Economy

MUMBAI/NEW DELHI (Reuters) – The Indian government could consider reducing taxes on some items such as maize and fuel in response to the central bank’s recommendations to help rein in climbing retail inflation, two sources with knowledge of the discussions told Reuters.However, a decision will only be taken after the release of February inflation data, one of the sources said.India’s annual retail inflation rate rose to 6.52% in January from 5.72% in December, data showed this week.”Food inflation is likely to stay high, prices of milk, maize and soy oil are adding to inflation worries in the near term,” a senior source familiar with the central bank’s and government’s thinking on the matter said.”The government is looking at cutting import duties on products like maize, which attract a 60% basic duty, while taxes on fuel could also be reduced again,” the source added.India’s finance ministry and Reserve Bank of India (RBI) did not immediately respond to Reuters’ queries.Though global crude oil prices have eased and stabilised in recent months, fuel companies have not passed on the lower import costs to consumers or companies trying to make up for previous losses.India imports more than two-thirds of its oil requirements. A cut in taxes by the central government could push pump operators to pass on the benefits to retail consumers and help bring down inflation.January’s retail inflation was above the RBI’s upper target limit of 6% for the first time since October and much higher than an estimate of 5.9% in a Reuters poll of 44 analysts.”We have some recommendations from them (central bank) which is a usual practice,” a second source said.”This has been one of the ways in which government and RBI has coordinated to create a stable macroeconomic environment. Fuel and maize are part of duties. We will probably wait for at least one more print before we decide on these,” he added.Though calls for another rate hike have risen sharply following the RBI’s hawkish monetary policy tone last week and the CPI shocker earlier this week, the view is not universal.”The RBI’s decision and stance remains vindicated by this number and it would be fair to surmise that if inflation remains above the 6% mark in the next couple of months there could be a further rate hike considered,” Madan Sabnavis, chief economist at Bank of Baroda said in a note, though he added that the probability of a hike was low.He said there was scope for the federal and local governments to consider lowering taxes, especially for fuel, to cool inflation.($1 = 82.7400 Indian rupees) More

SOULAC-SUR-MER, France (Reuters) – When it was built at the end of the 1960s on one of France’s most glorious Atlantic coastlines, the beach was over 200 metres (656 ft) away. Today, the hulk of the 80-flat Le Signal apartment block perches precariously on a dune just metres from the water and local authorities are tearing it down before it tumbles. Four stories high, it targeted vacationers in Soulac-sur-Mer, at the northernmost tip of the Gironde estuary in southwest France, known for its broad golden beaches and pine forests. But with beaches disappearing at a rate of about 2.5 metres per year in past decades, Soulac-sur-Mer suffered some of the fastest coastal erosion in France. By 2010, the ocean was lapping at the dune on which Le Signal was built.In 2014, the local government decided to relocate the building’s inhabitants and began the long process of expropriation and removing asbestos before starting demolition earlier this month.Behind a fence on a sunny day in February, residents and vacationers watched as an excavator bit pieces out of Le Signal’s empty hulk.”The demolition of this building puts a finger on a key question of our times, climate change and its impact on ocean levels,” said 71-year-old local resident Guy Bouyssou, who also feared the village itself, just north of Le Signal, could be the next in line for water damage. Adrien Privat, an official at French coast protection agency Conservatoir du Littoral, said that threat is very real.”Le Signal’s situation is largely symbolic for what is happening in terms of coastal erosion France,” he said. Privat said that global warming was having a major impact as higher average sea levels exacerbate other factors that cause erosion and make shorelines more vulnerable to storms.He added the boxy building was a typical example of the extensive build-up of coastal areas in the second half of the 20th century, when urban planners had little regard for the fact that shorelines are dynamic and ever-changing. “We estimate that some 50,000 residences are in zones that will require them to be moved by the end of the century. All of France’s coasts are under threat, and sandy coastlines more than rocky ones,” he said. He said ever-rising sea levels and increasingly violent storms made it impossible to let people live in Le Signal without costly shore protection measures that could also have negatively impacted nearby shorelines. He added that long expropriation procedures and the struggle to finance an environmentally sound demolition was a necessary rehearsal for things to come. “Le Signal is a warning for what could happen in other zones and for the need to prepare for it now,” he said. More

