4 ★ FINANCIAL TIMES Wednesday28 August 2019punchy... but not so large to let critics
say the government israidingRBI cof-
fers and destroying its balance sheet.”
The committee, led by former gover-
nor Bimal Jalan, recommended the cen-
tral bank maintain itsequity in a range
of 5.5 to 6.5 per cent of assets, from 6.
per cent previously. That facilitated the
transfer of the RBI’s entire net income of
$17.4bn from last year, and $7.4bn of
what was deemed excess capital.
The transfer, which includes $3.9bn
paid as aninterim dividendin February,
is about 2.5 times higher than the aver-
age payout in the last five years, but it
was stillbelow what New Delhisought.
HSBC said: “The government has got
some extra money without eroding RBI
credibility, given this is based on well-
articulated and sound economic princi-
ples.”Attention now turns to how New
Delhi intends to use the funds. Many
economists believeit should pay off
debt to reduce pressure on the bond
market.But somesaid it wasmore likely
the funds wouldbe used to repair the
hole in thebudgetto hit the fiscal deficit
target of 3.3 per cent of GDP.
Bond in doubtsee MarketsNew Delhi’s focus on the RBI balance
sheet intensified during Mr Modi’s first
term, after Arvind Subramanian, then
chief economic adviser, argued that
excess central bank equity be used to
recapitalise ailing public sector banks.
Struggling with ambitious spending
commitments and disappointing tax
revenue New Delhi put pressure on the
RBI to surrender its surplus capital with
no strings attached.Tensions over the
issueeruptedinto public view last Octo-
ber, when then deputygovernor Viral
Acharya warned, with Mr Patel’s bless-
ing, that New Delhi could “incur the
wrath of the financial markets, ignite
economic fire” if it undermined the
RBI’sindependence.
Within weeks Mr Patel had resigned
and the RBI, underMr Das, set up a
committee to propose a new capital
framework, including the appropriate
level of reserves. Economists say the
committee’s recommendations, which
were approved on Monday, paving the
way for this week’s transfer, have deftly
balanced payouts with prudence.
Saurabh Mukherjea, founder of Mar-
cellus Investment Managers, said: “It’sThe RBI is one of the world’s best-cap-
italised central banks, with an equity to
assets ratio of about 28 per cent, com-
pared to a global average of 8 per cent.
Without any legal obligation to transfer
its earnings to its sole shareholder, the
government, as many central banksdo,
the RBI has instead issued small ad hoc
dividends, amassing a large capital base
as a buffer for any potentialcrisis.
“The impression that is created is thatthe government is raiding something
that belongs to the RBI. But normally,
this is something that goes to the gov-
ernment anywhere else in the world,”
said economist Ila Patnaik, a professor
at the National Institute of Public
Finance and Policy.
Debate over whether India could use
some of the RBI capital more produc-
tively goes back at least a decade. Butbank’s autonomy and credibility. Many
analysts were quick to repeat those
warnings after the RBI’s decision,
authorised by Mr Patel’s successor
Shaktikanta Das.
“Once they introduce this notion that
the central bank is going to assist with
budgetary financing, it brings up the
obvious question of whether monetary
policy will be used more broadly to
finance government operations,”said
Eswar Prasad, a Cornell University eco-
nomics professor.
But others defended the logic of the
payout — and more in future — as a sen-
sible use of capital by one of the world’s
most robust central banks. Thekey
question, they suggest, is whether New
Delhi puts the revenue to productive use
or uses it as a short-term fix for its
finances as tax collections fall short.
“I don’t see anything egregious in the
transfer — there is no real reason as to
why the RBI should be sitting with those
kind of reserves,” said Jahangir Aziz,
chief of emerging markets research at
JPMorgan. “The question is, what does
the government do with that money?
That’s a completely different question.”AMY KAZMIN— NEW DELHI
For those who fear India’s central bank
has lost too much of its independence to
prime minister Narendra Modi, the
transfer of $25bn to the government this
week was always just a matter of time.
Withgrowth faltering and the govern-
ment’s fiscal position parlous, on Mon-
day the Reserve Bank of India seemed to
ride to Mr Modi’s rescue, agreeing the
unprecedented transfer from its bal-
ance sheet. Thehandout for the govern-
ment’s coffers,from the RBI’s profitable
central banking operations, amount to
about 1 per cent of gross domestic prod-
uct.
