Economy

States pushed back on a plan to take back some of their stimulus money to fund President Biden’s emergency spending request. Now Congress is trying to find other ways to offset the cost.FRANKFORT, Ky. — Gov. Andy Beshear has been toting oversize checks around his state in recent weeks, handing them out to city and county officials for desperately needed water improvements.The tiny city of Mortons Gap got $109,000 to bring running water to six families who do not have it. The people of Martin County, whose water has been too contaminated to drink since a coal slurry spill two decades ago, got $411,000. The checks bear Mr. Beshear’s signature, but the money comes from the federal government, part of a huge infusion of coronavirus relief aid that is helping to fuel record budget surpluses in Kentucky and many other states.Therein lies a Washington controversy. The funds, which Congress approved at a moment when the pandemic was still raging, are allowed to be used for far broader purposes than combating the virus, including water projects like those in Kentucky. Most states will get another round of “fiscal recovery funds” — part of President Biden’s $1.9 trillion American Rescue Plan — next month.But in Washington, Mr. Biden is out of money to pay for the most basic means of protecting people during the pandemic — medications, vaccines, testing and reimbursement for care. Republicans have refused to sign off on new spending, citing the state recovery funds as an example of money that could be repurposed for urgent national priorities.“These states are awash in money — everybody from Kentucky to California,” said Scott Jennings, a former aide to Senator Mitch McConnell of Kentucky, the Republican leader. “People are like: ‘We’ve printed all this money; we’ve sent it out. These states have these massive surpluses, and now you need more?’”Republicans were never fans of Mr. Biden’s rescue plan, which Democrats muscled through Congress without their support. Despite the many ways it is benefiting his state, Mr. McConnell once called it a “multitrillion-dollar, nontargeted Band-Aid” that would dump “another huge mountain of debt on our grandkids.”On Capitol Hill on Thursday, a day after Mr. Biden made a public appeal to Congress for more money, Senate Republicans and Democrats were nearing a deal on a $10 billion emergency aid package — less than half of Mr. Biden’s initial request. But they had not resolved crucial differences over the size and how to pay for it. Republicans want to use unspent money already approved by Congress, but the parties have been unable to agree on which programs should be tapped.Since the outset of the pandemic, the Trump and Biden administrations have injected $5 trillion into the American economy, including the rescue plan. With midterm elections approaching, the gush of federal stimulus spending will draw even greater scrutiny as Republicans accuse Democrats of wasting funds and fueling inflation, and demand a precise accounting of how the money has been spent.David Adkins, the executive director and chief executive of the Council of State Governments, said such questions were inevitable now that policymakers could catch their collective breath.“We have to lean into the notion that states are laboratories of democracy,” Mr. Adkins said. “Some of these things will fail; some of this money will not be spent well. But that is the nature of trying to navigate disruptive times.”The rescue plan set aside $195 billion to help states recover from the economic and health effects of the pandemic. When Mr. Biden made his initial aid request, senior lawmakers in both parties negotiated a plan to pay for it partly by taking back $7 billion from states, as part of a $1.5 trillion spending bill.Governors and rank-and-file Democrats balked, saying that to do so would disproportionately hurt the 31 states that have not yet gotten all their rescue funds, and the deal fell apart. Now it appears the state funds will be spared, though the fracas has cast a sharp spotlight on how the fiscal recovery funds are being spent.“I was never for giving this money to the states, but I was always of the belief that once you gave it to them, politics would not allow you to get it back,” Senator Roy Blunt of Missouri, the top Republican on the subcommittee that controls health spending, said in a recent interview.All told, the White House says 93 percent of the American Rescue Plan dollars that are currently available have been “legally obligated,” meaning they have either already been spent or are committed to being spent.Most states have either started spending their fiscal recovery funds, or have plans to do so. A recent analysis by the Center on Budget and Policy Priorities found that while most states are still developing budgets for the upcoming fiscal year, states have already budgeted 78 percent of their fiscal recovery fund allocation.Kentucky, where Mr. Beshear, a Democrat, is promoting record job growth and economic boom times, ended 2021 with a record $1.1 billion surplus, and another surplus is expected this year. The state has already received $1.1 billion in federal funds and expects another $1 billion in May. It is spending the money on broadband, bolstering tourism and shoring up the unemployment insurance fund as well as coronavirus testing, in addition to water improvements.Martin County recently received $411,000 in federal stimulus funds to help pay for desperately needed water improvements.Maddie McGarvey for The New York Times“These dollars are too important and too transformational to get caught up in a partisan fight,” Mr. Beshear said in an interview, adding: “These are dollars that are helping us as we emerge from Covid. We’ve got a choice to limp out of the pandemic or sprint out of the pandemic, and cutting off this aid only hurts the people that need it.”Congress specified four broad purposes for the money: to respond to the pandemic’s health and economic impacts; to provide bonus pay to essential workers; to prevent cuts in public services; and to invest in sewer, water or broadband infrastructure. But states can also use the funds to replace lost revenues, which gives them great flexibility in spending the money.Arkansas, for instance, has awarded $374,000 to a rape crisis center; $6.3 million to the Arkansas Coalition Against Sexual Assault; and another $6.3 million to the Arkansas Alliance of Boys & Girls Clubs. But the bulk of the money has gone toward improving broadband access and addressing the needs of the health care system.“The Omicron variant came in, cases skyrocketed, hospitals filled up and so we had to utilize a significant amount of our ARPA money for expanding hospital space, home testing and other public health response,” said Gov. Asa Hutchinson, a Republican, using the acronym for the rescue plan. “So that’s obviously the first responsibility, and then we looked at these other needs.”Other states are using the money in ways that are only tangentially related to Covid-19, but that are permissible under guidelines issued by the Treasury Department.Alabama devoted $400 million of its allocation, or roughly one-fifth, to building two new prisons, despite a public outcry from advocates for racial justice and civil liberties. Florida devoted $2 billion, nearly one-quarter of its $8.8 billion allotment, to highway construction — a decision that has drawn criticism from the nonpartisan Florida Policy Institute.“The intended purpose of the American Rescue Plan Act dollars was to ensure that individuals and communities could recover from the pandemic, and I think in many ways there were better uses for this money,” said Esteban Leonardo Santis, the group’s tax and revenue analyst.Twenty states, including Kentucky, spent a total of $15 billion to build up their depleted unemployment insurance trust funds. Independent analysts say that is effectively a tax break for businesses, which otherwise may have had to make up for the lost revenues. But Mr. Beshear defended it, saying that Kentucky businesses stepped up during the pandemic. A local Toyota plant made face shields, and bourbon distillers manufactured hand sanitizer, he said.The governor’s Twitter feed is rife with photos of big checks and smiling city and county officials; he is running for re-election in 2023.“If there’s one thing a governor knows how to do, it’s drive around their state and hand out huge checks and cut big ribbons with oversized scissors,” Mr. Jennings said. “They’re like game show hosts out there.”Chris McDaniel, a Kentucky state senator, spent much of this week immersed in budget talks, including planning how to use Kentucky’s next tranche of fiscal recovery funds.Luke Sharrett for The New York TimesExperts say, and the White House acknowledges, that the fiscal recovery funds have helped create state budget surpluses. Gene B. Sperling, a senior adviser to the president who is overseeing the American Rescue Plan, said the surpluses were proof that Mr. Biden’s stimulus package was working — and this was no time to pare back.“Ensuring that states and localities have a cushion for some pretty serious bumps in the road is smart policy,” Mr. Sperling said, “and a lesson learned from what happened after the Great Recession.”But those surpluses are likely to be temporary, and how states are using them has played into the controversy over Covid relief funds. The Center on Budget and Policy Priorities says 14 states are using temporary budget surpluses “to call for costly and permanent tax cuts targeted more to wealthy people” — a move the center described as a “bad choice.”Here in Frankfort, the state capital, Kentucky lawmakers in a hurry to wrap up their 2022 legislative session were working on pushing through a hefty income tax cut this week. But a proposal to use the state’s budget surplus to give Kentuckians a tax rebate of up to $500 seemed unlikely to pass, said its author, State Senator Chris McDaniel, the appropriations committee chairman.Mr. McDaniel, a Republican, spent much of this week immersed in budget talks, including planning how to use Kentucky’s next tranche of fiscal recovery funds. Another $1 billion is coming, and despite some philosophical misgivings, he said he saw no reason not to spend it.“I believe firmly that it was too much money that came down,” Mr. McDaniel said. “But I also believe that Kentuckians will bear the tax burden eventually, just like everyone else down the line, and I am not going to disadvantage future Kentuckians out of a point of philosophical pride.”Emily Cochrane More

