IMF Weekend Read

The latest IMF analysis of global economics, finance, development and policy issues shaping the world //

Dear maria, In today's edition we hear about priorities G20 leaders should consider, the IMF leading a shift in economic thinking, considerations for a green recovery, new statistical demands and challenges, innovation in sovereign debt restructuring, fighting corruption in sub-Saharan Africa, and preventing economic scarring in the Middle East and Central Asia, among many other highlights.  The Weekend Read will be on hiatus next week due to the Thanksgiving holiday, but we'll be back the week after. On that note, let's dive right in. ACTING TOGETHER AMID UNCERTAINTY As G20 leaders prepare for their virtual summit this weekend, IMF Managing Director Kristalina Georgieva urged governments to continue with strong policy action to combat the ongoing uncertainty caused by the crisis. "Success here depends on us acting swiftly—and acting together. I see three key priorities: (i) end the health crisis, (ii) reinforce the economic bridge to recovery, and (iii) build the foundations of a better 21st-century economy," she laid out in a new blog. Key for strengthening the bridge to recovery: Avoiding premature withdrawal of policy support and preparing for a synchronized infrastructure investment push once the pandemic comes under better control. New IMF staff research shows large potential gains when G20 countries invest at the same time. If those with the largest fiscal space were to simultaneously increase infrastructure spending by ½ percent of GDP in 2021 and 1 percent of GDP in the following years—and if economies with more constrained fiscal space invested one third of that—they could lift global GDP by close to 2 percent by 2025. This compares with just below 1.2 percent for an unsynchronized approach. Vaccine policy is economic policy: The MD continued an appeal for all nations to cooperate in promoting access to vaccines and treatments. Without access to vaccines and improvements in health systems, the world won't be able to reach a point of robust recovery, she said during a panel on rebuilding the global economy at Bloomberg's New Economy Forum. "We are an organization of 190 members. We are pressing this message that health and economy are two sides of the same coin and that we are so interdependent," she said. "If this crisis taught us something, it is we depend on each other." LEADING A SHIFT IN ECONOMIC THINKING  In a wide ranging interview with the Financial Times, IMF Chief Economist Gita Gopinath spoke of the role of fiscal policy in recovery, the need for a multi-pronged economic strategy for addressing climate change, the future of globalization, and her concerns about the pandemic's effect on widening inequality. "In terms of access to opportunities, in terms of education and healthcare, progress has stalled on those fronts," she said in the interview with the FT's European economics commentator Martin Sandbu. "It is an area I worry about because if you look at what this particular pandemic is doing, it is hastening our automation. That’s then going to aggravate the problem of inequality, which means that policies have to be tailored to address the fact that there will be many displaced workers." On the role of the IMF, she said the institution is leading in important shifts in economic thinking--"a role that we take very seriously."  "We have to make sure that we are giving our member countries the best possible advice, while looking at the world as a whole (now with 190 members) and recognizing the spillovers across countries, and what the actions of one country does to another," she said. A year of opportunity: If 2020 is a year of despair, 2021 could be an opportunity to put the world on a better path toward a sustainable future. "This is an opportunity to both address the problems that will come out of this crisis, to restart growth, to put the global economy not just on a higher growth trajectory but also on a much more sustainable growth trajectory," Gopinath said during a panel on jobs, growth, and sustainability at the Bloomberg New Economy Forum, adding that "2021 is the year that this should happen." That includes a three-pronged approach to a green recovery: a green fiscal stimulus with infrastructure spending, a predictable and credible carbon tax approach, and compensating lower income households to ensure the transformation is not regressive. On a carbon tax: "You want to do this in a way that starts out small but then is predicted to increase over time so that people actually start changing their consumption behaviors, move toward lower energy intensive activities," she said. "You also incentivize the private sector to come in and hasten the transformation." A NEW NORMAL FOR STATISTICS This year’s 8th IMF Statistical Forum on “Measuring the Economics of a Pandemic” brought together compilers of economic and financial data and users from around the world to discuss the importance of data issues and challenges caused by the pandemic. In his opening remarks, IMF Deputy Managing Director Tao Zhang pointed out that the pandemic is bringing new statistical demands and