It was fear of such a transferthat last
year sparked aconfrontation between
Mr Modi’s administration and Urjit
Patel, then RBI governor. The feud cost
Mr Patel his job and triggered stern
warnings about the loss of the centralINTERNATIONAL
HEBA SALEH— CAIROThree years ago, Egypt’s economy was
in crisis, as entrepreneurs scoured the
black market for dollars and foreign
investors shunned the country. Now it
is one of the Middle East’s fastest-grow-
ing economies, favoured bybond
investors seeking high yields in an
uncertain global environment.The turnroundis an important success
for the authoritarian regime of Presi-
dent Abdel Fattah al-Sisi. His govern-
ment has beencriticised by human
rights groups for a severe crackdown on
freedoms, but investorspraise its imple-
mentation of bold andsensitive reforms
shunned by previous administrations.
The challenge for Mr Sisi, a former
general who ousted his elected prede-
cessor in 2013, is to turn the country’s
macroeconomic improvements into
prosperity for its 100m people. Poverty
has been rising, official statistics say,
and foreign direct investment is paltry
outside the oil and gas sector.
“The best reform story in the Middle
East, perhaps in any emerging market,”
Ruchir Sharma, Morgan Stanley chief
global strategist, wrote this month.“Egypt is on track to become a breakout
nation,” he concluded in an upbeat note.
With the completion in July of a pro-
gramme of tough reforms agreed with
the IMF under a $12bn loan deal, Egyp-
tian officials boastthey have staved off
collapse and set the economy on a more
sustainable path. Economic growth
accelerated to 5.6 per cent in the fiscal
year that ended in June, the highest level
since 2010. Debt and the budget deficit
have been on a downward trend. The
deficit fell to 8.2 per cent of gross domes-
tic product this June down from 12.2 per
cent three years ago.
Even so, economists and businessmen
say Egypt has to make reforms to
unshackle the private sector if it wants
to wean itself off debt and speed up job
creation. Thiswould meancutting the
country’s notorious bureaucracy,
improving access to industrial land and
reassuring investors about thelimits of
military involvementin the economy.
Since coming to office in 2014, Mr Sisi
has turned to the armyin the absence of
private sector investment.In recent
years the military have expanded in
cement, steel, pharmaceuticals, fish
farmingand real estate.Under the IMF deal, Cairo pushed
through a steep currency devaluation,
slashed energy subsidies and imposed a
value added tax. Attracted by yields
above 17 per cent, foreign debt investors
flocked to the country. “Given the scale
of the devaluation of the currency in late
2016 they are not afraid of another one
imminently creating low currency risk
plus high interest rates,” said David
Cowan, Africa economist at Citibank.But a World Bank report in July
warned that “non-oil private sector
activity continues to be stifled by a chal-
lenging business environment”. It said
future reforms “should put larger
emphasis on levelling the playing field
to allow for more private sector partici-
pation in the economy.”
Mohamed Abou Basha, head of macro
analysis at EFG-Hermes, a regional
investment bank, said multinationals
had shown an appetite for investment in
Egypt, but the sums committedwere
still modest.
Inflation, which averaged 21 per cent
in the fiscal year to June, had cut deeply
into the purchasing power of families,
hurting demand. Inflation fell to 8.7 per
cent in July, its lowest level in four years.
Official figures also show the impact
of the austerity measures on poverty.
The number of Egyptians below a$1.
a day poverty line rose to 32.5 per centin
2018, from 27.8 per cent in 2015, accord-
inggovernment figures.
This addsmore than 4m peopleto the
ranks of the poor.Despite the economic
austeritythere has been no popular
backlash because protests are banned
and dissent is not tolerated.IMF austerity
Egypt reform wins investor praise but swells ranks of poor
HENRY FOY— MOSCOW
LAURA PITEL— ANKARAPresident Vladimir Putin turned air-
craft salesman yesterday as he showed
off Russia’s military wares to hisTurkish
counterpart, in an effort todeepen
defence ties between the two countries
and gloss over tensions resulting from
theiropposing objectivesin Syria.