Harry’s Wonder Bar is a trusted old dive in Nebraska’s capital, frequented by office clerks, construction workers and graduate students alike: the sort of wood-paneled place with a pool table in the back where phones generally stay in pockets, second fiddle to casual conversation, and beer mugs come frosted regardless of the season.As a half-dozen or so happy hour patrons gathered at the bar on a recent afternoon, most had something remarkable in common: Everybody seemed to know somebody who had earned a significant raise, or multiple raises, in the past year — and many, if not all, had received a jump in pay themselves.That included the bartender on the early-evening shift, Nikki Paulk, an easygoing woman with a flash of pink hair. “I’m in hot demand, baby,” she said, mentioning “desperate” employers with a burst of a grin. “I’ve worked at like six bars in the last six months because I just keep getting better offers I can’t turn down.”The unemployment rate in Nebraska was 2.1 percent in February, tied with Utah for the lowest in the nation and near the lowest on record for any state. In several counties, unemployment is below 1 percent. Even taking into account adults who have left the work force, the share of the population 16 and older employed in Nebraska is around 68 percent, the nation’s highest figure.After decades of wage and income stagnation, the seesaw of power between managers and their workers looks to at least temporarily be tilting in the direction of labor, with employers in competition for workers instead of the other way around. Unemployment in states including Indiana, Kansas, Montana and Oklahoma is almost as low as in Nebraska, testing the benefits and potential costs of an economy with exceptionally tight labor markets.Ms. Paulk, 35, graduated from college with a graphic design degree during the Great Recession, when jobs were scarce. She remembers working 60-hour weeks near minimum wage in Illinois, “being excited to find a quarter” that could go toward laundry. In 2013, she moved to Nebraska and took a job in medical data entry for $12 an hour.She started bartending in 2018, and since then, she says, her overall pay has more than doubled to $25 (and sometimes $30) an hour, including tips.The nationwide jobless rate in February was 3.8 percent, nearly back to prepandemic levels that were the lowest in a half-century. The particularly low unemployment in Nebraska is partly attributable to its higher-than-average high school graduation rate, and the dominant role of industries like manufacturing and agriculture that are less volatile than the service or energy sectors during downturns. Even at the peak of Covid-19 lockdowns in the spring of 2020, the state unemployment rate was 7.4 percent, half the national number.Yet the labor market in Nebraska may also be a harbinger for the country at large. Most economists expect overall unemployment to continue ticking downward this year. Job openings are near record highs, and jobless rates in January were lower than a year earlier in 388 of the 389 metropolitan areas evaluated by the Bureau of Labor Statistics.Many business analysts contend that if labor remains scarce, wages will grow too rapidly and employers will continually pass on that increased expense to consumers. At least for now, evidence of such a spiral is sparse: Federal Reserve data shows that median annual pay increases are well within the range — 3 to 7 percent — that prevailed from the 1980s until the 2007-9 recession.The State of Jobs in the United StatesJob openings and the number of workers voluntarily leaving their positions in the United States remained near record levels in March.March Jobs Report: U.S. employers added 431,000 jobs and the unemployment rate fell to 3.6 percent ​​in the third month of 2022.A Strong Job Market: Data from the Labor Department showed that job openings remained near record levels in February.Wages and Inflation: Economists hoped that as households shifted spending back to services, price gains would cool. Rapid wage growth could make that story more complicated.New Career Paths: For some, the Covid-19 crisis presented an opportunity to change course. Here is how these six people pivoted professionally.Return to the Office: Many companies are loosening Covid safety rules, leaving people to navigate social distancing on their own. Some workers are concerned.Unionization Efforts: The pandemic has fueled enthusiasm for organized labor. But the pushback has been brutal, especially in the private sector.The Fed, still concerned, has begun raising interest rates to cool off the economy and tame inflationary pressures. Supply chain challenges that arose during the pandemic have persisted, and the war in Ukraine is further complicating the outlook for inflation as well as overall economic growth. Consumer spending remains buoyant, yet surveys reflect dour economic sentiment among the public.In the meantime, even as price increases nag household budgets, burying the value of some new wage gains, a noticeable mass of employees and job seekers are gaining more leverage regarding benefits and conditions.Tony Goins was appointed by Gov. Pete Ricketts in 2019 as director of Nebraska’s Department of Economic Development.Terry Ratzlaff for The New York TimesDuring a virtual summit about the local economy held in February by the nonprofit group Leadership Lincoln, Eric Thompson, the director of the Bureau of Business Research at the University of Nebraska-Lincoln, argued that the labor market might be simply rebalancing.