The People’s Bank of China will promote steady growth of loans to micro and small businesses and will strengthen financial support to rental housing, it said after an annual financial markets and credit policy work conference, which took place on Feb. 10.”We will support the high-quality development of the real economy and actively prevent and control risks in key areas of the financial market,” the central bank said.Chinese banks have been gearing up to enhance credit support to prop up the economy after harsh COVID measures and a crisis in the property sector dragged China’s growth in 2022 to one of its worst rates in nearly half a century. The central bank will push platform companies’ financial businesses to finish their overhaul and will support healthy development of the companies. The central bank will orderly promote the two-way opening of the financial market and deepen opening up of bond and derivative markets, it said. The central bank also said it will promote launch of corporate bond management rules and revisions of note rules. More

MUMBAI/ISLAMABAD (Reuters) – Inflation in Pakistan could average 33% in the first half of 2023 before trending lower, and a bailout from the International Monetary Fund alone is unlikely to put the economy back on track, a senior economist with Moody’s (NYSE:MCO) Analytics told Reuters.”Our view is that an IMF bailout alone isn’t going to be enough to get the economy back on track. What the economy really needs is persistent and sound economic management,” senior economist Katrina Ell said in an interview on Wednesday.”There’s still an inevitably tough journey ahead. We’re expecting fiscal and monetary austerity to continue well into 2024,” she added.Pakistan government and the IMF could not reach a deal last week and a visiting IMF delegation departed Islamabad after 10 days of talks, but said negotiations would continue. Pakistan is in dire need of funds as it battles a wrenching economic crisis.An agreement on the ninth review of the programme would release over $1.1 billion of the total $2.5 billion pending as part of the current package agreed in 2019 which ends on June 30. The funds are crucial for the economy whose current foreign exchange reserves barely cover 18 days worth of imports.”Even though the economy is in a deep recession, inflation is incredibly high as (result of) part of the latest bailout conditions,” Ell said.”So what we’re expecting is that through the first half of this year, inflation is going to average about 33% and then might trend a little bit lower after that,” she added.The consumer price index rose 27.5% year-on-year in January, its highest in nearly half a century.Low income households could remain under extreme pressure as a result of high inflation on account of being disproportionately exposed to non-discretionary items.”Food prices are high and they can’t avoid paying for that, so we’re going to see higher poverty rates as well feed through,” the economist said.NO OVERNIGHT FIXEll said Pakistan has not has a great track record when it comes to IMF bailouts, so infusing additional funds alone may prove to be of little use.”If we’re going to see any improvement, it’s going to be very gradual. There’s just no overnight fix,” she said.The weaker rupee, which is plumbing record lows, is adding to imported inflation while domestically high energy costs on the back of tariff increases and still elevated food prices is likely to keep inflation high.Moody’s expects economic growth for the 2023 calendar year of around 2.1%.”It is likely that we will see further monetary tightening in Pakistan to try and stabilise inflation and also with the weakness in the FX they might kind of intervene there to try and force in stability, but again it’s not going to be a silver bullet,” Ell said.Last month, the central bank raised its key interest rate by 100 basis points (bps) to 17% in a bid to rein in persistent price pressures. It has raised the key rate by a total of 725 bps since January 2022.With significant recession-type conditions in Pakistan, skyrocketing borrowing costs could really exacerbate domestic demand struggles, she said.”You really need to see sustained sound macroeconomic management, and just injecting further funds in there without decent backing is not going to deliver the results that you’re looking for.” More

NEW DELHI (Reuters) – India is drafting a proposal for G20 countries to help debtor nations badly hit by the economic fallout from the pandemic and Ukraine war, by asking lenders including China, the world’s largest sovereign creditor, to take a large haircut on loans.Two Indian government sources told Reuters of the proposal as finance ministers and central bank chiefs from the Group of 20 prepared to meet in Bengaluru next week. The gathering will be the first major event of India’s one-year presidency of the G20, a bloc composed of the world’s biggest economies.The International Monetary Fund (IMF) said on Tuesday it would hold a virtual meeting with the World Bank, India, China, Saudi Arabia, the United States and other wealthy Group of Seven (G7) democracies on Friday to try to reach understandings on common standards, principles and definitions for how to restructure distressed country debts.”India is designing a proposal” to try to persuade countries like China to take a big haircut in lending to nations in difficulty, said one of the Indian officials, both of whom declined to be named as they were not authorised to talk to the media.China and other G20 countries were aware that India was working on a proposal, the officials said.China’s Ministry of Foreign Affairs told Reuters on Wednesday it had nothing to share beyond spokesperson Wang Wenbin’s comment at a news conference on Tuesday.”China takes the debt issue of developing countries seriously and supports relevant financial institutions to put forward solutions,” he said.”It is our consistent stance that multilateral financial institutions and commercial creditors, which hold the bulk of the debt of developing countries, should participate in the debt relief efforts.”The People’s Bank of China and the Finance Ministry did not immediately respond to requests for comment.India’s finance and foreign ministries did not immediately respond to emails and messages seeking comment either.New Delhi expects the United States to be one of the main backers of its proposal, said one of the sources.A spokesperson for the U.S. Treasury declined to comment.U.S. Treasury officials have previously said that they are opposed to China’s demand that multilateral development banks also take haircuts on debt principal in any restructurings. It was unclear whether the Indian proposal would advocate multilateral lenders taking haircuts.Two of India’s neighbours, Pakistan and Sri Lanka, are in economic crisis, and urgently seeking international help before they run out of foreign currency to pay for vital imports.India and the Paris Club of creditors recently told the IMF they supported Sri Lanka’s debt restructuring plan as the bankrupt nation sought a $2.9 billion loan. The United States said earlier this month it was willing to do its part too but that “we need to see credible and specific assurances that (China) will meet the IMF standard of debt relief”.The Export-Import Bank of China has offered Sri Lanka a two-year moratorium on its debt and said it would support the country’s efforts to secure an IMF programme, which a Sri Lankan government source said was not enough.The IMF, the World Bank and the United States have pushed for the so-called Common Framework – a G20 initiative that was launched in 2020 to help poor countries delay debt repayments – to be expanded to include middle-income countries but China has resisted.In December, World Bank President David Malpass said the world’s poorest countries owed $62 billion in annual debt service to bilateral creditors, a year-on-year increase of 35%, triggering higher risk of defaults. More

