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Rishi Sunak to save billions by counting IMF cash as aid for poor

Sunak

Rishi Sunak to save billions by counting IMF cash as aid for poor

Rishi Sunak is to save billions of pounds by counting as aid financial assistance to poor countries being provided as a result of a windfall Britain has received from the International Monetary Fund (IMF).

In a move that has been condemned by former Conservative international development secretaries, the chancellor has chosen not to use the UK’s share of a new $650bn IMF global fighting fund to increase the share of national output spent on aid.

Britain received $27.4bn (£20bn) as its share of an allocation of IMF special drawing rights (SDRs) – financial assets designed to help poor countries struggling during the pandemic – months after the government decided to cut aid spending from 0.7% to 0.5% of national income.

Other rich countries are making help provided as a result of the SDRs additional to existing budgets, but the UK will stick to internationally agreed rules that allow 30% of any concessional lending through the IMF to count as aid.

Romilly Greenhill, the UK director of the global anti-poverty campaign group ONE, said she expected the Treasury to recycle about 75% of its SDR allocation and that it was likely to save between £4bn and £5bn over a number of years as a result.

SDRs are an international reserve asset issued by the IMF that can be exchanged for one of five currencies: the US dollar, the euro, the Chinese yuan, the Japanese yen and sterling.

They are given to member states in line with their shareholding at the IMF, but the chancellor said that because poor countries had greater need, the government would recycle its SDRs. In a February tweet, he said it would give “additional financing to low-income countries to help their response and recovery”.

The G7 group of finance ministers, which Sunak currently chairs, will discuss how to recycle SDRs at the IMF’s annual meeting in Washington later this week.

Two former Conservative international development secretaries condemned the decision. Justine Greening said: “Britain has already reduced its aid spend from 0.7% to 0.5% of gross national income. If we are to be a truly global Britain then we should now be focused on having the maximum impact with what remains.

“It would be counter-productive to effectively even further reduce the aid investment that saves lives and keeps fragile states stable.”

Andrew Mitchell, the former international development secretary who led the Commons rebellion against the government’s decision to cut the aid budget from 0.7% to 0.5% of national output, said Sunak should think again.

“The Treasury is quite correct to say the classification of these SDRs falls under the aid budget, but the question is whether in the midst of a pandemic Britain should agree in these exceptional circumstances they should be made additional.”

Mitchell said the money being recycled by the UK to poor countries represented a contingent liability to the UK rather than actual spending. “This underlines the benefit of making it additional to the aid budget,” he added.

Greenhill said Sunak should reverse the decision in the spending review at the end of the month.

“It’s shocking that the Treasury is planning on classifying part of our SDR allocation as overseas development assistance,” she said. “It’s yet more evidence that they’re planning further cuts to the aid budget and are not being transparent about how they’re going about it, all of which will mean the loss of yet more life-saving programmes for the world’s poorest.

“It’s even more outrageous that we are the only rich donor to be considering counting this money as aid. Because of the way SDRs work, this money comes at barely any cost to the UK taxpayer. It’s literally taking charity away from those most in need.”

A UK government spokesperson said: “The UK is one of the leading international aid donors and this year we provided over £10bn towards poverty reduction, climate change, and global health security. We will return to the 0.7% target when the fiscal situation allows.”

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UK’s Truss defends economic plan that sent pound tumbling

UK’s Truss defends economic plan that sent pound tumbling

British Prime Minister Liz Truss on Thursday defended her economic plan and shrugged off the negative reaction from financial markets, saying she’s willing to make “difficult decisions” to get the economy growing.

In her first public comments since the government’s announcement of billions in uncosted tax cuts roiled markets and drove the pound to record lows, Truss said Britain was facing “very, very difficult economic times.” But she said the problems were global and spurred by Russia’s invasion of Ukraine.

She spoke after the Bank of England took emergency action Wednesday to stabilize U.K. financial markets and head off a crisis in the broader economy after the government spooked investors with a program of unfunded tax cuts, sending the pound tumbling and the cost of government debt soaring.

Truss told BBC local radio that “we had to take urgent action to get our economy growing, get Britain moving and also deal with inflation.”

“Of course lots of measures we have announced won’t happen overnight. We won’t see growth come through overnight,” she said. “What is important is that we are putting this country on a better trajectory for the long term.”