“Obviously, it’s still always better to be the employer than the worker, or at least usually it is,” he said. But the current environment does enable some employees to switch jobs or more easily vie for higher-level positions. Local employers are dropping degree requirements for a range of midlevel and entry roles.Many fast-food restaurants, struggling to staff locations near the $9 minimum wage in the state, have begun to offer starting wages of $14. Evidence of automation is just as rampant as Help Wanted signs: Some pharmacies dotting the main roads and highways appear to have more self-checkout kiosks than employees at a given hour.Mr. Thompson said such moves were not necessarily ominous for the working class but rather a reflection of the need for businesses to adapt while workers find jobs that can “maximize their skills and potential.”Tony Goins, a former senior vice president at JPMorgan Chase who was appointed by Gov. Pete Ricketts in 2019 as director of Nebraska’s Department of Economic Development, said the tight labor market could prompt managers to become more flexible and innovative.“At the end of the day, the market is dictating that I have to pay employees more money,” said Mr. Goins, a small-business owner himself with a cigar lounge in Lincoln. “So, I mean, how are you going to offset that?” To stay competitive in hiring, he said, managers need to improve culture, leadership, employee retention and recruiting.He spoke of his son, an assistant men’s basketball coach at Boston College — a position that he says requires continued outreach as well as the dual promise of “the chance to play for a winning program” and gaining personal development. “That’s not what C.E.O.s are used to,” he said.Businesses aiming to grow have begun to offer incentives beyond pay. The Japanese company Kawasaki Motors is spending $200 million to expand the 2.4-million-square-foot site in northern Lincoln where it makes Jet Skis, all-terrain vehicles and rail cars. It is increasing its 2,400-member work force by over 500 employees, with jobs primarily in fabrication, welding and assembly.The company is becoming more flexible about hiring and work styles in order to pull it off. “It used to take a couple of weeks to get hired at Kawasaki,” said Bryan Seck, its chief talent management strategist in Lincoln. “Now, it’s down to four hours.”With the knowledge that many parents remain on the sidelines of the work force because of child care duties, Kawasaki recently created a 9 a.m. to 2 p.m. shift tailored for those who need to retrieve children from school and day care in the early afternoon. Starting wages are $18.10 an hour, Mr. Seck said, with benefits including health care and a 401(k) plan.Todd Heyne, the chief construction officer at Allo Communications, a cable company based in Lincoln.Terry Ratzlaff for The New York TimesIn addition to increasing wages to retain employees, Todd Heyne, the chief construction officer at Allo Communications, a cable company based in Lincoln, said management decided that easing in-person work requirements could expand the pool of available workers. That led the company to allow many of its customer service representatives and technical support employees to train and work farther afield as it prepares to expand beyond Nebraska and Colorado.Not all problem-solving is easy. The added labor costs come on top of supply chain pressures that have increased the price of crucial materials like fiber optic cable by as much as 30 percent. Vendors are often charging 20 percent more for their contracted tasks. As a result, the company has taken steps like hiring its own trucking staff.In the end, “combined with some automation efficiencies, our team will see sizable wage increases with less rudimentary work,” Mr. Heyne said, reducing manual paperwork, centralizing back-end systems and doing more to fix customers’ network issues remotely. So despite the cost challenges, “I’ve never been more optimistic about where we’re sitting, our position in the market, how we compete against our competitors, and our technology,” he added. “Which is strange.”For many, the opportunity of this economic moment is tinged with worry. They include Ashlee Bridger, a 30-year-old student at the Lincoln campus of Southeast Community College who works in administration for the nearby firm Huffman Engineering after being recruited from a job fair.Ms. Bridger left her job as a nurse to pursue a career in human resources because she felt confident enough to bet on herself: “Of course, it was a risk. Leaving any career is.” But in the current job market, she said, “I knew I would be able to work my way up easier.”She has also had a series of life milestones fall into place. She will graduate in May with an associate degree and will start bachelor’s degree work in the fall at Nebraska Wesleyan University. The managers at Huffman have told her that she is welcome to continue working there when her schedule allows, and that they would like to hire her in a more senior role after she completes her studies.Last year, she got married in summer, then moved with her husband into a newly built house in Lincoln in August. Though they feel financially stable, she half-joked that they were lucky the home was mostly built before lumber prices soared. With prices up across the board now, “I’m more cautious about my spending,” she said.Ms. Paulk, the bartender at Harry’s thriving off better pay, has friends and customers who are upset about recent inflation. “But it’s something controlled out of our hands anyway,” she said with a shrug.“All I know,” she added, “is now I’m not broke anymore — it’s great. Life is good.” More

