IMF boss worried 60% of low-income countries at debt-distress risk

The International Monetary Fund has said the global economy is at a highly uncertain moment.

In the Managing Director's Global Policy Agenda, Spring Meetings 2023, themed: ‘Safeguard Economic Stability, Support Vulnerable Countries, Sustain Our Future Prosperity’, the Fund said tentative signs of stabilisation earlier this year have receded, and “the outlook is increasingly risky and uncertain”. MD Kristalina Georgieva noted: “Strong consumer demand in advanced economies (AEs), together with the reopening of the Chinese economy, buoyed activity in the second half of 2022”.

However, she noted, successive shocks—including Russia’s war against Ukraine—and now recent financial market stress, in the context of tighter monetary policies needed to bring down inflation, are weighing on the global recovery and macro-financial stability.

These factors, she pointed out, “are also casting a shadow on the outlook: global growth in the near and medium term is projected to remain weak by historical standards and could weaken further if financial stress continues and leads to a sharp tightening of financial conditions”.

“And, although declining commodity prices and synchronised monetary tightening helped moderate inflation, underlying price pressures are proving sticky. At the same time, divisions within and across countries are deepening, exacerbated by rising fragmentation”, she indicated.

As a result, a record 345 million people, mainly in low-income countries (LICs), face acute food insecurity, and more than 700 million people are living in extreme poverty.

Within countries, the cost-of-living crisis is affecting vulnerable groups the most, she noted, adding that emerging markets (EMs) are vulnerable to spillover risks from continued but necessary tight policies in AEs from financial market stress.

“About 60 per cent of LICs and 25 percent of EMs are already in or at risk of debt distress, whereas debt restructuring processes have been sluggish”.

Also, “rising fragmentation could further entrench these divides by limiting resources to support the vulnerable, thus hampering global trade and investment flows, and delaying urgently needed action on a range of shared challenges, including the climate crisis”.

She outlined the following strong policy actions, which she said are needed together with pragmatic approaches to find areas of common ground to respond to shared challenges.

The key priorities are to:

(1) safeguard economic and financial stability as a basis for stronger growth through resolute domestic policies to reduce inflation and debt while bolstering global trade;

(2) support vulnerable countries through stepped-up international financial assistance and debt relief; and

(3) sustain our future prosperity by jointly tackling climate change and investing in a more inclusive and digital future.

The IMF, Ms Georgieva reported, “is proactively engaging with our members to chart a clear course to a stronger and more sustainable path for the global economy”.

In collaboration with partners, she said the Funs is focused on delivering prompt and tailored macro-financial advice, financial assistance—including on a precautionary basis—and capacity development (CD) to help member countries navigate the difficult and highly uncertain global economic context.

“In doing so, we aim to safeguard the International Monetary System (IMS) and to bolster resilience to current and future shocks”.

“To deliver for our membership, we count on their unwavering support, particularly for scaling up financial assistance to our vulnerable members and for completing the 16th General Review of Quotas by December 15, 2023”.

Bolstering macro-financial stability and rebuilding the foundation for sustained growth, she mentioned, “require well-calibrated, decisive, and agile policies. Medium-term growth prospects are the weakest in decades. Debt is up, purchasing power is down, and uncertainty and downside risks have risen, especially related to financial sector stability”.

Inflation, while moderating, “is still too high in many parts of the world. In this context, policymakers must remain steady with their anti-inflation stance, safeguard financial stability, reduce deficits and debt burdens while protecting the most vulnerable, and bolster long-term growth. International coordination is essential to support trade and to safeguard the stability of the IMS”.

Read below some other relevant parts of her message:

• Monetary policy must continue to prioritise durably bringing inflation down and guarding against a de-anchoring of inflation expectations. Given elevated uncertainty and risks, central banks must calibrate policies in a data-dependent manner, communicate their objectives clearly, and be ready to adjust and use their full set of policy instruments, including to address financial stability concerns, working closely with supervisory and regulatory authorities. Where market strains emerge, central banks should stand ready to provide appropriate liquidity support, while safeguarding their balance sheets.

