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Pakistan is exploiting Chinese credit to modernize its railways despite the debt crisis

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Since the 19th century, Pakistan’s intermittent railways have carried passengers and cargo from the Arabian Sea to the Himalayas. But the colonial-era network is in grave disrepair, with rickety trains and some tracks left unusable by last year’s devastating floods.

Along with its close ally China, Pakistan It is now preparing at least a partial solution: a $10 billion renovation of the 1,700km arterial Main Line 1 railway to be paid off with loans from Beijing.

prime minister Shahbaz Sharif President Xi Jinping agreed in November to begin work on the line linking the southern port city of Karachi with Lahore and the capital, Islamabad. The project is expected to increase the maximum speeds of trains on the road to 160 km/h.

But the ML1 upgrade has raised questions about whether heavily indebted Pakistan should borrow billions of dollars more for its expensive infrastructure. A time of severe financial stress.

Some analysts believe Pakistan, which owes about $100 billion in external debt to lenders including the World Bank and China, is at risk of default after its foreign exchange reserves plummet.

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Ahsan Iqbal, Pakistan’s planning minister, said the ML1 upgrade was vital to keeping trains running and an example of the transformative work that made Chinese credit possible.

“If we don’t implement this project, in two years Pakistan will lose its railway logistics,” Iqbal told the Financial Times.

“The entire railway system is going to collapse, this main line is going to collapse. It would be too risky to run commercial operations on this track. It is no longer an option. It is an imperative.”

Map of the railway network in Pakistan

But the critics said Take on more debt Project ML1 was an example of the kind of bad borrowing decisions that have led Pakistan into successive economic crises in recent years. Pakistan’s foreign reserves fell to less than $6 billion, or less than one month’s worth of imports.

Zubair Khan, Pakistan’s former commerce minister and IMF official, said the government was “fooling the country,” and said Pakistan was closer to running out of reserves than officials admitted. “There are hidden truths.”

Iqbal who supervises Pakistan’s participation in the Belt and Road Initiative, China International Infrastructure Plan, said it would take six to nine years to complete the ML1 upgrade. The work will include replacing the track, upgrading the signaling, converting level crossings into underpasses or flyovers and building fences to prevent livestock from crossing the line.

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The planning minister said the project would proceed in phases to “make it more manageable”, with an initial cost of $3 billion. He said the loan from China would be repayable over 20 to 25 years and would be “soft”, without giving further details.

Column chart of net reserves with SBP (month-end levels, billion dollars) showing declining foreign exchange reserves of the Central Bank of Pakistan

Chinese lending to Pakistan goes back years, as part of an effort to forge economic and military ties that would help counter their common rival India. The ML1 upgrade is part of the China-Pakistan Economic Corridor, a focus of BRI with an estimated total cost of $60 billion.

The China-China Economic Corridor also includes China’s development of a deep-sea port at Gwadar in southwestern Pakistan, among other projects. Beijing separately Supplying the Pakistan Army With eight submarines and advanced J-10C fighter jets.

A Western diplomat in Islamabad said the persistence of such projects even as Beijing sees mounting financial straits in countries beneficiaries of the Belt and Road Initiative indicates the importance it places on relations with Pakistan.

Even if the rest [of BRI] The diplomat said China wants to keep track with Pakistan, lagging behind, adding that the relationship has “important military aspects that have developed in the long term.”

The projects — and Chinese funding — have also inflamed domestic tensions. Police in Gwadar last month imposed emergency measures and dismantled a protest camp that had obstructed operations at the port demanding, among others, Chinese nationals to leave.

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People gather on the platform at Lahore railway station
The ML1 upgrade will add to Pakistan’s foreign debt © Mohsin Raza/Reuters

Projects such as ML1 have also raised concerns among analysts about whether excessive Chinese lending is exacerbating pressures on Pakistan’s precarious finances. Chinese state lenders are among Islamabad’s largest creditors, accounting for about $30 billion of its outstanding debt.

Abid Hassan, an economist and former adviser to the World Bank, said ML1 should be “delayed”, saying Pakistan should suspend public investment that generates revenue in rupees but was funded with foreign currency debt.

It is unfair to single out China’s role in Pakistan’s debt woes, said Sakib Sherani, of consultancy Macro Economic Insights, who is credited with making the largest payments in the current fiscal year to multilateral lenders.

But Chinese loans tend to carry higher interest rates than multilateral or other bilateral creditors, according to the AidData research lab at William & Mary College in the US. China’s annual interest is typically 3-4 percent, AidData said, compared with 1-2 percent for OECD lenders.

Even as it is outsourcing Beijing for the ML1 project, Pakistan is looking elsewhere for funds to help stabilize its shrinking reserves. The Finance Ministry is in talks with the International Monetary Fund to secure the next tranche of the $7 billion aid programme, and has said it will reach out to “friendly” countries such as Saudi Arabia for more loans.

Sharif’s government is betting that it can stabilize the economy in time for parliamentary elections, which must be held before the end of this year.

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Iqbal said he was confident the country would succeed. Pakistan is facing the economy [and] Financial difficulties, but not on the scale that the virtual economy has become so far. We manage very wisely.”


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BoE Pill Sees Persistent Inflation Risk, Even If Gas Price Falls By Reuters

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© Reuters. FILE PHOTO: A general view shows the Bank of England building in London, Britain on November 3, 2022. REUTERS/Toby Melville

By David Milliken

LONDON (Reuters) – Britain risks persistent inflationary pressures from a tightening labor market, Bank of England chief economist Howe Bell said on Monday, even if prices stabilize or fall.