Surging energy costs, supply chain disruption and Russia’s invasion of Ukraine have knocked Japanese business confidence lower for the first time since the outbreak of the Covid-19 pandemic two years ago, an important survey has shown.The latest quarterly survey by the Bank of Japan revealed that sentiment among big Japanese manufacturers fell for the first time since the April-June 2020 quarter, marking a turning point for Asia’s second-biggest economy, where businesses had previously been cautiously optimistic about an end to the pandemic.But the survey, which was conducted between late February and late March, also showed the large disconnect between the foreign exchange assumptions made by corporate Japan and the recent reality of a market where the yen plummeted this week to a seven-year low. The BoJ’s Tankan survey of business confidence, released on Friday, dropped to a level of plus 14 in the first quarter from plus 17 in the previous three months, compared with a median market forecast of plus 12. The Tankan survey, one of the most comprehensive economic indicators in Japan, polls big companies about whether business conditions are “favourable” or “unfavourable”. The latter tally is subtracted from the former to generate a composite reading of between minus 100 and plus 100, with figures above zero indicating positive business sentiment and those below zero negative sentiment.While sectors such as production machinery sustained the index in the quarter to March, pulp and paper and other industries worsened. Automobile production fell after the suspension of plant operations following the resurgence of the Omicron variant. Big manufacturers expected conditions to deteriorate further in the coming three months, with a predicted index of plus 9. The downward trend was echoed by large non-manufacturers, which slipped in the survey from plus 10 to plus 9. Among these companies, accommodation and food services expect a significant improvement from the lifting of quasi-state of emergency Covid-19 measures, but the sector sub-index is expected to remain in negative territory in the next three months, according to the BoJ.

