What We're Reading:

What We're Reading:

UK Prime Minister Liz Truss is out. Here’s what happens next. As Liz Truss stepped down from a turbulent and record-short stay as U.K. Prime Minister on Thursday, the question is what’s next from the country whose politics have taken investors on a roller-coaster ride over the last several weeks. (MarketWatch)

EU leaders open divisive summit on energy crisis. European Union leaders opened a two-day summit Thursday divided on whether, and how, the bloc could impose a gas price cap to contain the energy crisis fueled by Russian President Vladimir Putin’s invasion of Ukraine and his strategy to choke off gas supplies to the bloc at will. (AP)

Hong Kong shares hit lowest level since 2009. Shares in Hong Kong have slumped to the lowest level since the global financial crisis, after a major speech by the city's leader. The benchmark Hang Seng index fell by more than 3% to its lowest level since May 2009, before regaining some ground. (BBC)

London court rulings bring new clarity to misdelivery disputes. Misdelivery claims are one of the messiest types of disputes in trade finance, with cases regularly winding up in court. (Global Trade Review)

EU agrees on new Iran sanctions over Ukraine drone strikes. EU ambassadors have agreed on a new package of sanctions against Iranian officials in response to recent drone strikes in Ukraine. Tehran has denied supplying Russian forces with arms. (DW)

Firms hold off investment due to Tory turmoil. The good news is that the financial markets have not taken further fright at the extraordinary political scenes of discord and chaos in the UK's governing party. (BBC)

Truss quits, but UK’s political and economic turmoil linger. Financial markets breathed a sigh of relief, but Truss leaves a divided party seeking a leader who can unify its warring factions. (AP)

Fed’s Harker sees ‘lack of progress’ on inflation, expects aggressive rate hikes ahead. Philadelphia Federal Reserve President Patrick Harker said higher interest rates have done little to keep inflation in check, so more increases will be needed. (CNBC)

Can a non-Gandhi president revive India's Congress party? The Congress party held onto power for decades. But despite its new leadership, the party's near-term prospects continue to look bleak after the loss of two national elections in a row. (DW)

What a third term for Xi Jinping could mean for China and the world. Xi has already been in power for a decade, a period marked by growing authoritarianism in China. Many experts believe he could emerge a more emboldened leader in his new term. (NPR)

Biden just took a big swing at lowering gas prices ahead of the midterm elections. President Joe Biden is once again stepping in to try and curb soaring gas prices, as Americans feel the pinch of higher prices and turn away from Democrats as the midterm elections approach. (Business Insider)

Trade finance credit risk back to pre-pandemic levels, ICC confirms. Default rates across all trade finance asset classes dropped in 2021 compared to the previous year, defying the turmoil of the Covid-19 pandemic, according to the latest International Chamber of Commerce (ICC) trade register. (Global Trade Review)

Will the Great Resignation trend end soon? After COVID peaked, millions of Americans quit their jobs to take advantage of a tight labor market. But with many big firms now announcing layoffs as the US economy slows, could resigners' remorse be next? (DW)

Inflation in Egypt is expected to reach new heights upon a recent loan deal with the International Monetary Fund (IMF) for a near $8 billion as part of an economic restructuring plan. Egypt’s inflation rose to 15% in September, but EFG Hermes, the country’s biggest investment bank, expects a second wave of inflation to occur within the coming weeks. “Our base case projects inflation accelerating to 18%-19% with a weaker EGP reflecting on food and fuel prices,” the bank said, according to The National.

The new reform program can be described by three major cornerstones, according to AhramOnline:

1. Financial policies: The Egyptian government plans to keep the public debt-to-GDP ratio below 80% over the short term.

2. Monetary policies: Efficiency of current monetary policies and ensure local market’s price stability.

3. Structural reforms for the Egyptian economy: Improvement in business climate, increased export rates and productivity.

“The monetary exchange rate policies would anchor inflation expectations, improve monetary policy transmission, improve the functioning of the foreign exchange market and bolster Egypt’s external resilience,” Gerry Rice, the IMF’s director of communications told AhramOnline.

The implementation of a structural reform agenda is expected to “gradually enhance the competitiveness of the economy,” Rice added. It is essential to “improve the business climate and foster transition towards a greener economy.”

Earlier this year, the Central Bank required importers to use letters of credit over a cash-against-documents system—but some groups of trade and business associations disagreed with this shift. An article from Nasdaq reveals importers said letters of credit require more payments in advance, “tying up funds that could otherwise be invested in their business while also driving up input costs and prices of products sold on the local market.”

According to the latest FCIB Credit and Collections Survey results, letters of credit are the most common method used by respondents to secure payment. 60% of survey respondents said payment delays are increasing in the country, and 44% blame regulatory issues for those delays. Another 44% said central bank issues were causing payment delays, 33% said customer inability to pay and 33% said government approval. On average, customers in Egypt are about 23 days beyond terms.  

What Credit and Collections Survey respondents are saying:

• “Each transaction requires a letter of credit due to government requirements.”
• “We only have one customer in Egypt and they will no longer reply to requests for payment and have never provided a reason for the delays.”
• “Be extremely cautious selling here.”
• “Keep checking the news as the LC requirement happened quickly, it changes and some are suggesting this requirement may be going away.”
• “It is important to know customer's payment process to avoid misunderstandings or delays due to administrative issues.”

The next survey officially opens Monday, Oct. 24 and covers Italy, Mexico, Pakistan, and Vietnam. Want to take the survey early? Click here.

Lithuania’s post-pandemic economic recovery has been thrown off course as Russia’s war of aggression against Ukraine led to surging inflation and slowing economic growth. Continued careful management of public finances along with structural reforms will help Lithuania to navigate these new challenges and emerge stronger and more resilient, according to a new OECD report.

