa, which is preventing 20mn tonnes of wheat from leaving Ukraine. Good luck with that. Putin’s invasion, not the resulting sanctions, is the main cause of this misery. Still, the west should take seriously Sall’s complaint that sanctions on Russian banks have made it difficult, if not impossible, to buy grain and fertiliser from Russia. One EU official admitted there was a “glitch” in the sanctions regime. It must be fixed.In the longer run, many countries — particularly in Africa, where urban populations are rising quickest — need to think harder about food security. The 2003 Maputo Declaration committed African heads of state to devote at least 10 per cent of budgetary allocations to agriculture. Few have come close.Instead of lending serious effort to raising domestic yields, too many governments have sought to placate restless urban populations with food imports. Africa is the fastest-growing consumer of wheat even though, outside a few countries including Kenya and South Africa, little is grown on the continent. Crops that are produced locally need more attention. The widespread use of teff, an ancient Ethiopian grain, in the Horn of Africa is a good example. Other crops that could be eaten more widely include cassava, grown in west and central Africa, which can be made into bread. Governments also need to combat soil erosion and reconsider genetically modified crops. As well as food, too many countries are dependent on fertiliser imports. In Africa, Morocco is one of the few big producers. Countries with big gas reserves, including Mozambique, Tanzania, Ivory Coast, Senegal and Mauritania, should be developing a domestic fertiliser industry as a priority. In Nigeria, businessman Aliko Dangote has shown this is possible. This year, he inaugurated a fertiliser plant just outside Lagos with the capacity to produce 3mn tonnes of urea annually, making it among the biggest in the world. He told CNN that his fertiliser is being shipped to the US, Brazil, Mexico and India, earning valuable foreign exchange. But Dangote’s fertiliser should also be the basis for a domestic push for higher crop yields.Governments are right to worry about their hungry urban populations. The solution is to pay more attention to their farmers. [email protected] More

The vice-chair of the Federal Reserve has warned that the US central bank may need to extend its run of half-point rate rises into September if inflation does not slow sufficiently in the coming months.In an interview with CNBC on Thursday, Lael Brainard said: “If we don’t see the kind of deceleration in monthly inflation prints [and] if we don’t see some of that really hot demand starting to cool a little bit, then it might well be appropriate to have another [Fed] meeting where we proceed at the same pace.”However, she added: “If we are seeing a deceleration in the monthly prints, it might make sense to be proceeding at a slightly slower pace.”Brainard’s comments came just weeks after the Fed implemented its first half-point rate rise in 22 years in a bid to tame rampant inflation. Current market pricing suggests the US central bank will implement two more half-point rate rises at its upcoming meetings in June and July. With no meeting in August, the earliest opportunity for the US central bank to implement a fourth rise would be in September.Asked whether the Fed had any plans to pause its rate-rising cycle altogether, Brainard pushed back, suggesting the central bank intended to take action at each of its subsequent meetings for the foreseeable future.“Right now it’s very hard to see the case for a pause,” she said. “We’ve still got a lot of work to do to get inflation down to our 2 per cent target.”Brainard added that she would be watching for a “string” of data indicating that price pressures are abating, consumer demand is ebbing and the overheated labour market is cooling off.The Biden administration has also stepped up its rhetoric on inflation and its commitment to counteracting rising prices. The president met with Fed chair Jay Powell this week, and expressed his confidence that tighter monetary policy would “address the crisis for the American people”. His comments were seen as a tacit endorsement of the central bank’s plans to dramatically raise rates.

In addition to monetary tightening, this month the Fed began shrinking its $9tn balance sheet, which may amount over time to the equivalent of two or three rate rises, Brainard said on Thursday.The overarching concern among economists is that the Fed’s efforts to contain inflation will cause painful job losses and possibly a recession — something top officials have pushed back on given the strength of the labour market.“We’ve got twice as many job openings as unemployed. In those circumstances historically, businesses have brought down hiring and reduced openings rather than necessarily laid-off workers,” said Brainard. “I think there’s a path there where we could see demand cooling, inflation coming down, the labour market being in better balance, while still being strong.” More

Ukraine’s central bank has raised its benchmark lending rate from 10 per cent to 25 per cent, its first increase since Russia launched its full-scale invasion of the country in late February.The National Bank of Ukraine described Thursday’s move as a “resolute step” to tackle inflation, which shot up to 17 per cent in May and is on course to hit more than double last year’s average of 10 per cent.It said the rise would protect household income and savings in the hryvnia, Ukraine’s currency, and stop Ukraine burning through its foreign reserves need to protect its exchange rate.A smaller rise, the NBU said, “would have had no significant influence on the financial and economic system” during wartime because of the likely limited effect on asset prices. The central bank said it “expects that the government and the banks will respond adequately to the hike in the key policy rate by raising interest rates on domestic government debt securities and deposits”. That, it added, “will make hryvnia assets, including domestic government debt securities, more attractive, preventing household income and savings from being eroded by inflation”.Lower rates would have created expectations of future rate rises that would have damped demand for the local currency and not given hryvnia assets above inflation yields needed to revive investor interest, the central bank said.It added that it would probably move to cut rates once inflation worries and pressures on the hryvnia subsided.A sharp increase in government spending has pushed the budget deficit up 27 per cent month-on-month to $7.7bn in May, Kyiv-based investment bank Dragon Capital said in a Thursday note to investors.Air strikes and artillery bombardment of cities have caused more than $100bn in infrastructure damage, according to the Kyiv School of Economics. The World Bank expects Ukraine’s economy to contract by as much as 45 per cent this year.The country’s increasing reliance on imports has forced the central bank to spend more of its foreign reserves to maintain the hryvnia’s exchange rate with the dollar, rising from a $2bn monthly average in March and April to $3.4bn in April.Kyrylo Shevchenko, the NBU’s governor, said support from Ukraine’s foreign backers was sufficient to sustain its reserves but called on the IMF to strike a new deal with Kyiv.“As always, macroeconomic stability and the robustness of state finances should be at the centre of the programme,” Shevchenko said, according to local media. Timothy Ash, senior emerging market debt strategist at BlueBay Asset Management, said the rate rise was “the rational and right thing to do”.“With enough western financial support, Ukraine can outlast Russia,” he added. But he warned that if western backers did not change policy by continuing to finance Kyiv mostly through debt, it would reach “unsustainable levels” and trigger restructuring which would “set Ukraine’s postwar development back years”.The central bank had shied away from raising rates in the first three months of the war and instead focused on ensuring Ukraine’s banking and payments systems continued to function. It said the invasion had created “strong psychological pressure” that meant an increase would not stabilise inflation expectations or discourage Ukrainians from buying foreign currency.By June, however, it said “risks to macrofinancial stability have risen in the medium term” from low yields on hryvnia assets as Ukraine burnt through its reserves.“The threat has grown that the economy dollarisation might rise and the financial system might lose respective resources,” the NBU said. “Depreciation expectations of households and businesses are not stable and are susceptible to war developments, in particular to changes on the frontline and other situational factors.” More