The survey found that companies were under pressure from the suppression of economic activity because of the Omicron wave, unstable financial markets triggered by the war in Ukraine and subsequent sanctions against Moscow and higher costs owing to rising energy prices and the weakening yen. “The survey was intended to assess the depth of the downside risks surrounding Japan’s economy, but it was not as bad as previously expected,” said Takuji Aida, chief economist at Okasan Securities.While the yen’s depreciation may put additional pressure on profits because of rising procurement costs, Aida said that the weaker currency was acting as a tailwind for the Japanese economy by raising export prices, which would somewhat mitigate the negative impact of the war in EuropeThe survey found the average predicted exchange rate for the fiscal year starting in April stood at ¥111.93 against the US dollar, marking a large contrast with recent days. On Friday morning, the yen traded at about ¥122 to the dollar after hitting a seven-year low of ¥125.1 this week.The better-than-consensus survey result should have a slightly positive impact on equities, but “foreign factors are much more important influences today”, said John Vail, Nikko Asset Management chief global strategist. More

The writer is head of emerging markets economics at CitiThe past two years have seen some crying wolf about the risk of an imminent debt crisis among lower-income developing countries, but those fears are worth taking more seriously now.Even before events in Ukraine introduced a new threat to risk appetite among global investors, a double whammy of tighter US monetary policy and a sharp decline in global trade growth was beginning to constrain the ability of lower-income countries to get hold of dollars. The longer geopolitical tension stays elevated, the deeper that problem will become.Fears of an immediate debt crisis surfaced as soon as the pandemic did in early 2020. The view was that many developing countries simply would not have the foreign exchange to service their debt. That kind of worry back then was misplaced for three reasons. First, the US Federal Reserve’s dramatic loosening of monetary policy kept capital markets open for emerging markets borrowers by supporting risk appetite globally. Second, the US Treasury’s huge fiscal stimulus helped to generate a surge in global trade. Third, the IMF supported developing countries’ financial stability through emergency disbursements and, above all, through the issuance last year of $650bn worth of special drawing rights, a multicurrency reserve asset.Now though, the external environment facing low-income developing countries is deteriorating fast. US monetary tightening will certainly erode investors’ risk appetite towards emerging markets. The debt crises of the 1980s showed how the financial stability of developing countries is threatened when the US has an inflation problem of its own to deal with.Meanwhile, global trade growth started to decline sharply in the latter part of 2021 — terrible news for countries that depend on such growth to generate foreign exchange revenues.This is all taking place against a background in which some important metrics of developing countries’ creditworthiness have deteriorated to worrying levels. In developing countries rated single B, for example, the average ratio of external debt to exports is effectively back above 200 per cent, a level last seen in the late 1990s. Equally, the amount of these countries’ export revenues that is consumed by servicing external debt payments is also back above 25 per cent, an amount also not seen for two decades.The market had already begun to worry about single B-rated sovereigns, in the sense that the past few months had seen a marked increase in their risk premia relative to more creditworthy countries. But there is plenty of space for these concerns to deepen.The current surge in commodity prices is in principle good news for lower-income developing countries, many of whom are commodity exporters. But it is not enough, in some cases, to offset the recent collapse in risk appetite.Credit spreads for fragile commodity importing countries have obviously widened markedly since February 24, the start of the invasion of Ukraine. Yet there are also even some fragile commodity exporters which have been hit by the risk aversion.Another reason why default-risk among low-income developing countries is rising has to do with the IMF itself. The last time developing countries suffered something like a systemic debt crisis, in the 1980s, the IMF’s view of its role was more or less to maintain the flow of international payments. Its behaviour, in other words, was basically creditor-friendly, putting the burden of adjustment on countries themselves to control domestic spending growth through belt-tightening in order to service external debt.These days, though, it is much more sensible to describe the IMF as a debtor-friendly institution. The Fund has been making some serious effort to encourage the G20 to go further in offering debt relief to low-income countries under the umbrella of their Common Framework that was announced in late 2020. Currently only three countries — Chad, Ethiopia and Angola — have applied for debt relief under the framework and the IMF wants more involved. Things being what they are, the Fund may get its wish.And since the Common Framework requires private creditors to participate on comparable terms with the G20, it looks like defaults to private creditors are set to increase. Maybe that’s no bad thing: If a country can’t pay its debt, then debt relief is entirely appropriate. And it is worth bearing in mind that private creditors tend to have short memories, allowing a defaulting country to return fairly fast to international capital markets. But debt defaults are often messy — one more thing to worry about in a world full of worry.  More

Russia’s rouble has wiped out nearly all of the losses incurred after President Vladimir Putin’s invasion of Ukraine as Moscow applies draconian capital controls and blocks most foreign traders from exiting their investments.The currency’s rebound shows how Moscow has managed to fend off a collapse of the country’s financial system but at the cost of further isolating Russia from global finance and adding fuel to a powerful economic pullback. In early March the rouble plunged to 150 to the US dollar — losing almost half its value in less than a fortnight — after US and European sanctions cut Russia out of global payment systems and froze a large part of the more than $600bn war chest amassed by the country’s central bank. “As a result of our unprecedented sanctions, the rouble was almost immediately reduced to rubble,” US president Joe Biden said during his visit to Poland last week.Since then, the currency has perked up considerably, and on Thursday it traded at 81.7 to the dollar, roughly the same level as February 23, the day before Putin sent Russian troops into Ukraine.Oil and gas revenues have helped to stabilise the rouble, as exports continue flowing to Europe. But stringent curbs introduced by Moscow to prop up the rouble’s value have been crucial in staving off a deeper currency crisis, according to Oleg Vyugin, chair of the Moscow Exchange’s supervisory board and former deputy governor of the central bank.“There was a moment in the beginning when the rouble fell sharply . . . when many citizens were moving their money abroad,” Vyugin said. “But then an embargo on this was introduced and it became pretty much impossible to use dollars in the country or abroad.”Russians have been prohibited from moving money to their own foreign bank accounts, extracting more than $10,000 in international currencies over the next six months, or taking more than that sum out of the country in cash. Banks and brokers have been temporarily banned from operating cash-based foreign exchanges for dollars and euros.The central bank also more than doubled interest rates to 20 per cent, providing an incentive to people to save their roubles rather than dump them for foreign currency. The measure prevented a run on the banks and kept the Russian banking system intact. Foreigners have also been forbidden from exiting local stocks, leaving their investments trapped.“This is so heavily managed by the authorities that I don’t think these are levels that can be taken as a reflection of the Russian economy, or the effectiveness of sanctions,” said Cristian Maggio, head of emerging markets portfolio strategy at TD Securities.Foreign investors, many of whom are effectively trapped holding Russian assets, are unable to transact in this market, and banks outside Russia have largely stopped quoting dollar-rouble exchange rates, according to Maggio. “Offshore this market just doesn’t exist,” he said. Still, sanctions have actually bolstered one of the traditional strong points of Russia’s economy: its trade surplus. Soaring energy prices coupled with a sharp drop in imports has created a “very strong balance of trade, and a huge excess of currency on the trade balance”, Vyugin said.Oil sales make up about 30 per cent of Russia’s fiscal revenues and current global price rises are “giving Russia the strongest terms of trade since ‘peak oil’ in 2008”, said Elina Ribakova and Robin Brooks, economists at the Institute of International Finance. “So even if Russia ships less oil now due to western sanctions, Putin still gets lots of hard currency inflows.”Ribakova forecast that Russia’s current account could probably reach $200bn to $250bn in 2022, from about $120bn in 2021, due to a collapse in imports combined with strong commodity exports. These revenues mean Russia could rebuild the central bank reserves that were frozen under sanctions in the space of just over a year, she said.Companies that earn proceeds in foreign currencies — mainly oil and gas exporters — have also been forced to exchange 80 per cent of those proceeds into roubles, effectively outsourcing the job of supporting the currency to the private sector.The Russian central bank spent a relatively modest $1.2bn on propping up the rouble on the two working days following the invasion, and has not intervened in currency markets since then, according to its own data. Analysts also say Putin’s plan to force European gas buyers to pay in roubles could provide a further boost to the currency.Still, the relative strength of the rouble could mask the profound damage that sanctions are expected to do to the Russian economy. Ribakova estimates that Russia’s economic output will shrink by 15 per cent this year, wiping out a decade and a half of growth, as domestic demand collapses — with a deeper contraction possible if there are further sanctions on oil and gas exports.More than 400 foreign companies have withdrawn from Russia, she said, many of them “self-sanctioning” by quitting the country even if sanctions do not strictly require them to do so. “The exchange rate is part of a political effort to imply the sanctions aren’t working,” said Timothy Ash, an economist at BlueBay Asset Management. “But it’s not a real market. And wherever the rouble is trading today, tomorrow, or next year, Putin has turned Russia into an international pariah.” More

