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The US Dollar Will Continue as the World’s Reserve Currency

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By Richard E. Caroll

Despite the current glut of article’s questioning the status of the currency of the United States and its role as the global reserve currency, the US dollar will continue to be the world’s reserve currency for an indefinite period of time.

Even though the People’s Republic of China is promoting changing its currency to the E-Yuan, the basic fundamentals of economics will still apply.  Along with China’s reluctance to allow monetary capital flight from China, the overall state of the Chinese economy, its lack of an impartial judicial system, the drift back to an economy reminiscent of the Mao Zedong era, the lack of intellectual freedom necessary for a vibrant and growing economy, and the ongoing demographic crisis in China; the Chinese economy is not capable of assuming the role of the United State as the major reserve currency of the world.

The Fundamentals of the Chinese Economy

Since the opening of the Chinese economy to the world in 1978, the economy of China has boomed, and is currently regarded as the 2nd largest economy in the world.  One of the main reasons for the white-hot growth of the Chinese economy was the status of the Chinese economy when the Chinese Communist Party (CCP) opened up the economy and allowed its economy to flourish.  In December of 1978, China’s GDP was $149.5 billion.  In December of 2020, China’s nominal GDP was $14.72 trillion.  This type of growth was to be expected due to the constraints placed on China’s economy by the CCP under Mao Ze-Dong.  While impressive, this type of growth can only happen once.  Now that the economy has reached a saturation point, the natural laws of supply and demand will emerge, and the Chinese growth rate will be subject to world-wide market-place fluctuations.  Interference by the Chinese government into the market, which it frequently does, only serves to distort the true status of the economy, and inevitably will exact a heavy monetary price when the market finds its natural equilibrium point. One of the characteristics of a strong economy is the ability by investors to transfer funds from one country to another and to allow unrestricted inflows and outflows of capital.

China maintains strict capital outflow restrictions, making it difficult, if not impossible, for investors in China, both foreign and domestic, to take their capital out of China if the situation warrants it.  China began restricting capital outflows in 2016 after losing $1 trillion USD defending its currency.  The Chinese loosened up, but in 2018 tightened again at the beginning of the U.S. and Chinese trade war.  By maintaining capital controls, China restricts the free flow of financial intermediation, and imposes controls on a free market economy.

While the Chinese economy has a nominal GDP of $14.72 trillion, this does not show the true state of the Chinese economy.  The Chinese economy is divided into two distinct parts; the State-Owned Enterprises (SOEs) and the private enterprise aspect of the Chinese economy.  The SOEs are solely to provide jobs and income for the Chinese population.  The SOEs are not subject to the ebbs and eddies of a free market economy, and are more concerned with providing jobs than making a profit.  While the SOEs only account for 25% of the Chinese economy, they are given lower interest rates on loans, and are backed explicitly by the Chinese government.  Twice, the bad loans made by SOEs have been bailed out by the Chinese government.  While private market firms make up some 87% of employment in China, the SOEs account for 85% of the 109 Fortune 500 Companies in China.  SOEs continue to be a drag on economic growth in China and carry immense loads of debt.

While China may have an economy of over $14 trillion, it also has a debt level of 290% of its GDP; this would translate to over $40 trillion. Unlike the West, where contract law in non-partisan and subject to written law and enforced by courts and state-owned police, the judicial system in China acts as an arm of the CCP, and law is subject to change arbitrarily without prior warning or comment from the public.  A public commission undertaken by Senator Jeff Merkley and co-chair Congressman James P. McGovern found that:

“China’s judiciary continues to be subject to a variety of internal and external controls that significantly limit its ability to engage in independent decision making. Several internal mechanisms within the judiciary itself limit the independence of individual judges. A panel of judges decides most cases in China, with one member of the panel presiding at trial. Despite recent reforms to enhance the independence of individual judges and judicial panels, court adjudicative committees led by court presidents still have the power to review and approve decisions in complex or sensitive cases. Finally, judges in lower courts frequently seek the opinions of higher courts before making decisions on cases before them. Some legal reformers in China oppose this practice, arguing that it undermines the right of appeal. China experts differ on whether the practice has become more or less frequent as reforms have progressed in recent years.”

With intellectual property rights more of a joke than a reality, the incentives for ground- breaking research are absent in China.  Without any type of incentive for the expense and time needed for the creation of new technology, no currency can have a solid foundation.