Elites rarely welcome upstarts. So when financiers and policymakers recently gathered in Davos for the World Economic Forum meeting, crypto schadenfreude was in the mountain air.Earlier this year, when crypto was booming, numerous digital assets companies booked space on the Davos promenade to advertise their power and brands. But just beforehand, the terra and luna stablecoins collapsed, and the price of tokens such as bitcoin tumbled. Cue establishment chatter about a “crypto winter” — and general sneering about digital Ponzi schemes. But amid the sniping, investors should have taken note of another important — if less discussed — theme in the digital asset debate: namely that the world’s big central banks are becoming more interested in using distributed ledger technology, or blockchains, themselves.This is not because they like the retail central bank digital currencies that normally grab headlines. Yes, the mighty People’s Bank of China is testing this, along with some smaller emerging market countries, including Jamaica. The European Central Bank is pondering it too, as François Villeroy de Galhau, the French central bank governor told Davos.However, most western central bankers are wary of creating retail CBDC — ie letting citizens hold digital central bank cash — because they fear the implications of being responsible for their data and/or dislike the idea of disintermediating commercial banks. The crash of terra has also reduced any sense of urgency. So, too, the fact that mobile payments are making it increasingly easy, fast and efficient for citizens to use fuddy-duddy fiat currency. But what is sparking establishment interest is using CBDC for wholesale cross-border payments, to move funds between financial institutions and central banks. “We believe in wholesale [CBDC] and we have run nine experiments [with these],” de Galhau told the WEF, noting that although “retail CBDC is where the public interest is”, this misses the point.Or as Ravi Menon of the Monetary Authority of Singapore, which has been experimenting with CBDC for seven years, recently told an important central bank meeting in Zurich: “We are barking up the wrong tree with retail CBDCs. The tree we should be barking up is wholesale cross-border CBDCs.”This might not be what most politicians or ordinary citizens want to hear, given the arcane inner workings of wholesale markets. But it matters, since the shift in emphasis is driven by two key factors. One is a recognition that current cross-border payment systems are achingly slow; so much so that Roberto Campos Neto, the Brazilian central bank governor, recently told an IMF meeting — only partly in jest — that it has been faster to move money from São Paulo to London by boarding a plane with bags of cash than using official bank channels. However, if central banks “scale up [wholesale CBDC] and achieve atomic settlement you can make cross payments at close to zero cost and the benefits are huge”, as Menon said in Zurich. Or as Kristalina Georgieva, head of the IMF, told Davos: “CBDC are not yet internationalised, but this is where the opportunity is.” There is, in other words, a genuine use case.The second attraction is cultural: a wholesale CBDC can be organised by a club of central bank technocrats without needing much debate with politicians, or voters. This does not make it easy to create wholesale CBDCs on a large scale. Far from it. The technology hurdles remain daunting. Wholesale CBDCs may also require central banks to cede a little sovereignty since using distributed digital ledgers means they no longer control fiat currencies in the traditional manner. That requires mutual trust.However, the central banking tribe that convenes around the Bank for International Settlements in Basel does generally trust each other — and more than their own domestic politicians. More than a dozen cross-border wholesale CBDC experiments have occurred, not just with the French and Singaporean central banks, but countries such as Switzerland, South Africa, Thailand, China and the United Arab Emirates. It is not clear (yet) whether these can scale up. One key block, as Georgieva stressed in the Zurich and Davos meetings, is that there is still no “interoperability” between these separate pilots. But if this does emerge — ie scaleable systems are created — there would be further interesting implications. One is that future historians might conclude that the most significant long-term consequence of distributed ledger technologies for finance was not bitcoin and other cryptocurrencies. Instead, it lay in deeply dull corners of banking, like wholesale payments. They might also decide that while distributed ledgers were presented as a tool that could rip power away from establishment institutions, this innovation actually reconsolidated them in some ways. The Davos elite is usurping the dream. Of course, bitcoin maximalists would retort that this is precisely why CBDCs are a bad (if not unworkable) idea; their assumption is that central banks cannot continue to hoard monetary power. Maybe so. But the real moral of all these discussions is that “blockchain” can mean a multitude of different — and sometimes contradictory — [email protected] up for Gillian Tett’s Moral Money newsletter, ft.com/newsletters More