In a series of interviews, Truss said her government’s decision to cap energy bills for households and businesses would help tame inflation and help millions of people facing a cost of living crisis.

But it was not that decision that alarmed the markets. It was the government’s announcement on Friday of an economic stimulus program that included 45 billion pounds ($48 billion) of tax cuts and no spending reductions — without an independent economic assessment of the cost and impact.

The Bank of England warned that crumbling confidence in the economy posed a “material risk to U.K. financial stability,” and said it would buy long-term government bonds over the next two weeks to combat a recent slide in British financial assets.

The bank’s former governor, Mark Carney said that the government and the central bank appeared to be pulling in different directions.

“Unfortunately having a partial budget, in these circumstances — tough global economy, tough financial market position, working at cross-purposes with the Bank — has led to quite dramatic moves in financial markets,” he told the BBC.

The pound traded at around $1.08 on Thursday, above its record low of $1.0373 on Monday. It has lost some 4% of its value since Friday.

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Stimulus Packages Provided During Pandemic Triggered Inflation- CBN

The Central Bank of Nigeria (CBN) has attributed the rising inflationary rates to the stimulus packages provided to citizens during and after the pandemic.

It added that although this increased spending, it also created global supply challenges.

CBN’s director, Monetary Policy Department, Hassan Mahmoud, said this on Wednesday at a post-MPC briefing tagged: “Unveiling Facts behind the Figures’’.

The Monetary Policy Committee had on Tuesday, unanimously voted to increase interest rate to 15.5 per cent.

“A lot of households and small businesses were injected with stimuluses; the U.S did two trillion dollars, Nigeria did about five trillion Naira, these increased the ability of people to spend.

“But the supply side could not meet up with the demand because that volume of injection was far more than the regular intake for those economies, this made prices go up,’’ he said.

Mahmoud also blamed the Russian-Ukraine war, as well as the resurgence of COVID-19 in China for the rise in global inflationary trend.

“That region accounts for more than 50 per cent of global commodity supply and 38 per cent of global oil and gas supply. The war resulted in some shortages which made prices go up.

“Then the COVID-19 lockdown in China. The country is the largest importer of commodities across the globe,’’ he added.

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China’s yuan slides to 14-year low against US dollar

China’s yuan slides to 14-year low against US dollar

China’s yuan fell to a 14-year low against the dollar Wednesday despite US central bank efforts to stem the slide after U.S. interest rate hikes prompted traders to convert money into dollars in search of higher returns.

A weaker yuan helps Chinese exporters by making their goods cheaper abroad, but it encourages capital to flow out of the economy. That raises costs for Chinese borrowers and sets back the ruling Communist Party’s efforts to boost weak economic growth.

The yuan fell to 7.2301 to the dollar, its lowest level since January 2008. One yuan was worth about 13.8 cents, down 15% from its March high.

The yuan has exceeded expectations it might fall to 7 to the dollar after the Federal Reserve started aggressive rate hikes to cool inflation that is at a four-decade high. The Fed has raised rates five times this year and says more increases are likely.

By contrast, the People’s Bank of China has cut interest rates to boost growth that fell to 2.2% over a year earlier in the first six months of 2022 — less than half the official 5.5% target.

The yuan is allowed to fluctuate up or down 2% from its starting price each day in tightly controlled trading. That prevents big daily swings, but down days can add up to a big change over time.

To shore up the exchange rate, Beijing cut the amount of foreign currency deposits Chinese banks are required to hold as reserves to 6% from 8% as of Sept. 15. That increases the amount of dollars and other foreign currency available to buy yuan, which should push up the exchange rate.

Still, that reserve cut is unlikely to stop a slide that is driven by “a strong U.S. dollar and the expectation of more Federal Reserve hikes,” said Iris Pang of ING in a report.

“Less aggressive rate hike talk” might help the yuan rally, but it might weaken further “if the Fed maintains its very hawkish tone” into next year, Pang wrote.

Chinese officials have previously promised to avoid “competitive devaluation” to gain an advantage in trade.

The yuan sank in 2019 during trade tension with then-President Donald Trump. That prompted suggestions Beijing was trying to reduce the impact of U.S. tariff hikes, but there was no official confirmation. The currency later strengthened.

Other governments also are struggling to manage capital flows under pressure from Fed rate hikes. On Friday, Vietnam’s central bank raised a key interest rate in what economists said appeared to be an effort to stop an outflow of money in search of higher returns.

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