Another month, and another letter from my mortgage lender arrives. The Bank of England’s decision to increase the base rate means the repayment on my tracker loan is inching up — again.Am I bothered? Hardly. Opting for a lifetime tracker when I remortgaged my London flat in 2008 was one of the best financial decisions of my life.When I first took it out, the interest rate was about 5 per cent, but soon it dropped like a stone to below 1 per cent. Instead of making lower monthly repayments, I stuck to the original level, then paid off bigger chunks as my pay increased.The end result is that now, as rates are rising, I’m close to paying it off (the rate was so low, I slowed the overpayments some years ago to beef up my pension and Isa contributions instead).I’ve benefited handsomely from interest rates staying “lower for longer”, but the prospect of rates getting “higher much sooner” raises all kinds of questions for our personal finances.Investors are already braced for rapid rises in interest rates as central banks around the world battle higher inflation.In the US, the Fed recently made its first rate rise since 2018, and is expected to make seven more increases this year (officials expect rates to be nudging 3 per cent by 2023). In the UK, markets are pricing in rates rising to 2 per cent by the end of this year, though the Office for Budget Responsibility (OBR) has warned rates could hit 3.5 per cent next year if higher inflation persists.In the race to get inflation under control, economists worry that rapid tightening risks sparking a recession and higher unemployment as businesses (and governments) absorb higher costs of borrowing. All of this uncertainty is weighing on global equity and bond markets, and raises the unwelcome prospect of “stagflation” — higher inflation combined with slower economic growth. This is challenging terrain for all investors, but especially those nearing retirement or who have already started drawing an income from their investments.

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As discussed on the Money Clinic podcast this week, younger investors are concerned this could spell the end for the traditional 60:40 portfolio split between equities and bonds, and wary of the risks of taking on more equity exposure to expand their funds. What rising rates will mean for UK property prices is (perhaps) more likely to come up in conversation at your next dinner party.Considering double-digit house price growth, you might think rising interest rates would take some heat out of the market. In a recent note, research group Capital Economics described property as the “weak link” as interest rates rise. Nevertheless, it predicted rates would have to get to around 4 per cent to trigger price falls, unless quantitative tightening causes a greater economic wobble than expected (rising unemployment would spook mortgage lenders much more than rising interest rates). But what about the impact on the consumer economy? As someone with a variable-rate mortgage and rising monthly costs, I am very much in a minority. Jason Napier, managing director of European banking research at UBS, says that fixed-rate loans now account for around 80 per cent of the UK’s £1.6tn mortgage market. The fact that so many UK consumers are locked into low rate deals means “as the Bank of England raises rates, very little changes immediately for consumers”, he says. Outstanding fixes are split pretty much 50:50 between two-year and five-year terms, so the “payment shock” of rolling off on to higher rates is very much a problem for tomorrow.Even if you have a few years to go on your fix, consider how the OBR’s 3.5 per cent scenario could inflate your monthly repayments. “The average interest rate on an outstanding mortgage in the UK is 2.1 per cent,” Napier says. “Based on a standard 25-year term, if interest rates went up 1 per cent, this would add around £100 to monthly repayments for every £100,000 you are borrowing.”Napier feels the scale of rate rises markets currently anticipate is unlikely to push many households into default. Most borrowers will have been “stress tested” on rates of 5-6 per cent, which was the average mortgage rate when Northern Rock failed. But combined with other cost of living pressures, none of this bodes well for consumer spending.

If I had a bigger loan, I’d be scouring my mortgage paperwork to see what level of overpayments I could potentially make (these are often capped at 10 per cent of your outstanding balance per year). Use a mortgage overpayment calculator to see the potential reductions you could make to your outstanding balance by the time your fix ends. When the time comes, the lower your loan to value, the better the rate you’ll be able to get. And if the Bank of Mum and Dad has any spare funds, helping adult children with regular gifts from excess income could not only reduce the size of their mortgages, but also shrink future inheritance tax liability. Changes to the base rate have a less immediate effect on the cost of short-term borrowing, but the record level of credit card spending has raised alarm bells. It’s impossible to say how much of February’s £1.5bn spending spree — the highest monthly total since records began — is due to hard-up consumers borrowing to beat the rising cost of living or more affluent ones enjoying renewed freedoms. I chatted to Chris Giles, the FT’s economics editor, who is of the view that both trends are happening at once. With standard bank overdraft rates of 40 per cent, should we be surprised that consumers see the typical 20 per cent charged on credit cards as a better deal?It turned out we had both used our credit cards to book family holidays for later in the year (the twin attractions of enhanced consumer protection and loyalty points). We are careful to pay off our monthly balances in full, thus avoiding interest charges, but not everyone can afford to do so — and zero per cent deals are getting much harder to come by.Perhaps the only silver lining will be better rates of interest on cash savings accounts. For now, new entrant Chase is offering the market-leading rate of 1.5 per cent on account balances of up to £250,000.This is welcome news for hard-pressed savers, but still nowhere near outpacing inflation which is expected to hit 8 per cent by the end of June. Taking more risk and investing the money, paying down a chunk of your mortgage, or (dare I say it) spending it on a well-earned holiday may prove to be a better use of your cash. Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb More