China is facing an unprecedented demographic crisis.  An outgrowth of the one child policy has left China with a rapidly aging population, with fewer younger being able to fill the factories, and its armed forces.  The one child policy implemented by the Chinese Communist Party in September of 1980 has left China frantically trying to jumpstart birth rates in China, with little or no success.  The demographic chart below graphically demonstrates this crisis:

The population crisis in China works against the Chinese in establishing its currency as a replacement for the US dollar.  While it is fashionable amongst those writers schooled in political science and social sciences to argue that the E-Yuan will soon replace the US dollar as the world’s major reserve currency, the above economic and mathematical facts argue against any such outcome, specifically given the natural resources of the United States, coupled with the strong independent and non-partisan judicial system in the United States as to real property and intellectual property rights.

The Fundamentals of the United States Economy

In sharp contrast to the fundamentals of the People’s Republic of China, the fundamentals of the United States are strong and vibrant.

The United States is blessed with fertile ground and can not only feed itself, but in fact is one of the major breadbaskets of the world.  With the Mississippi and Missouri river systems, the agricultural richness of the United States has a cheap way of transporting its bounty to the coasts of the United States, but also to the rest of the world in general.  While there are many pretenders to the throne, there is only one champion, and that is the United States of America.

The modern judicial system of the United States is one of the oldest and most stable judicial systems in the world.  The law does not change from day to day based on the political whims of political parties, both Republican and Democratic, but on the rule of written law.  While the law may be changed, modified of eliminated altogether, it is done so under the rule of democratic guidelines, with the public being given ample time to weigh in on changes to the law, and the either approve or disapprove attempts by lawmakers to change the judicial system.  With strong protection for individual real property and intellectual property rights, the United States provides a fertile ground of innovation and the creation of wealth.  This provides for a stable and safe environment of investors, both domestic and foreign.

The demographics of the United States compares favorably for the environment of economic growth and internal domestic consumption.  The following demographic pyramid shows the continuing dynamics of population growth in the United States:

There are currently two major research projects proposing the E-Dollar backed by the United States Federal Reserve Bank.

There is the Digital Currency Initiative at MIT in collaboration with the Federal Reserve Bank in Boston.  There is also the Digital Dollar Project with the backing of 5 of the 7 Federal Reserve Banks in the United States.

While the United States does face challenges in the world in relationship to a changing political world landscape, the fundamentals of its economy is not one of them. The United States monetary unit, the United States Dollar is the world’s reserve currency and will continue to be so into the future.

Speculative articles based more on rumor and innuendo’s are exactly that, speculative and not grounded in fundamental economic or in reality.


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A Labour Government Should not Frighten the Horses

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The UK general election is likely to mean changes, but Gulf citizens need not be too worried.

By James Drummond

If the tension was killing you, now you know. If it wasn’t, then be aware that a general election in the United Kingdom will be held on July 4 – less than six weeks away.

For the hapless Rishi Sunak, it looks like a case of “If it were done when ’tis done, then ’twere well it were done quickly.” Polls indicate that after 14 years of conservatism, real or imagined, voters are likely to elect a new Labour government.

What does this mean for us here in the Gulf?

The six Gulf states are certainly exposed to Britain. The extent of GCC holdings in the UK is enormous, ranging from Qatari ownership of the Shard building in London, stakes in the Sainsburys supermarket chain and Barclays bank, to Sheikh Mohammed bin Rashid’s Godolphin stables in Suffolk.

Manchester City and Newcastle United football clubs are owned by Emirati and Saudi interests, respectively. Kuwait’s wealth is managed by the Kuwait Investment Office near St Pauls Cathedral.

Labour has been careful to detail very few policies (or hostages to fortune, as its strategists may see it), but last week, David Lammy, the likely new foreign secretary, outlined a further campaign against dirty money.

Britain is a “corruption services centre”, while London is a “hotbed of kleptocracy”, Mr Lammy said. He said that he wanted to reward whistleblowers and clamp down on “enablers” of financial crime.

Given the paucity of public announcements, Lammy’s speech is significant, because it implies that the incoming government is likely to act. Fighting financial crime is relatively uncontroversial and attracts cross-party support – although in the UK’s case with limited success.

British politicians have made similarly grandiose statements before. But after Russia’s invasion of Ukraine, London has moved particularly against Russian dirty money, and sanctioned individuals. It finally introduced an obligation mandating the disclosure of beneficial owners of property.