The latest OECD Economic Survey of Lithuania says Lithuania has been among the fastest growing OECD economies of the past decade. Strong exports and integration into global value chains helped to drive its rapid recovery from the pandemic. Now, Lithuania is impacted by the fallout from the war in Ukraine. GDP growth is projected to be modest at 1.6% in 2022 and 1.3% in 2023 amid falling exports and uncertainty over energy supply.

Soaring prices for oil and gas, and to a lesser extent food and housing, pushed annual inflation above 22% in September, the second-highest level in the euro area.

The Survey says fiscal policy should contribute to mitigating inflationary pressures, while support for high energy prices should be temporary and targeted at the most vulnerable households and firms. The Survey recommends prioritizing reforms to sustain productivity growth and boost employment, such as improving the governance of public firms, upgrading education and strengthening apprenticeships to bring skills in line with labor market needs, and doing more to foster innovation and the adoption of digital technologies.

“Lithuania showed great economic resilience during the COVID-19 crisis, helped by sound financial and fiscal policies,” said OECD Acting Chief Economist Alvaro Pereira. “The war in Ukraine is now posing new challenges, but Lithuania is well placed to tackle these, providing targeted support to cushion the impacts of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine while rebuilding fiscal space gradually and looking ahead to ways to strengthen employment and support productivity gains.”

To help turn new investment into sustainable growth, the Survey recommends that Lithuania builds on its past progress in reducing the number of state-owned enterprises and improving their governance. Lithuania has a business-friendly climate with effective regulation that both supports domestic firms and helps to attract foreign ones. Subjecting all public entities to the same legal, financial and regulatory framework as private firms is essential to level the playing field.

Accelerating the digital transition will be key to further increasing productivity. There is scope to further increase investment in research and development, including through a more balanced combination of tax-incentives and direct support to small innovative firms. Barriers to the adoption of advanced technologies can be reduced by improving digital infrastructure and access to finance. Enhancing digital skills would help to broaden the digital transformation.

Over time, it will be important to address the fiscal costs of a rapidly ageing population, including finding ways to increase the adequacy of the pension system while maintaining its sustainability.

See an Overview of the Survey with key findings and charts.

Sub-Saharan Africa faces one of the most challenging economic environments in years, marked by a slow recovery from the pandemic, rising food and energy prices and high levels of public debt. One of the most urgent issues confronting the region is the need to tackle decade-high levels of inflation—which are devastating incomes and food security—while also supporting growth.

While there are big differences between countries, the median of inflation rates in the region increased to almost 9% in August. And even though the rise has been less dramatic than in other parts of the world, and the drivers are different, inflation is nearly double pre-pandemic levels, risking social and political instability and worsening food insecurity.

Despite a rebound last year, the fallout from the pandemic has kept domestic economic activity in sub-Saharan Africa relatively muted, and we expect growth in the region to slow this year. Most countries in the region have lacked the resources to support and stimulate growth, in sharp contrast to richer countries elsewhere that could inject trillions of dollars into their economies.

In sub-Saharan Africa, inflation has been driven less by domestic activity than in advanced economies. Instead, external developments have shaped the path of inflation since the start of the pandemic. They include the sharp spike in global commodity prices, swings in the exchange rate, global supply chain disruptions and natural disasters.

In the case of food, the prices of key staples such as maize and wheat have increased since 2019, contributing two-thirds of overall inflation in fragile states and one-half elsewhere in the region. Higher global energy prices and the strong dollar have also fed through to inflation indirectly, via transportation and tradable goods like household products.

By contrast, there have been only modest increases for the prices of goods and services that most reflect domestic demand pressures, so-called nontradables—which typically include any locally-produced services, such as in the hospitality, health, or education sectors.

With food and energy accounting for half of household consumption in sub-Saharan Africa, living costs across the region have spiraled. The IMF estimates that 12% of the region’s population will face acute food insecurity by the end of this year.

Many countries have therefore turned to subsidies and tax cuts to alleviate the squeeze in household incomes. These measures should be temporary and as well targeted as possible to maximize their impact and minimize their costs on already-stretched budgets.

Central banks across the region had already started raising interest rates in response to rising inflation, capital outflows and currency depreciation resulting from monetary policy tightening in advanced economies. Examples include Ghana, Malawi, Mozambique, Nigeria, Uganda and the economic and monetary unions for both Central and West Africa.

Monetary authorities also find themselves facing an increasingly delicate trade-off: raising rates to keep inflation in check will risk choking off credit for investment, depressing economic activity and reducing incomes. Meanwhile, fiscal consolidation and the global slowdown weigh on domestic economic activity.

That means central banks should proceed with caution and raise interest rates gradually so as not to jeopardize the recovery. But policymakers must also not be complacent: countries where domestic demand pressures are acute, or inflation is very high may need to tighten faster or more decisively.

The same applies to countries where monetary policy credibility is weak, the currency is depreciating rapidly, or foreign exchange reserves are shrinking. While countries with exchange rates that are fixed or heavily managed have, so far, experienced lower inflation than those with more flexible regimes, their ability to control the pace of interest-rate increases is constrained by their currency arrangement.

There are some concerns that monetary policy could still be too accommodative, given that rate increases have not kept pace with inflation. Policy coordination can help. Fiscal consolidation has a role to play in countries where policy is too loose, as can a combination of rate increases and currency depreciation.

Given sub-Saharan Africa’s fragile recovery, combined with the fact that domestic demand pressures have not so far been an important driver of inflation, policymakers must proceed with caution in coming months while closely monitoring inflation.

Reprinted with permission; IMF Blog.

This blog, which draws on the October 2022 Regional Economic Outlook for Sub-Saharan Africa, reflects additional research contributions from Seung Mo Choi, Samson M’boueke and Cleary Haines.

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate