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We focus on rising wage pressures in the US economy that led to a recent correction in the stock market, and how this could create a conflict between the country’s fiscal and monetary policies.  The Trump administration is implementing an expansionary fiscal policy (the tax cut, the pending infrastructure program) just when the Federal Reserve is planning to raise interest rates due to concerns about overheating.  As national debt increases, rising interest rates will exacerbate US debt dynamics, which will add to fiscal deficits.  Given Trump’s willingness to feud with US institutions, the Fed may become his next target.  However, the central bank isn’t just any other institution: open conflict between the executive branch and the Fed may have adverse consequences for the markets.  Word Count: 1,841.

We discuss SBP’s surprise decision to raise the policy rate by 25 bps, citing inflationary pressures.  We argue that while a hike of this magnitude will do little to suppress demand, it allows the SBP to preempt resistance to its economic aims for 2018 (namely, tightening liquidity and raising interest rates).  It has taken this decision to create expectations of further rate hikes.  If these do not materialize, banks will only provide short-term financing to the government.  Therefore, to avoid a worsening of the maturity profile of Pakistan’s domestic debt, policymakers will have to accept the need to increase interest rates, regardless of upcoming elections and other political considerations.  Higher interest rates, along with a depreciated rupee, will also facilitate the country’s entry into an IMF program.  Word Count: 1,810.

Our projections suggest that FY18 will be a transitional year for Pakistan.  Urgent policy action is required on the external front, namely the staggered depreciation of the Rupee.  This will return the country to a higher inflation trajectory, which will require further tightening of monetary policy.

We expect an IMF program in FY19.  We see the external deficit being higher this year compared to FY17, but not excessively so.  Our projections suggest that higher fuel prices and a weaker Rupee will cause inflation to peak at 8.6% in FY19, before stabilizing in the 7-8% range.  We view this return to price pressures as a reversal of the abnormally low inflation we have seen over the past two and a half years.  With average inflation projected at 4.9% this year, and fiscal management under pressure, we do not see much interest rate pressure in FY18.  Instead, we predict a 100-125 bps adjustment in FY19.

So, while the loss of macro stability will create uncertainty and require careful management, this transition was long overdue.  The artificial economic calm will be disrupted as structural issues demand substantive policy actions.  Word Count: 5,539

In this paper, we argue that an IMF program in 2018 is inevitable, as SBP’s unencumbered reserves reach negative $1.8 billion.  We discuss the December devaluation of the rupee, which coincided with the IMF’s post-program monitoring (PPM) discussions.  We contend that the program will focus on making CPEC liabilities transparent and payable, either by scaling back projects or delaying repayments.  The program will likely also focus on implementing more accurate real estate valuations, which will allow policymakers to account for the true wealth in the country.  This is necessary to manage the spending patterns of Pakistanis, especially on imported luxury goods.  We conclude that a confluence of geopolitics and domestic economic compulsions, may be setting the stage for an IMF program that brings real change.  Word Count: 3,334.

We argue that the shocking arrest of several high profile Saudi princes and ministers, is a decisive moment in Crown Prince MBS’s reform campaign.  We contend that the event is best understood within the context of changing regional dynamics, and MBS’s checkered track record (e.g. the Yemen war).

Iran’s growing regional influence and Russia’s military involvement in Syria (not to mention the rift between Turkey and the US), has created a divide in the Middle East.  Saudi Arabia and the UAE have stepped up their anti-Iran rhetoric.  This muscular foreign policy is encouraged by President Trump, who is keen to achieve an outcome that suits Israel and isolates Iran.  We argue that MBS may have opened up too many fronts, which could have unsettling repercussions for the entire Gulf region.  We also believe that MBS’s urgency to sell part of ARAMCO, is part of an all-or-nothing strategy, which is very un-Saudi.  Since Pakistan has wisely decided to stay neutral in this Saudi-Iran stand-off, we fear that worker remittances from the Kingdom and the UAE could fall in 2018.  This will put further pressure on Pakistan.  Word Count: 4,449.

In this paper, we discuss the government’s newest “clever” policy step – the imposition of import duties on a host of consumer items.  We argue that a closer look at the list reveals that many of these imports are insignificant in value.  In fact, closely related items that are imported in substantial amounts, are left off the list.  We contend that, in the past few years, Pakistan’s economy has been coasting along because of the fall in oil prices and the initiation of CPEC.  The resulting increase in private wealth has fueled unproductive imports, which were easy to finance.  As SBP’s FX reserves started falling, the policy response was to increase borrowing to fund the external deficit.  This was coupled with a refusal to let the Rupee adjust for fear of increasing inflation and interest rates.  We conclude that this short-termism has deposited us (once again) at the doorstep of the IMF, making a stabilization program inevitable in 2018.  Word Count: 1,709.

We explain the dominance of the US Dollar over global trade, by likening international trade to a physical marketplace owned by the US, and used by all other countries.  The perennial demand for the dollar allows the US to run large external deficits (while the rest of the world runs a net external surplus).  Furthermore, its ability to unilaterally impede dollar transactions (by halting dollar clearing) allows the US to inflict economic pain on its adversaries.

We argue that global trade and macro imbalances cannot persist indefinitely.  China is planning RMB-denominated futures to transact with oil exporters in RMB rather than the dollar, which would reduce demand for the dollar.  We contend that Iran could be the first to opt for the RMB oil future, and as the instrument gains acceptance, the dollar will weaken while the RMB will strengthen.  This should cause US imports to fall as China’s imports from the US rise.  The rebalancing is required to make global trade more sustainable.  Word Count: 4,694.

We argue that the media coverage of the US-North Korea stand-off, dulls the true urgency of the issue.  A closer look reveals that a nuclear exchange is a distinct possibility, given the leadership of these two countries.  We use a probability distribution framework to analyze potential outcomes.  We conclude that, surprisingly, the least destructive path forward will involve a successful ICBM launch by North Korea.  Word Count: 2,972.

We present three BOP scenarios for FY18, and argue that the likeliest scenario will involve an FX crisis resulting in an abrupt devaluation in Q3-FY18.  We then discuss potential directions the Pakistan-China relationship might take in light of the build-up of CPEC-related debt.  If China treats CPEC as a commercial venture, there could be two outcomes: (1) China helps enhance Pakistan’s FX generation capacity (by investing in the export sector); or (2) it acquires Pakistani assets when the country is unable to repay its FX debt.  We conclude that the latter would sour relations and breed resentment in Pakistan, which will undermine CPEC’s long-term prospects.  The likely way forward will involve joint ventures between the two countries that enhance Pakistan’s export earnings.  Word Count: 4,252.

In this paper (published 3 days after the blockade was imposed) we predict that Qatar would not accede to Saudi demands.  It would instead weather the diplomatic crisis and economic isolation.  We argue that the blockade pushes Qatar closer to Iran and Turkey, reinforcing the presence of an anti-Saudi bloc in the region.  We conclude that, while Qatar will have to withstand some economic pain, its massive natural gas reserves (that it shares with Iran) and associated long-term sales agreements, give it an edge in the stand-off.  Word Count: 3,410.