changes. “The pandemic has affected the capacity of policymakers, economists, and statisticians to measure impact and draw inferences to inform public policy, as well as what we can do to overcome these challenges,” he said. The papers presented at the conference advanced our understanding of the new normal for statistical agencies. For three days, researchers explored the emerging data needs for understanding economic and financial developments and vulnerabilities exposed by the pandemic, and proposed innovative new indicators and approaches to meet those data needs. We also heard about statistical agencies’ strategies to meet the challenges of producing and communicating timely, accurate, and relevant information during the pandemic. The agenda also included a special high-level panel on Celebrating Statistics: The Science and Art of Making Numbers Talk to commemorate World Statistics Day (which takes place every five years). In his remarks, Nouriel Roubini of New York University’s Stern School of Business, explained how new kinds of data could help prevent the dangerous disconnect between financial markets and the real economy that has occurred during the pandemic. The event closed with a one-on-one conversation between Ian Goldin, Professor of Globalization and Development at Oxford University, and IMF Managing Director Kristalina Georgieva. Goldin, in his keynote address, made the case that the pandemic has created a new challenge of adjusting to a new reality. "Not so many things are fundamentally different to what would have happened but what is different is this urgency, this compression and with it the need to think more rapidly, to accelerate our thinking and of course our actions," he said. Take a look at the papers and presentations and watch the session videos here. INNOVATION IN SOVEREIGN DEBT RESTRUCTURING The question of whether countries can restructure debt in new and innovative ways is the subject of new IMF staff research. Can sovereign debt instruments help creditors and debtors reach agreement on how to restructure debt by sharing some upside potential, and make a country’s debt portfolio more resilient to future shocks? "Debt instruments that adjust payouts to creditors according to (or 'contingent on') the sovereign’s future health—measured by GDP, exports, or commodity prices—could help break this negative cycle," the IMF's Peter Breuer and Charles Cohen write in a new blog. "In an economic slowdown, these 'state-contingent debt instruments' would maintain debt relief that a country obtained in a restructuring. In an upswing, they would automatically provide additional compensation to creditors as the country’s ability to pay improves." FIGHTING CORRUPTION IN SUB-SAHARAN AFRICA This week the Africa Training Institute in Mauritius, hosted a 5-day course on building institutions to fight corruption in sub-Saharan Africa. The training presented by IMF staff and guest speakers targeted government officials from Ministries of Finance, Central banks and other key agencies in Africa.   In the opening session, participants discussed why training is relevant for countries in Africa, as well as the 2018 Fund Enhanced Governance Framework. The training promoted an understanding of the legal instruments, mechanisms and strategies that need to be in place to prevent and prosecute corruption and enhance transparency and accountability. Training is a key part of capacity development, one of the three core functions of the IMF. Watch the opening session here. STOPPING SCARRING IN THE MIDDLE EAST, CENTRAL ASIA Countries in the Middle East and Central Asia face the daunting possibility that the impact of the COVID-19 crisis will linger for even longer than the global financial crisis. Our economic outlook estimates that, five years from now, countries in the region could be 12 percent below the GDP level suggested by pre-crisis trends—compared with 9 percent for emerging markets and developing economies. A new IMF Country Focus, drawing from the Regional Economic Outlook for the Middle East and Central Asia, notes that it will be essential to promote economic recovery while avoiding "zombie" sectors. Measures such as temporary support for wages, interest subsidies, and tax deferrals will be essential to ensure that businesses have sufficient liquidity. Spending on health, education, and social assistance should be protected, and innovative digital solutions to improve targeting and expand coverage should be explored, among other things. A CRISIS OF DISRUPTION AND ACCELERATION "This is going to be a transformative crisis. It will change the way economies are going to work going forward, and the reason for that is that this is coming from the fact that this crisis is about disruption and acceleration," Jihad Azour, Director of the IMF's Middle East and Central Asia Department, said during a virtual panel on mitigating the long-lasting economic impacts of COVID-19 in the Middle East and North Africa. The need to address vulnerabilities in the region such as informality, better flexible work arrangements, technology and education infrastructure improvements, access to finance, and inclusive policies for women and youth are important lessons from the crisis, he said. Watch the full event here. IMF LENDING Check out our global policy tracker to help our member countries be more aware of the experiences of others in combating COVID-19. We are also regularly updating our lending tracker, which visualizes the latest emergency financial assistance and debt relief to member countries approved by the IMF’s Executive Board. To date, 77 countries have been approved for emergency financing, totaling over US$31 billion—the most recent approval was in the amount of US$52 million to South Sudan to address the impact of the COVID-19 pandemic. Looking for our Q&A about the IMF's response to COVID-19? Click here. We are also continually producing a special series of notes—more than 50 to date—by IMF experts to help members address the economic effects of COVID-19 on a range of topics including fiscal, legal, statistical, tax and more. FINAL THOUGHT Thank you again very much for your interest in the Weekend Read. We really appreciate your time. If you have any questions, comments or feedback of any kind, please do write me a note.  Adam Behsudi Deputy Editor, IMF Weekend Read abehsudi@IMF.org Dear maria, We just published a new blog—please find the full text below. Translations coming soon.   Continued Strong Policy Action to Combat Uncertainty By Kristalina Georgieva As G20 leaders meet virtually this week, the global economy faces a critical juncture. Countries have started to climb back from the depths of the COVID-19 crisis. But the resurgence in infections in many economies shows just how difficult and uncertain this ascent will be. The good news is the significant progress on vaccine development. While there are many caveats, this raises hopes of vanquishing the virus that has taken more than a million lives and caused tens of millions of job losses. The not-so-good news is the severity of the pandemic and its negative economic impact. Last month, the IMF projected a historic global GDP contraction of 4.4 percent in 2020. And we expect a partial and uneven recovery next year, with growth at 5.2 percent. Data since our latest projections confirm the global recovery has continued. For many economies—including the United States, Japan, and the Euro Area—economic activity in the third quarter turned out stronger than expected. But as the IMF’s note to the G20 leaders’ summit points out, the most recent data for contact-intensive service industries point to a slowing momentum in economies where the pandemic is resurging.  In other words, while a medical solution to the crisis is now in sight, the economic path ahead remains difficult and prone to setbacks. On the upside, faster-than-expected containment of the virus or the development of better treatments would allow for a quicker return to normal activity, limit economic scarring, and boost growth. On the downside, if new outbreaks require more stringent mobility restrictions, or if the development, production, and widespread distribution of vaccines and treatments is delayed, social distancing will persist for longer. As a result, growth will be lower, public debt higher, and the scars on the long-term potential of the economy more severe—think of how extended job losses can harm the human capital of workers. That is why we need continued strong policy action to combat continued uncertainty. Success here depends on us acting swiftly—and acting together. I see three key priorities: (i) end the health crisis, (ii) reinforce the economic bridge to recovery, and (iii) build the foundations of a better 21st-century economy. First, end the health crisis. The resurgence in infections is a powerful reminder that a sustainable economic recovery cannot be achieved anywhere unless we defeat the pandemic everywhere. Public spending on treatment, testing, and contact tracing is now more important than ever. So, too, is cooperation across borders to lower the risk of an inadequate supply of vaccines, treatments, and tests. This means stepping up multilateral efforts on the manufacturing, purchase, and distribution of these health solutions—especially in poorer nations. It also means removing recent trade restrictions on all medical goods and services, including those related to vaccines. We estimate that faster progress on widely shared medical solutions could add almost $9 trillion to global income by 2025. This would help narrow the income gap between poorer and richer nations at a time when inequality between countries is set to increase. Second, reinforce the economic bridge to recovery. Led by G20 countries, the world has taken unprecedented and synchronized measures that put a floor under the world economy, including $12 trillion in fiscal actions and massive liquidity support from central banks. Financing conditions have eased for all but the riskiest borrowers. Given the gravity of the crisis, we need to build on these measures. Many developing nations continue to face a precarious situation, largely because of their more limited capacity to respond to the crisis. And globally, economic and financial uncertainties remain high. For example, elevated asset valuations point to a disconnect of financial markets from the real economy, with inherent risks to financial stability. Furthermore, much of the fiscal policy support is now gradually waning. Many lifelines such as cash transfers to households, job retention support, and augmented unemployment benefits have expired or are set to expire by the end of this year. This comes at a time when employment losses from the crisis are still projected to be sizable. In the global tourism sector alone, up to 120 million jobs are estimated at risk. So, how can we reduce uncertainty and strengthen the bridge to recovery? Avoid premature withdrawal of policy support. In some economies—there is room for further fiscal support next year beyond what is currently budgeted. For countries with limited fiscal space, it will be critical to prioritize and reallocate spending to protect the most vulnerable. Equally important is continued monetary accommodation and liquidity measures to ensure the flow of credit, especially to small and medium-sized firms, complemented by appropriate financial sector policies. This would help support growth, jobs, and financial stability. Prepare now for a synchronized infrastructure investment push, once the pandemic comes under better control to invigorate growth, limit scarring, and address climate goals. Where slack remains high, this kind of public sector investment can help move economies toward full employment while strengthening private sector productivity. Moreover, new IMF staff research shows large potential gains when G20 countries invest at the same time. If those with the largest fiscal space were to simultaneously increase infrastructure spending by ½ percent of GDP in 2021 and 1 percent of GDP in the following years—and if economies with more constrained fiscal space invested one third of that—they could lift global GDP by close to 2 percent by 2025. This compares with just below 1.2 percent for an unsynchronized approach. In other words, if countries acted alone, it would take about two-thirds more spending to achieve the same outcomes. The bottom line is that we can build the impetus for growth, jobs, and address climate change, far more effectively if we work together.   Third, build the foundations of a better 21st-century economy. The most consequential uncertainty facing us today is this: how can we use this moment of disruption to build a better economy for all? This was the focus of world leaders when they gathered at the Paris Peace Forum last week, and it will be top of mind for G20 leaders. We all recognize that environmental sustainability must be a key building block of a more resilient and inclusive economy. It requires a powerful combination of measures, including a green investment push and gradually rising carbon prices. We estimate that this type of policy package could lift global GDP and create about 12 million new jobs over a decade, while putting us on a path towards net zero emissions by mid-century. Yet one thing is clear: if we are to harness green growth and realize the full potential of the digital economy, we must support workers as they transition from shrinking to expanding sectors. Social spending is absolutely crucial, including increased investment in training, re-skilling, and high-quality education. This is particularly important for low- and medium-skilled workers, among whom women and young people are overrepresented. They have been hit especially hard by the crisis.   Another building block is fiscal sustainability. Record-high global public debt is one of the key legacies of the crisis. Addressing this challenge over the medium term will be critical, including through a retooling of tax systems to mobilize revenues in an equitable way. But for many low-income countries with heavy debt burdens, urgent action is required now, including access to more grants, concessional credit, and debt relief. Here the G20 has been key. Its debt service suspension initiative has given many low-income countries temporary “breathing space” in their fight against the virus. And the new Common Framework, agreed with support of the Paris Club, goes further: if fully implemented, it will allow poorer nations to apply for permanent debt relief, while ensuring that all creditors negotiate on the same level playing field. Finally, support the world beyond the G20! Multilateral efforts are vital to help the poorest economies through the crisis. So, too, are continued efforts to strengthen rules-based trade, foster an international system of taxation where everyone pays their fair share, and bolster the global financial safety net. Without these, inequality will be exacerbated, and the global economy will face even greater challenges in the period ahead. At the IMF, we have responded to this crisis in an unprecedented manner—including over $100 billion in new financing to 82 countries and debt service relief for our poorest members. We aim to do even more to help our 190 member countries overcome this crisis and build a better post-pandemic economy. Kristalina Georgieva is Managing Director of the International Monetary Fund. ***** Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care, Glenn Gottselig Blog Editor, IMF GGottselig@IMF.org