If you want to see why the Bank of Japan’s yield curve control — and whether it survived a change of governorship at the central bank — is a hugely important question for the entire world, take a look at this killer chart.This comes to us from Apollo’s chartmeister (and chief economist) Torsten Sløk, and shows how the Bank of Japan is now buying so many bonds to defend its yield ceiling that its counteracting all the balance sheet shrinkage by the Fed, BoE and ECB.As Sløk says:BoJ purchases of JGBs to keep yields low are now bigger than Fed QT, and the result is that central banks are once again adding liquidity to global financial markets, which was likely contributing to the rally in equities and credit in January. With YCC still in place in Japan, QE will continue to support global financial markets.We’re (very) unconvinced that the BoJ continuing to hoover up the GB market has played a meaningful role in the global market rally we’ve seen since the autumn. That looks far more driven by signs that inflation is slowing, economic growth is firmer than expected, and central banks are becoming less aggressive about tightening monetary policy.But the BoJ’s actions still clearly matter to the bond market. Its policy of keeping Japanese government bond yields rooted near zero has acted as an anchor for the entire global fixed income complex. At the very least that has helped moderate the rise in bond yields driven by faster inflation and punchy interest rate hikes elsewhere.The new incoming BoJ governor Kazuo Ueda has been tight-lipped on what he thinks about the current monetary stance, only telling reporters that it was “appropriate” and that “for now, I think it is necessary to continue easing measures”. But if YCC is finally killed off — or even just tweaked — it will probably be a major event for markets everywhere. More

Industrial production and retail sales in December fell to their worst year-on-year contractions since the onset of the Covid-19 pandemic in early 2020.
According to the World Bank, the International Monetary Fund and the OECD, Russian GDP dropped by at least 2.2% in a best-case scenario in 2022 and by up to 3.9%.
And is widely expected to contract again in 2023.

Men wearing military uniform walk along Red Square in front of St. Basil’s Cathedral in central Moscow on February 13, 2023.
Alexander Nemenov | Afp | Getty Images

The coming months will be critical in figuring out how Russia’s economy is holding up in the face of a new suite of sanctions, and for how long it can continue pouring money into its military assault on Ukraine.
Russia’s budget deficit hit a record 1.8 trillion Russian rubles ($24.4 million) in January, with spending growing by 58% from the previous year while revenues fell by more than a third. 

Industrial production and retail sales in December fell to their worst year-on-year contractions since the onset of the Covid-19 pandemic in early 2020, with retail sales dropping by 10.5% year-on-year while industrial production shrank by 4.3%, compared to a 1.8% contraction in November. 
Russia has yet to report its GDP growth figures for December, which are expected to be incorporated into full-year 2022 data slated for this Friday.
According to the World Bank, the International Monetary Fund and the OECD, Russian GDP dropped by at least 2.2% in a best-case scenario in 2022 and by up to 3.9%, and is widely expected to contract again in 2023.
However, both the Russian finance ministry and the central bank maintain that all of this is within their models. 
Several unique circumstances and accounting technicalities go some way to explaining the scale of the January deficit figure, according to Chris Weafer, CEO of Moscow-based Macro Advisory.