Overseas trusts are also now required to disclose their ultimate beneficial owners, and there is now greater transparency when registering entities at Companies House.

This seems to have had only limited effect, however. Last week Andrew Mitchell, the deputy foreign secretary, cited estimates that 40 percent of the world’s dirty money still passes through London.

Spotlight on Corruption, a non-governmental organisation, wrote in October last year that “major reform is needed to how lawyers and accountants, the property sector and company formation agents are regulated for money laundering.” Lammy may choose to take further action against these and other professionals.

Other so-called enablers include retired politicians, some of them in the House of Lords, who work as advisors to unsavoury actors. Labour could move to tighten disclosure, although several of its senior former members are likely to lobby against further transparency.

It is also possible that Labour will go further in taxing expatriates. In its limited public commitments, the party has promised to clamp down on “tax dodgers”.

Those with property in the UK already pay tax on rental income they receive, and worldwide assets are subject to Britain’s inheritance tax. Some Gulf Arab families with UK property have been caught by inheritance tax.

A government led by Sir Keir Starmer, the Labour leader, could go further, as the US does, in taxing worldwide income of its citizens, more than 200,000 of whom live in the UAE alone. The argument is that if you have the privilege of carrying the passport, you have an obligation to pay tax.

Another question surrounds nationalisation. Labour is committed to re-nationalising the railways for one, although the infrastructure is already under central government control.

But another target may – may – be England’s water supply network, which was privatised in 1989. Shareholders in various of the rump companies include the Qatar Investment Authority and Adia of the UAE.

The water companies have been the subject of a vociferous campaign, for allegedly paying their shareholders high dividends while neglecting maintenance and investment. It is possible that an incoming Labour government will nationalise the industry.

All that said, the primacy of the rule of law and respect for property rights remain strong in Britain.

Barratt, a mass housebuilder, reported earlier this week that London remains the top choice among world cities for UAE investors looking to buy overseas. The holdings of Gulf states and rights of Gulf citizens in the UK remain secure, even with a Labour government.

James Drummond is Editor-in-Chief of the AGBi

Courtesy: The AGBI.Com


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Kuwait’s Political Crisis Adds to Economic Uncertainty

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Kuwait’s latest standoff is deeply concerning for both the near and long term, writes Andrew Cunningham

The decision by Kuwaiti emir Sheikh Mishal Al-Ahmad to dissolve the country’s recently elected parliament just days before its inaugural session on May 14 presents overseas investors and Kuwaiti citizens with more uncertainty.

The situation raises concerns about the country’s economic prospects over both the short and long term.

Disputes and stand-offs between Kuwait’s emirs and its boisterous parliament are nothing new. Parliament has been dissolved, and the constitution suspended, numerous times over the past 40 years. The country has held four elections in the past four years.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

In March this year, rating agency Fitch described Kuwait’s fiscal and external balance sheets as among the strongest of any of the governments it rates.

But when we look at long-term trends, the picture is more complex and less secure.

Kuwaiti government spending remains overwhelmingly dependent on oil and gas revenues. The government has made almost no progress, over many decades, in diversifying the economy away from oil, or in reducing the huge burden of government salaries and welfare payments.

Oil and gas revenues currently account for nearly 70 percent of total income and, according to IMF projections, will continue to do so for the rest of the decade.

These revenues have served the country well in the past, despite the volatility of oil prices, but such overwhelming dependence looks foolhardy when consumers worldwide are striving to reduce consumption of oil and gas and investors and energy firms have pivoted towards renewables.

Nearly all of the Kuwaiti government’s non-oil and gas revenue arises from overseas investments and from dividends from state-owned companies. Tax revenues account for less than 1 percent of total government income.

Looking beyond the fiscal imperative to diversify the economy is the need to provide employment opportunities for Kuwaiti citizens.

No less than 84 percent of the Kuwaiti workforce was employed by the government at the end of 2022. It is hardly surprising that nearly half of government expenditure is allocated to the salaries of public employees.

Pressure for social spending will increase in the years ahead. A World Bank report, published last year, showed that levels of obesity and Type 2 diabetes were higher in Kuwait than in any of the other GCC countries and nearly double the average in OECD countries.