• Regulatory, supervisory, and macroprudential policies must focus on strengthening the resilience of the financial sector, including to abrupt or sizable changes in interest rates and real estate and other asset prices. Country authorities will need to monitor developments carefully and take active steps to strengthen prudential oversight. Data, supervisory, and regulatory gaps will need to be addressed in both the bank and nonbank financial sectors. Macroeconomic and exchange rate adjustments remain the first line of defense in the face of external shocks.

The use of preemptive capital flow measures (CFMs) on inflows and macroprudential policy measures may be useful in some circumstances to address financial stability risk. If capital flow and exchange-rate pressures emerge, currencies should be allowed to adjust, while temporary foreign exchange intervention could help address market dysfunction. Temporary capital flow management measures on outflows may help in imminent crisis circumstances.

• Fiscal policy needs to continue to reduce elevated debt levels, while buttressing monetary and financial sector policies in bringing inflation down and maintaining financial stability. Measures to address cost-of-living pressures must be better targeted to support the most vulnerable groups, while, to the extent possible, preserving the market signals from higher prices. Credible risk-based fiscal frameworks can help promote consistent macroeconomic policies aligned with monetary policy objectives, reduce debt vulnerabilities over time, and rebuild buffers to better respond to future shocks.

• Supply-side policies can help complement monetary and fiscal policies in bolstering growth, alleviating price pressures, and building supply-chain resilience. But such policies need to be carefully designed to avoid distortive practices that may be counterproductive to sustained, inclusive growth.

Structural reforms should aim to address market power and rent-seeking behavior; improve regulations, planning processes, and the business environment; support education; and bolster labor market flexibility and participation. Such reforms are key to address longer-term structural challenges and to help achieve the Sustainable Development Goals.

• International coordination can help bolster the stability of the IMS. Trade should resume its role as an engine for growth. Large benefits can come from refraining from distortive trade practices, avoiding wasteful subsidy races, and strengthening the multilateral trade system, including through the World Trade Organization. Through our surveillance, the IMF provides targeted advice through in-depth analyses and sharing lessons across the membership.

• Bilateral surveillance emphasises the need for a consistent policy mix tailored to country circumstances that recognises trade-offs and is geared toward dealing with high uncertainty. Against the backdrop of increased financial stability risks, we continue to upgrade macro-financial analysis in surveillance, focusing on strengthening systemic risk analysis and policy advice to help members deal with shocks and develop contingency plans to address and preempt risks.

The revised Institutional View and our ongoing work to operationalise the Integrated Policy Framework—guiding the use of multiple policy tools to address spillover risks if market frictions become elevated—support members to develop appropriate policies to manage capital flow and exchange rate volatility.

And by enhancing our engagement on social spending and integrating our strategies—on climate, digital, and with fragile and conflict-affected states (FCSs), and more recently gender—in our surveillance and other core activities, we are better able to help our members develop stronger, more inclusive, and more resilient economies.

Our just completed review of the Framework for Enhanced Fund Engagement on Governance reaffirms the criticality of strengthening governance, including by addressing corruption, to bolster the design and impact of domestic macro policies, with due attention to the importance of evenhanded engagement across members.

And the recent Review of the Role of Trade in the Work of the Fund helps guide our policy advice on increasing supply-chain resilience while avoiding distortive protectionist measures.

• Our multilateral surveillance and analytical work prioritize macroeconomic policies to contain inflation, including monetaryfiscal interaction and policy responses to commodity-price shocks; the interplay between capital flows, CFMs, and crises; the role of fiscal policy in tackling elevated debt levels; digitalisation of public finance and infrastructure; and policies to address financial sector vulnerabilities. We are also analyzing the spillovers from fragmentation and working on helping members reach a common understanding of the implications of inaction or damaging unilateral actions and arrive at pragmatic solutions that preserve the stability of the IMS.