Aurelia Butler

ISLAMABAD (Reuters) -Pakistan will need to cut expenditures and development funds to try and revive an International Monetary Fund (IMF) programme, Finance Minister Miftah Ismail said on Wednesday. “We will seek revival of the IMF programme, and we will, God willing, do belt tightening, and cut PSDP (Public Sector Development Funds),” Ismail told a news conference in Islamabad.Ismail said he would be travelling to Washington later in the day to attend an IMF meeting, that will also be attended by Pakistan’s central bank governor Raza Baqir, who is already there. Pakistan is waiting for the IMF to resume talks on its seventh review of the $6 billion rescue package agreed in July 2019. If the review is approved, the IMF will release over $900 million and unlock other external funding.With a yawning current account deficit and foreign reserves falling to as low as $10.8 billion, the South Asian nation is in dire need of external finances. A new Pakistani government that took over this month from ousted Prime Minister Imran Khan said it was facing enormous economic challenges, with the fiscal deficit likely to exceed 10% of gross domestic product (GDP) at the end of the current financial year in June ahead of presenting the annual budget.Hammad Azhar, the energy minister in the Khan government and now his party’s focal person on economy, termed Miftah’s numbers “complete hogwash.” The new government of Prime Minister Shehbaz Sharif also needs to deal with double-digit inflation, and slow growth of the economy, which the IMF said in its latest report was likely to stay at 4% against Pakistan’s earlier projection of 4.8%. The toughest call is to reverse subsidies in oil and power, and defending a blanket tax amnesty Khan gave in the run up to his fall, which Ismail termed was like “planting mines” for the new government.Sharif’s government has for now decided not to roll back an estimated 373 billion Pakistani rupees ($2.1 billion) in subsidies despite the strain on public funds, citing the possible backlash if it were to raise fuel prices just days after taking power. More

BEIJING (Reuters) – China’s finance ministry and tax regulator on Wednesday said they will accelerate Value Added Tax (VAT) credit rebates for small firms. Medium-sized manufacturing firms are allowed to claim VAT credit rebates starting from May, earlier than the previously announced starting time of July, the Ministry of Finance and the State Taxation Administration said in a statement. More

TORONTO (Reuters) – As the Bank of Canada opens the door to hiking interest rates above a neutral setting for the first time in 14 years, the goal of taming inflation without triggering a recession is challenged by the multiple drivers of price pressures and record-high household debt.To tackle a three-decade high for Canadian inflation, the central bank says it will hike its benchmark interest rate toward the neutral rate, which it estimates to be between 2% and 3%, adding that it may need to lift rates above that range.At neutral, interest rates are neither stimulating nor restraining economic activity, so a move above neutral could increase the risk of a hard landing, or sharp downturn for the economy – an outcome that central banks hope to avoid.The BoC has not hiked above neutral since 2008 or earlier. It has published an update of its estimate for neutral every year since 2017, raising it last Wednesday by quarter of a percentage point.”It may be a little bit harder to dock the boat, so to speak, than it has been over the last ten years,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets.”There are a lot of forces out there that are contributing to inflation and some of them may not be that temporary.”An aging workforce, the transition to a greener economy and moves to reduce economic interdependence between countries are among the long-term drivers of inflation, while temporary pressures include supply shocks related to the COVID-19 pandemic and the war in Ukraine. Canada’s inflation rate was 5.7% in February.The U.S. Federal Reserve has also signaled it could lift interest rates above neutral in the current tightening cycle. But Canada’s economy is likely to be particularly sensitive to higher rates after Canadians ramped up borrowing during the pandemic to participate in a red-hot housing market.Household debt is 186% of disposable income, a level that is the highest by far among G7 countries, data from the Organisation for Economic Co-operation and Development shows. There’s a big risk that asset markets such as the housing sector “end up collapsing as rates rise,” said David Rosenberg, chief economist & strategist, at Rosenberg Research.Last week, the BoC raised its benchmark rate by half of a percentage point to 1%, its biggest single hike in more than two decades, and said the economy is strong enough to handle further tightening. Money markets are betting that the policy rate will climb to 3% next year, which would be the highest since 2008 and well above the 1.75% peak of the previous rate hike cycle in 2017 to 2018.Still, the small gap between Canadian 2- and 10-year yields, at 35 basis points, is an indication that investors expect economic growth to slow. The flat yield curve comes as monetary policymakers globally turn more hawkish after potentially waiting too long to reduce pandemic-era support.”The bottom line is (that) central banks … overestimated the amount of stimulus that was required last year,” said Darcy Briggs, a portfolio manager at Franklin Templeton Canada. “They overstayed their welcome.” More

The European Central Bank may raise interest rates as soon as July amid “significant” inflation risks that will probably require further tightening later in the year, according to Governing Council member Martins Kazaks.He said he wouldn’t challenge trader bets that the ECB’s deposit rate — currently at a record-low -0.5% — will increase to zero this year. There’s also no need for the rate to linger at this “magical number” for longer than necessary. “A rate increase in July is possible, and I have no reason to disagree with what markets are pricing for the second half of the year,” Kazaks, who heads Latvia’s central bank, said in a Bloomberg interview. “We are on a solid path of policy normalization” where “we step-by-step gradually get to zero and then above.”With euro-area inflation at a record 7.5% and rising, policy makers are pressing ahead with unwinding monetary stimulus this year. Money markets are betting on more than a 50% chance of a quarter-point rate hike by July, with 25 basis points of tightening baked in for September and December.Still, the economic fallout from the war in Ukraine means policy makers are moving cautiously. Central banks in the U.S. and the U.K. are further ahead in removing crisis-era stimulus, which has exposed the ECB to criticism that it’s underestimating the inflation risks.“Gradual doesn’t mean slow,” said Kazaks, who tends to have hawkish policy views. “It doesn’t mean being consciously behind the curve. No, it just means checking if taken policy measures are appropriate.”Kazaks said that rate increases of 25 basis points “seem appropriate” for now, though policy makers can always discuss larger moves depending on the economic data. Current inflation readings mean the ECB shouldn’t wait for faster wage growth, and even a significant slowdown in price pressures or the economy would only delay, not derail, policy normalization, he said.Policy makers have been adamant that one precondition for raising rates for the first time in more than a decade is halting a 2015 bond-buying tool. That decision is on the agenda for their June 8-9 meeting.“We haven’t seen any major elements of stress in financial markets, which makes me think that ending QE early in the third quarter is possible and appropriate,” Kazaks said. “Whether it could already happen at the end of June, we’ll have to discuss when we get new forecasts.”Bloomberg reported earlier this month that ECB staff is working on a backstop to use against debt-market stress. But Kazaks argued that there’s currently no need for new tools to ensure monetary policy reaches all parts of the 19-nation region. “As far as I’m concerned, it’s sufficient to say ‘We will do what’s our task and we will deliver’,” he said. “We’ve done it before and we’ll do it again if needed.”On the risks to the economic outlook, he pointed to remaining pandemic disruptions, supply chains and the war in Ukraine. He also said the economy is probably closer to the “adverse scenario” the ECB published in March, which foresees weaker growth and faster inflation this year, and the risk of a technical recession is “non-trivial.”Like many of its European peers, the former Soviet republic is trying to speed up efforts to wean itself off Russian gas. Kazaks said the region would benefit from a joint fund — similar to the one created in response to the pandemic — to help energy independence and investment in renewables. “Sanctions on Russia are a necessary condition but for them to be efficient we ourselves need to change the ways we behave,” he said. “The challenge for Europe is to be able to switch away from Russian energy sources before Russia finds new ways to supply to other buyers.”©2022 Bloomberg L.P. More