Bell said in a speech he will deliver in New York later on Monday.

“(This) will strongly influence my position on my monetary policy in the coming months,” he added.

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The Bank of England has released a transcript of Bell’s comments ahead of the speech he plans to give to the Capital Market Association at New York University.

The Bank of England raised its key rate to 3.5% in December, up from 0.1% a year earlier, and financial markets expect the central bank to raise interest rates again to 4% in its next policy announcement on February 2nd.

However, economists and markets are divided on how much further the price hike will be beyond that. Inflation has fallen slightly since it hit a 41-year peak of 11.1% in October, and the British economy appears to be entering a shallow recession.

Bell said that even if there was a drop in natural gas prices, the main driver of the latest spike in inflation, that was no guarantee that underlying price pressures would fall enough for inflation to return to the BoE’s 2% target.

Bell said businesses and workers need to accept lower inflation-adjusted profit margins and wages than they were before the energy shock.

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“The more companies try to maintain real profit margins, and employees try to maintain real wages at pre-energy price shock levels, the more likely it is that domestically generated inflation will pick up its own momentum,” Bell said.

Britain is currently facing a wave of strikes as trade unions seek to reduce the impact of inflation on their members’ salaries.

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Strong economic data points to a shallow recession in the Eurozone

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Unemployment in the eurozone hit a new record low, while output from German factories rose in November, boosting hopes of a milder economic slowdown than fears in the single currency area.

Figures from Eurostat, the European Commission’s statistics office, showed that the number of people in the labor market without work fell slightly in November. Eurostat reported that 10.849 million workers were without jobs, 2,000 fewer than the previous month and the lowest since records began. The unemployment rate has remained unchanged since October at 6.5 percent.

Meanwhile, Germany’s Federal Statistics Office reported that industrial production rose 0.2 percent between October and November, a reading slightly better than the 0.1 percent expansion forecast by economists polled by Reuters.

Francesca Palmas, chief economist for Europe at Capital Economics, a research firm, said the rise confirmed that German manufacturing strength “held up better than expected” during the fourth quarter of 2022.

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On Friday, Germany’s statistics office is set to publish its first estimate of last year’s gross domestic product, which economists expect to show the economy contracted by a modest amount during the last three months of 2022.

The rise in energy prices last spring after Russia’s invasion of Ukraine raised fears of energy shortages and a deep recession in the eurozone. However, economists have steadily raised their growth estimates in recent months on the back of better-than-expected incoming data and falling wholesale gas prices.

Investor sentiment regarding the Eurozone economy also improved. The Syntex market sentiment index, also published on Monday, showed the third consecutive increase in January to the highest level since June 2022. Patrick Hussey, managing director of Syntex, said.

The resilience of the eurozone economy and its labor market it is expected that It leads to more interest rate increases by the European Central Bank.

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With unemployment stuck at historically low levels, “the ECB’s hawkish tone is likely to multiply with further tightening in the coming months,” says Paolo Grignani, economist at Oxford Economics.

Markets are pricing in a 50 basis point increase in interest rates when the European Central Bank meets on February 2nd. That would be up from the 2.5 percentage point increases since June last year, which took the deposit rate to 2 percent in December.

A tight labor market could boost wage growth and keep core inflation higher for longer. While the headline inflation rate fell to single digits in December, come in at 9.2 percentCore inflation — which excludes changes in food and energy costs and is seen as a better measure of long-term price pressures — rose from 5 percent to 5.2 percent.

Line chart of 2022 GDP growth forecasts, by forecast date showing that economists have revised their 2022 economic growth forecasts for the Eurozone

Bert Collin, chief eurozone economist at ING, noted that the strength of the labor market “makes it a key risk for the ECB’s second round inflationary effects.” With a tight labor market, Cullen added, “unemployment is unlikely to rise enough to make labor shortages a thing of the past.”

Between October and November, the unemployment rate in Italy, France and Spain fell by 0.1 percentage point to 7.8 percent, 7 percent and 12.4 percent, respectively. It remained at 3 percent in Germany.

Melanie Debono, chief economist for Europe at Pantheon Macroeconomics, said fiscal support across the eurozone should prevent a “significant increase in unemployment,” despite the economic downturn.

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UK and EU Hit Break in Brexit Talks on Sharing Trade Database By Bloomberg

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& Copy Bloomberg. A Royal Mail Plc transporter trailer is loaded onto a ferry at the Port of Larne in Larne, Northern Ireland, UK, on ​​Tuesday, July 5, 2022. British Prime Minister Boris Johnson wants Parliament to pass his plan to override the Brexit deal by The end is from 2022, but it could take up to a year to become law if the House of Lords gets involved. Photographer: Emily McInnes/Bloomberg

(Bloomberg) — The European Union is preparing to agree to use the UK’s live database to track goods moving from Great Britain to Northern Ireland, the first sign of progress in a long-running dispute over post-Brexit trading rules.

An agreement was finalized at a lunch between British Foreign Secretary James Cleverly and European Commission Vice President Maros Sefkovic on Monday, according to people familiar with the matter.

Someone said that the block completed the test of the database proposed by the United Kingdom last year, and suggested several areas for improvement. The person added that the UK had agreed to work on the comments.

This development is the first hurdle cleared since talks began again last year after eight months of deadlock. Although a technical step, the database deal will raise hopes of a further agreement on trade flows, and may help reduce customs checks between Northern Ireland and the rest of the UK.

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The UK government did not immediately respond to a request for comment.

© 2023 Bloomberg LP

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