Next to the motorway, heading north from Mauritius’ international airport, is a row of boxy apartment blocks festooned with washing hung out to dry. These are the cramped dormitories of thousands of foreign textile workers, the majority from Bangladesh.The hostels, which also house workers from Madagascar and Nepal, illustrate a dilemma for Mauritius. As the economy has grown more successful, wages have risen sharply, forcing manufacturers — at least those in labour-intensive industries — to either relocate abroad or import cheap labour.At its peak in 2000, manufacturing made up more than 21 per cent of the island’s GDP. That proportion has since halved to 10.7 per cent, according to the World Bank. That is partly because other industries — notably financial services — have expanded, producing what economists consider a beneficial diversification of the economy. But it also reflects what some say is the manufacturing sector’s inability to move sufficiently quickly up the value chain.“When you look at other countries like Singapore, Malaysia and Thailand, they also started with textiles but they moved upmarket into higher-value addition and a more diversified range of products including electronics,” says Vinaye Ancharaz, an economic consultant and expert in manufacturing. Somehow, he says, Mauritius never quite made that leap. These days many textile manufacturers can only survive in Mauritius by employing lower-wage workers from abroad. Others have decamped to Madagascar. Minimum wage legislation has pushed up local pay: unemployment, partly a result of a mismatch of skills, has jumped from 6.7 per cent three years ago to above 9 per cent. “Bangladeshis are doing us a big service,” says Ancharaz. “They are doing jobs that Mauritians don’t want to do, not only in textiles but also in the seafood industry and even in construction, sectors that have been abandoned by Mauritians.” Mauritius’ economic take-off was built on manufacturing. Even in the final years of British rule, when the island’s economy was almost totally dependent on sugar exports, the government sought to catalyse a manufacturing sector. Import-substitution policy used tariff barriers to protect local producers, thus encouraging the manufacture within the country of essential goods, from margarine to toilet paper.The island’s small population — about 1.3mn — limits economies of scale. To be more competitive, the government opened export processing zones, offering various tax, credit and other incentives. This enabled textile manufacturers to import cotton and fabric duty free and to export finished garments. “The good thing about textiles is it requires low-skilled labour, which we had in abundance,” says Ancharaz of those early days. Gradually, manufacturers began to source fabric locally and to make more sophisticated products, including highly priced knitwear.“We got more and more immersed into the textile industry and that inhibited diversification,” says Ancharaz. In recent years, he argues, too much foreign direct investment has gone into luxury property and not enough into productive investment. Ken Poonoosamy, chief executive of the Economic Development Board of Mauritius, says there is more to the manufacturing sector than its detractors suggest. He points to other areas, including fish processing (mainly tuna canning), jewellery and medical devices, as evidence that industry has not stood still. Natec Medical, based in the island’s high-tech Ebene business park, about 10km from the capital, Port Louis, is a leading producer of stents and balloon catheters. This is a niche area that, Poonoosamy says, benefits from Mauritius’ commitment to good infrastructure, a business-friendly environment and free tertiary education. Fred Swaniker, a Ghanaian entrepreneur who opened the campus of the African Leadership University on the island, testifies to Mauritius’ ease of doing business. “They really rolled out the red carpet,” he says. “This was a country that was serious about attracting foreign investors . . . I didn’t see that anywhere else on the continent.” Swaniker argues that the development of the island rests on its continued openness to skilled labour. “To really drive the next phase of economic development they need to let in a wave of immigrants,” he says, recalling similar policies in Singapore. “The population is ageing and, without increasing the size of the workforce, it will be harder to raise GDP.”Poonoosamy acknowledges the limitations of size but says one of the island’s biggest competitive advantages is its market access. “We are one of the countries that have made the most benefit out of Agoa,” he says of the African Growth and Opportunity Act, that enables tariff-free access for many Mauritian goods to the US. In 2019, Mauritius became the first African country to conclude a trade agreement with China and it is a member of the African Continental Free Trade Area. Such agreements, says Poonoosamy, will allow local manufacturers to move more aggressively into new areas, including pharmaceuticals, nutraceuticals (food-based substances — for example, such as vitamin supplements and often of herbal origin — used for treating and preventing diseases) and auto-parts. Ravin Dajee, managing director of Absa Bank, Mauritius, says the island needs to reduce its current account deficit, which widened to 15.6 per cent of GDP last year from 5.4 per cent in 2019. As tourists return and as manufacturers fill order books — boosted by the weak rupee, which makes Mauritian exports more competitive — the deficit should rapidly narrow. The IMF expects a figure of 6.8 per cent this year. Dajee says manufacturing can stage a longer-term recovery, but that this should not be predicated on a weak rupee. “I wouldn’t want to build an industry on that basis,” he says. “We want to build our competitive advantage on product quality and reliability.” More

In 2020, the World Bank classified Mauritius as a “high-income country” after its annual per capita earnings hit $12,500 — quite something for an island nation which, at independence in 1968, had been a mono-crop sugar producer with average incomes per person of roughly $200.In the half century since, the way Mauritius has diversified its economy and climbed the value chain by moving into textiles, manufacturing, tourism, banking and financial services has been textbook development.But if Mauritius, a functional democracy with a minimum wage and free education and healthcare, has become the closest thing Africa has to an economic miracle, it is one that has been rudely interrupted.As the World Bank was announcing Mauritius’ admission to the high-income club — based on 2019 figures — the island was grappling with its worst crisis since independence.

$12,500

Pre-pandemic annual per capita earnings

For an economy that depends on the free inflow of tourists, goods and capital, the Covid-19 pandemic proved devastating. The economy shrank 15 per cent in 2020. Per capita income collapsed to about $8,600. “For eight months, we were a high-income country,” says Rama Sithanen, a former finance minister. “Now, we have gone back to where we were 10 years ago.”As the pandemic struck, the government adopted what amounted to a zero-Covid policy. That was partly dictated by the 1.3mn population’s high incidence of diabetes and cardiovascular disease — a byproduct of increasing affluence — comorbidities that made Mauritians particularly vulnerable to Covid. The official death toll has been limited to 786.The authorities screened people arriving from China from January 2020. In March, just after the government announced the first three Covid cases, it adopted measures such as sending tourists back to their home countries and severely restricting movement outdoors of its own people.“By July, there was no Covid, but there were also no tourists,” says Azim Currimjee, a managing director at the Currimjee telecoms-to-beverages conglomerate. Arrivals went from an annual 1.4mn to practically zero, as tourism — the island’s biggest employer, accounting for more than 100,000 jobs and at least one-fifth of gross domestic product — tipped into paralysis.Overseas guests have their temperature taken on checking in at a Mauritian resort © Ben Birchall/PAThen, in July 2020, the MV Wakashio, a Japanese bulk carrier, ran aground on a coral reef close to an ecologically sensitive part of the island’s south-eastern shore — although away from big tourist resorts. It leaked an estimated 1,000 tonnes of oil, in what some called the island’s worst environmental disaster. Tens of thousands of people demonstrated in Port Louis, the capital, accusing the government of incompetence.As for efforts to prop up the Covid-stricken economy, the government responded with one of the most ambitious stimulus packages on the continent, including generous wage support. With the help of 80bn rupees from the central bank, it established the Mauritius Investment Corporation (MIC) to lend money to some of the biggest companies in struggling sectors such as tourism. In return, employers were prohibited from laying off staff.“We threw the textbook out of the window,” says Currimjee. “The policy was, first, to make sure we stay alive and, second, to make sure there is no economic damage.”Since October, tourists have returned. The IMF expects growth of 6.7 per cent in 2022, with some private sector economists putting it slightly lower. But government opponents have criticised how emergency funds were distributed. “Lack of transparency has fuelled a lot of suspicion,” says former President Ameenah Gurib-Fakim, who herself lost office over a financial scandal in 2018.“We went on a spending spree and, today, we are facing the consequences of our giveaway,” says Arvin Boolell, a former leader of the opposition Labour party. The central bank, he adds, has lost its credibility through what he deems accounting tricks in creating the funds to give to the MIC.“The adjustment is taking place via the rupee at the expense of the poor,” Boolell says of the central bank’s tolerance of a sliding currency and the resulting imported inflation.Renganaden Padayachy, finance minister, and Harvesh Kumar Seegolam, central bank governor, did not agree to be interviewed for this report. However, the government argues that its extraordinary measures were prudent.

$8,600

Annual per capita earnings after the pandemic hit

It points to the appointment of an outsider — Lord Meghnad Desai, professor emeritus of the London School of Economics — as the first chair of the MIC as evidence of good governance. “As long as the money is spent judiciously and on the main purpose for which it was designed — save the jobs, save the affected companies, give them some breathing space — I am not particularly concerned,” Desai has said.“The fact that Mauritius is a middle-income prosperous country, and well run by and large, will help it ride out the pandemic relatively well,” he added.Mauritius’ longer-term task is to continue its upward trajectory. Pravind Jugnauth, the prime minister re-elected for a second term in late 2019, has set the island’s sights on emulating Singapore, albeit the Asian city state’s GDP per capita is about six times that of Mauritius.Government supporters point to Mauritius’ sophistication as an offshore financial centre — including as a conduit for investment to Africa and India — as evidence that it can continue to move up the value chain.A decision by the intergovernmental Financial Action Task Force (FATF) last year to remove Mauritius from its “grey list” should also alleviate some concerns about the island’s reputation as a secretive tax haven. “There have been a few cases that have hit the headlines,” says Sithanen, now chair in Mauritius of Sanne Group, a UK-listed asset management company, “We sat down with FATF and addressed the deficiencies.”

Financial services aside, officials highlight the completion of infrastructure projects — notably a light railway linking Port Louis with the inland town of Curepipe — and the development of niche high-value-added businesses in medical devices and pharmaceuticals.In addition, they foresee the expansion of education and the so-called blue economy — sustainable use of ocean resources from rare-earth mining to tuna processing. Politicians, meanwhile, say the country should do more to protect and sustainably exploit its exclusive economic zone ranging across 2.3mn square kilometres.Indranarain Ramlall, associate economics professor at the University of Mauritius, argues that the island’s success has been continually to reinvent itself but, recently, it has failed to embrace new industries such as IT and robotics. “We badly need to develop another sector,” he says. “Things are changing fast, so we need to adapt in order to survive.”The writer is the FT’s Africa editor and author of The Growth Delusion: Wealth, Poverty and the Well-Being of Nations (Bloomsbury, 2018) More