Partly as a result of this, the World Bank estimated that Kuwait’s old age dependency ratio – the number of people over 65 years old in relation to those of working age – will be nearly double that of its neighbours by 2040.

Kuwait is also a country that is being significantly affected, even today, by climate change. Temperatures during the summer can exceed 50 degrees, making Kuwait one of the hottest places on earth.

These are difficult and complex challenges, both economic and social, but they are hardly unique to Kuwait. That they are, in some cases, more acute in Kuwait than elsewhere is due to decades’ long procrastination and political paralysis.

The government’s General Reserve Fund, which held most of its liquid assets, was entirely depleted in September 2020, according to Kuwait’s own ministry of finance. With AA ratings, the obvious solution was to borrow money – Kuwait’s debt-to-GDP ratio is less than 5 percent. Yet the parliament has still not passed a so-called ‘Liquidity Law‘ that would allow modest issuance of foreign currency debt.

The parliament also held up the introduction of Value Added Tax (VAT), making Kuwait one of two of the six GCC countries not to fulfil a joint commitment to implement a minimum VAT of 5 percent.

Over the past four years, all three of the big international credit rating agencies have downgraded the government of Kuwait.

In their rating reports, all agencies cited a dysfunctional and slow-moving political environment that was reducing the country’s financial flexibility and delaying much needed economic and financial reform.

Politics matters.

It is unrealistic to think that after decades of enmity the ruling family and the parliament will soon form a harmonious working relationship.

But they do need to find some common ground that will enable them to start addressing fundamental economic and social issues while the country still has large financial reserves and strong credit ratings.

Time is running out.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems


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ICD and JSC Ziraat Bank Collaborate to Boost Uzbekistan’s Private Sector

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At the 3rd Tashkent Investment Forum, the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan took a significant step forward in their partnership to empower small and medium-sized enterprises (SMEs) and foster economic growth in Uzbekistan. The forum, held in the capital city of Uzbekistan, brought together key stakeholders from the public and private sectors to discuss investment opportunities and economic development strategies for the region. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is aimed at boosting the private sector in Uzbekistan.

During the forum, ICD and JSC Ziraat Bank Uzbekistan formalized an expression of intent to collaborate on various initiatives aimed at supporting SMEs. One of the key elements of this collaboration is the provision of a Line of Financing (LoF) facility by ICD to JSC Ziraat Bank Uzbekistan. This LoF facility will enable the bank to fund private sector projects as an agent of ICD, thereby providing SMEs with access to the necessary capital to initiate and grow their businesses.

The partnership between ICD and JSC Ziraat Bank Uzbekistan is expected to have a significant impact on the SME landscape in Uzbekistan. By equipping entrepreneurs with the resources they need to succeed, this collaboration will not only support the growth of individual businesses but also contribute to the overall economic development of the country. SMEs play a crucial role in driving economic growth, creating jobs, and fostering innovation, and this partnership will help strengthen the SME ecosystem in Uzbekistan.

JSC Ziraat Bank Uzbekistan, as a strategic partner for ICD, brings a wealth of experience and expertise to the table. As a prominent commercial bank with foreign capital, JSC Ziraat Bank Uzbekistan has a strong track record of supporting SMEs and promoting economic development. The bank’s partnership with ICD further underscores its commitment to advancing the private sector in Uzbekistan and its dedication to supporting the country’s economic growth.

ICD, for its part, is a leading multilateral development financial institution that focuses on supporting the economic development of its member countries through the provision of finance and advisory services to private sector enterprises. By partnering with JSC Ziraat Bank Uzbekistan, ICD is furthering its mission of promoting economic development and fostering entrepreneurship in Uzbekistan and across the Islamic world.

The LoF facility provided by ICD to JSC Ziraat Bank Uzbekistan is just one example of the many initiatives that the two entities are undertaking to support SMEs in Uzbekistan. In addition to providing financial support, the partnership between ICD and JSC Ziraat Bank Uzbekistan will also include capacity-building initiatives and technical assistance programs to help SMEs succeed in today’s competitive business environment.

Overall, the partnership between ICD and JSC Ziraat Bank Uzbekistan represents a significant step forward in supporting SMEs and fostering economic growth in Uzbekistan. By working together, these two institutions are helping to create a more vibrant and dynamic private sector in Uzbekistan, which will ultimately benefit the country’s economy and its people. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is expected to have a far-reaching impact on the private sector in Uzbekistan.


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