The big drop in tax revenue was mostly accounted for by changes in the tax regime that kicked in at the beginning of January, the finance ministry claimed. Companies previously paid taxes twice per month, but now make one consolidated payment on the 28th of each month. 

The finance ministry suggested most of the January tax payments had not yet been accounted for by Jan. 31 and will instead feed into the February and March figures.
Weafer also highlighted a change in the Russian oil tax maneuver that came into force in January and is expected to iron out in the coming months, while the nature of Russian public spending allocation means it is heavily concentrated at the end of the year, widening the fiscal deficit.
Christopher Granville, managing director of global political research at TS Lombard, noted two further factors distorting the most recent deficit figures.
Firstly, this was the first print since the sanctioning states’ embargo on Russian crude imports went into force on Dec. 5.
“Before that date, Europe had been loading up with Urals crude, then straight to zero, so the Russian seaborne export trade had to be re-routed overnight,” Granville told CNBC. 
“Obviously a lot of preparations for that re-routing had been made (Russia buying up tankers, getting more access to the ‘shadow’ or ‘dark’ fleet etc), but the transition was bound to be bumpy.”

The actual Urals price dived as a result, averaging just $46.8 per barrel during the period from mid-December to mid-January, according to the Russian finance ministry. This was the tax base for much of January’s oil and gas-related federal budget revenues, which also suffered from the fading of a revenue windfall in the fourth quarter from a hike to the natural gas royalty tax.
The finance ministry also flagged massive advance payments for state procurement in January, which totaled five times those of January 2022.
“Although they don’t say what this is, the answer is perfectly obvious: pre-payment to the military industrial complex for weapons production for the war,” Granville said.
How long can the reserves last?
For the month of January as a whole, the average Urals price edged back up to $50 a barrel, and both Granville and Weafer said it would be important to gauge the impact on Urals price and Russian exports as the full impact of the latest round of sanctions becomes clearer.
Sanctioning countries extended bans to bar vessels from carrying Russian-originated petroleum products from Feb. 5, and the International Energy Agency expects Russian exports to plummet as it struggles to find alternative trading partners.
The export price for Russian crude is seen as a central determinant for how quickly Russia’s National Wealth Fund will be drawn down, most notably its key reserve buffer of 310 billion Chinese yuan ($45.5 billion), as of Jan. 1.
Russia has ramped up its sales of Chinese yuan as energy revenues have declined, and plans to sell a further 160.2 billion rubles’ worth of foreign currency between Feb. 7 and Mar. 6, almost three times its FX sales from the previous month.
However, Russia still has plenty in the tank, and Granville said the Kremlin would stop depleting its yuan reserves well before they were fully exhausted, instead resorting to other expedients.

“A flavour of this is the idea floated by MinFin to benchmark oil taxation on Brent rather than Urals (i.e. a material hike in the tax burden on the Russian oil industry, which would then be expected to offset the blow by investing in logistics to narrow the deficit to Brent) or the proposal from First Deputy Prime Minister Andrey Belousov that major companies flush with 2022 profits should make a ‘voluntary contribution’ to the federal budget (mooted scale: Rb200-250bn),” Granville said.
Several reports last year suggested Moscow could invest in another wave of yuan and other “friendly” currency reserves if oil and gas revenues allow. Yet given the current fiscal situation, it may be unable to replenish its FX reserves for some time, according to Agathe Demarais, global forecasting director at the Economist Intelligence Unit.
“Statistics are state secrets these days in Russia especially regarding the reserves of the sovereign wealth funds — it’s very, very hard to know when this is going to happen, but everything that we’re seeing from the fiscal stance is that things are not going very well, and so it is clear that Russia must draw down from its reserves,” she told CNBC.
“Also, it has plans to issue debt, but this can only be done domestically so it’s like a closed circuit — Russian banks buying debt from the Russian state, etcetera etcetera. That’s not exactly the most efficient way to finance itself, and obviously if something falls down then the whole system falls down.”
Early rounds of sanctions following the invasion of Ukraine set out to ostracize Russia from the global financial system and freeze assets held in Western currencies, while barring investment into the country.
Sanctions not about ‘collapse’ of Russian economy
The unique makeup of the Russian economy — in particular the substantial portion of GDP that is generated by state-owned enterprises — is a key reason why Russian domestic life and the war effort appear, at least at face value, to be relatively unaffected by sanctions, according to Weafer.
“What that means is that, in times of difficulty, the state is able to put money into the state sectors, create stability and subsidies and keep those industries and services going,” he said. 
“That provides a stabilizing factor for the economy, but equally, of course, in good times or in recovery times, that acts as an anchor.”