Mr Putin took President Recep Tayyip
Erdogan on a tour of Russia’s annual air
show, where Moscow’s new SU-stealth fighter was exhibited, just weeks
after Turkey’s decision to buy a Russian
missile defence system saw it barred
from adopting a rival US warplane.
Ties between Russia and Nato mem-
ber Turkey have deepened significantly
in recent years, reflected in Ankara’s
decision to buy theS-400 missile
defence systemdespite Washington’s
threat that it would result in the suspen-
sion of Turkey’s order for 100 F-
fighter jets. The Pentagon has already
begun following through on that vow,
and Ankara may face further sanctions
in retaliation for the Russian purchase.
But the heavy focus on military co-op-
eration — affirmed by a decision to
begin a second shipment of S-400 com-ponents just hours before the talks —
belied heightened friction between the
leaders over a Russian-backed assault
by Syrian government forces on Idlib,
the country’s last opposition bastion.
That bombing campaign has pushed
to the brink of collapse a shaky Turkish-
Russian agreement aimed at avoiding a
full military assault on the province,
which Mr Erdogan fears will bring a
fresh wave of refugees across the border.
In a joint press conference, Mr
Erdogan praised Turkish-Russian co-
operation in Syria but warned of a
“humanitarian disaster” in Idlib after a
surge in attacks against civilians. “It is
unacceptable for the [Syrian] regime to
use the excuse of fighting terrorism tobombard civilians from the ground and
from the air,” he said.
Turkey is already grappling with ris-
ing public opposition to the 3.6m Syri-
ans who have sought safety there since
the conflict began in 2011. Mr Erdogan
said “hundreds of thousands” of people
in Idlib had fled their homes and
warned “a large number of these people
are now moving towards our borders”.
Mr Putin saidhe and Mr Erdogan
had outlinedmeasures to “eliminate
terrorist hotbeds in Idlib and normalise
the situation in this area, and, respec-
tively, in Syria as a whole”.
Russia has previously blamed Turkey
for failing to clear the Idlib region of mil-
itants using it as a base to launch attacksagainst Syrian and Russian troops, a
task Mr Erdogan agreed to as part of the
ceasefire dealmade last September.
Turkey has in turn accused Damascus
of violating the agreement with a series
of attacks,backed by Russian air sup-
port. Nonetheless, both leaders insisted
after yesterday’s meeting that the deal
remained in place.
The at-times tense press conference
contrastedwith the personal bonhomie
between the two leaders during the
heavily choreographed tour of the air
show at an airport close to Moscow.
When Mr Erdogan asked his host
whether the SU-57 was available to pur-
chase, Mr Putin replied: “You can buy
it,” provoking laughter from both men.Defence ties
Putin and Erdogan mask rift over Syria
Russian leader hopes to
deepen links with Turkey
despite tension on IdlibROBIN HARDING— TOKYODonald Trump’s assurances that he is
not planning to impose tariffs on Japa-
nese automobiles “at this moment” has
received a lukewarm reception in
Japan as the broad outlines emerged on
a trade deal with the US.Immunity from threatened tariffs on its
car exports is a minimum demand for
Japan in talks for a “mini” or “early har-
vest” trade deal with the US. Mr Trump
and Japanese prime minister Shinzo
Abe announced an agreement in princi-
pleat the G7 summit last weekend and
aim to sign it in September.
Speaking at a press conference after
the G7 in France, Mr Trump said he
was not considering automotive tariffs
on Japanat present. “It’s something I
could do at a later date if I wanted to, but
we’re not looking at that,” he said.
But Mr Trump was fiercely critical of
US trade ties with Japan, signalling that
any reprieve from tariffs might not last
and raising questions about what, if
anything, Japan would gain from strik-
ing a deal with Washington.
“We just want to be treated fairly.
Japan has had a tremendous trade sur-
plus with the United States for many,
many years, long before I came here,”
said Mr Trump. “We’re taking these hor-
rible, one-sided, foolish, very dumb,
stupid... trade deals that are so bad
and we’re making good, solid deals out
of them.”
Yuichiro Tamaki of the opposition
Democratic Party for the People said,
however, that Mr Abe had been cor-
nered by the US. Nobuyuki Baba, secre-
tary-general of the Japan Innovation
party, an opposition party that usually
backs trade deals, said: “It’s hard to see
the merits for our country.”