In the private sector, Weafer noted, there is far greater volatility, as evidenced by a recent plunge in activity in the Russian auto manufacturing sector. 
However, he suggested that the government’s ability to subsidize key industries in the state sector has kept unemployment low, while parallel trading markets through countries such as India and Turkey have meant the lifestyles of Russian citizens have not been substantially impacted as yet.
“I think it’s increasingly dependent on how much money the government has to spend. If it has enough money to spend providing social supports and key industry supports, that situation can last for a very, very long time,” Weafer said.
“On the other hand, if the budget comes under strain and we know that the government can’t borrow money, that they’re going to have to start making cuts and making choices between military expenditure, key industry supports, social supports, and that’s what situation may change, but right now, they have enough money for the military, for key industry supports, for job subsidies and for social programs.”
As such, he suggested that there is little pressure on the Kremlin from the domestic economy or the population to change course in Ukraine for the time being.
Diminished technology access
Demarais, author of a book on the global impact of U.S. sanctions, reiterated that the most significant long-term damage will come from Russia’s receding access to technology and expertise, in turn causing a gradual attrition of its main economic cash cow — the energy sector.
The aim of the sanctions onslaught, she explained, was not a much-touted “collapse of the Russian economy” or regime change, but the slow and gradual attrition of Russia’s ability to wage war in Ukraine from a financial and technological perspective.
“The technology gap, those sectors of the economy that rely on accessing Western technology in particular, or Western expertise, in many areas are definitely going to degrade and the gap between them and the rest of the world is going to widen,” Weafer said.
The Russian government has begun a program of localization and import substitution alongside companies in so-called friendly countries, with a view to eventually creating a new technological infrastructure over the next several years.
“Even the optimists say that’s probably the end of the decade before that can be done, it’s not a quick fix,” Weafer explained.
“I think even government ministers are saying by the time you put everything in place with training and education, facilities etc., it’s a minimum five-year program and it’s probably more like seven or eight years before you can start to deliver engagement, if you get it right.”
A spokesperson for the Russian finance ministry was not immediately available for comment when contacted by CNBC.

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UK inflation slowed by more than expected to a five-month low in January, adding to growing evidence that price pressures have peaked. The annual rate of consumer price inflation declined to 10.1 per cent in January, the Office for National Statistics said on Wednesday, down from 10.5 per cent in December. Inflation hit a high of 11.1 per cent in October. The January reading was lower than the 10.3 per cent forecast by economists polled by Reuters. Core inflation, which strips out volatile food, energy, alcohol and tobacco prices, declined to 5.8 per cent in January from 6.3 per cent the previous month. The figure, a closely watched measure of underlying price pressure, was much lower than the 6.2 per cent forecast by economists.“With the end of the inflationary menace on the horizon, the Bank of England is under increasing pressure to change its course by ending the current tightening cycle,” said Yael Selfin, chief economist at the consultancy KPMG.

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The Bank of England recently forecast that headline inflation would fall “sharply” for the rest of the year on the back of lower energy price growth. It signalled that it could be near the end of its tightening cycle while warning about the risks of “greater persistence” in underlying inflation.However, services inflation, a measure of domestically generated price pressure, also eased sharply to 6 per cent in January from 6.8 per cent in the previous month.“It is the easing in services inflation that will do the most to reassure the Bank of England that inflation is moderating as it had hoped,” said Ruth Gregory, economist at Capital Economics. She added that the change of interest rates rising from the current 4 per cent to her forecast of 4.5 per cent “are now a bit slimmer”.Markets are pricing in a 0.25 percentage point rate rise in interest rates next month, a slowdown from the half percentage point increase in February.The slowdown will be little relief for households as prices remain elevated and inflation continues to rise faster than wages. Moreover, food prices rose at an annual rate of 17 per cent in January, unchanged from the previous month and the highest on record. The slowdown in January’s annual inflation was “driven by the price of air and coach travel dropping back after last month’s steep rise”, said Grant Fitzner, ONS chief economist. He added that “petrol prices continue to fall and there was a dip in restaurant, café and takeaway prices”. The annual price growth of motor fuels slowed to 7.7 per cent in January from a peak of 43.7 per cent last July. However, UK price pressures remain higher than in some other countries, in part because of energy costs.US inflation slowed to a 15-month low of 6.4 per cent in January. In the eurozone, preliminary figures showed price growth slowing to an eight-month low of 8.5 per cent in January, following a large reduction in energy inflation.

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Chancellor Jeremy Hunt said: “While any fall in inflation is welcome, the fight is far from over.“High inflation strangles growth and causes pain for families and businesses — that’s why we must stick to the plan to halve inflation this year, reduce debt and grow the economy.” More