Tobias Harris, senior vice-president
at advisory firm Teneo in Washington,
saidMr Trump’s statement was better
than nothing for Mr Abe but it raised
questions about whether the proposed
trade deal would include binding lan-
guage to protect Japan from future US
tariffs. “Imagine the domestic backlash
for Abe if, after reaching a deal, Trump
nevertheless threatened Japan again
with auto tariffs over some other issue.”
No details of the planned US-Japan
deal have been released, but the broad
outline is a reduction in Japanese agri-
cultural tariffs tolevels agreed in the
Trans-Pacific Partnership, a regional
trade pact from which Mr Trump with-
drew. In return, the US will cut some
industrial tariffs.
Unlike the TPP, however, the US will
not cut tariffs on passengercars. That
will leave Mr Abe trying to sell a deal
that is visibly worse than the TPP.
“The Trump administration — by
simultaneously celebrating Japan’s con-
cessions while offering virtually no pub-
lic details about US concessions — is
making matters significantly harder for
Abe,” said Mr Harris.
Economists saidthe outline deal
would do little to boost Japan’s economy
although protection from automobile
tariffs would be welcome.
Meanwhile, Japan’s farmers fear they
will be exposed to huge imports of beef.
The TPPincluded a safeguard whereby
higher tariffs would kick in if beef
imports to Japan from member nations
exceeded a certain quota over 12
months. That quota was set assuming
the US was part of the TPP.Bilateral relations
Japanese give
tepid reaction
to outlines of
US trade deal
India.Fiscal policy
Central bank payout gives Modi spending options
Economists say $25bn transfer
should cut New Delhi’s debt and
not just fix a hole in the budget
JAMIE SMYTH— SYDNEYAn Australian writer has been formally
arrested on charges of espionagein
China in a move that threatens to
worsen Canberra’s strained diplomatic
relations with Beijing.Yang Hengjunhas beenheldsince Janu-
ary, when he disappeared in the south-
ern city of Guangzhou, as his wife and
child awaited visas to travel to Australia.
Yesterday Canberra confirmedMr
Yang had been formally arrested by Chi-
nese authorities and would continue to
remain in criminal detention.
Marise Payne, Australia’s foreign
minister, saidCanberra was “very con-
cerned and disappointed” to learn of Mr
Yang’s formal arrest and criticised the
harshconditions he has been held in for
seven months without charge.
“Since that time, China has not
explained the reasons for Dr Yang’s
detention, nor has it allowed him access
to his lawyers or family visits,” she said.
“I respectfully reiterate my previous
requests that if Dr Yang is being held forhis political beliefs, he should be
released.”
Geng Shuang, Chinese foreign minis-
try spokesman, confirmedYang Jun, as
Mr Yang is referred to in China, had
been arrested on suspicion of spying.
“China’s state security department
will process the case in accordance with
the law and fully ensure Yang Jun’s vari-
ous rights,” Mr Geng said.
“China expresses strong dissatisfac-
tion with the statements that Australia
has made about this case. China is a
country with rule of law. Australia
should conscientiously respect China’s
judicial sovereignty and should not via
any means interfere in China’s lawful
handling of the case.”
Beijing has also criticised Canberra
for its decision to barHuaweifrom pro-
viding 5G mobile equipment in Aus-
tralia on security groundsand for the
introduction of tough laws aimed at
curbing foreign influence on its politics
and society — a move interpreted as
targeting China.
Additional reporting by Christian ShepherdStrained relations
China arrests Australian
writer on spying charges
Egypt’s growth set to
outpace big regional players
Real gross domestic product, rebased 100120140160180 1412 16 18 20ForecastSources: IMF, FT calculationsIraqEgypt
Other
countries*Iran* including Qatar, Pakistan, UAE, Saudi Arabia‘[It is not
acceptablefor the
Syrian]regime to
use theexcuse of
fightingterrorism to
bombardcivilians’
Recep Tayyip
ErdoganTurkey’s Recep
Tayyip Erdogan,
left, and Russia’s
Vladimir Putin
tour the annual
Moscow air
show yesterday
AlexeyNikolsky/EPAIndia’s central
bank: the logic of
the payout has
split opinion and
directed attention
towards PM Modi
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