ΙΜF update

 

Dear maria, In today's edition we focus on why the risk to U.S. inflation is low, how public and private money can coexist in the digital age, the latest economic outlook for Europe, why climate change vulnerability is bad for sovereign credit ratings, what's next for the Middle East and North Africa, why the world needs a new system of governance for the buying and selling of data, and more. On that note, let's dive right in. WHY INFLATION RISKS IN THE UNITED STATES ARE LOW "After ending last year with unexpectedly strong vaccine success and hope that the pandemic and economic distress it caused would recede, we woke up to the reality of new virus variants and the unpredictable, winding road that it can lead the world down," writes the IMF's Gita Gopinath in a new blog published this morning. "Something similar has happened with the discourse on inflation." Gopinath writes that at the end of last year, after a historic collapse of the global economy estimated at -3.5 percent, inflation was below target in 84 percent of countries. This was expected to allow for continued low interest rates and government spending to support growth, especially in advanced economies. The U.S. plan for an additional $1.9 trillion of fiscal spending has challenged this view, with even traditionally dovish economists raising concerns about an overheated economy that could push inflation well above the comfort zone of central bankers. The evidence from the last four decades makes it unlikely, even with the proposed fiscal package, that the U.S. will experience a surge in price pressures that persistently pushes inflation well above the Fed’s 2 percent target. Our preliminary estimate is that the proposed U.S. package, equivalent to 9 percent of GDP, would increase U.S. GDP by a cumulative 5 to 6 percent over three years. Inflation, as measured by the Fed’s preferred index, would reach around 2.25 percent in 2022, which is nothing to be concerned about and, indeed, would help underpin the achievement of the goals outlined in the Fed’s policy framework. Gopinath cites several structural factors that underlie this diminished relation between inflation and economic activity in many countries. One such factor is globalization that has limited inflation in traded goods and even some services. A second factor is automation which, along with relative declines in the price of capital goods, has largely kept higher wages from being passed through to prices. Another important factor is that expectations of inflation have remained broadly stable around the targets set by central banks, thanks to central banks’ independence and the credibility of their policies. Read the full blog here for more details. Also, click here to watch a live conversation between Gita Gopinath and students at the University of Ghana on key findings of the IMF’s World Economic Outlook Update. A DUAL MONETARY SYSTEM IN THE DIGITAL AGE In a new blog by the IMF's Tobias Adrian and Tommaso Mancini-Griffoli explore how public and private money can coexist in the digital age.  Today’s world is characterized by a dual monetary system, involving privately-issued money—by banks of all types, telecom companies, or specialized payment providers—built upon a foundation of publicly-issued money—by central banks. While not perfect, this system offers significant advantages, including: innovation and product diversity, mostly provided by the private sector, and stability and efficiency, ensured by the public sector. These objectives—innovation and diversity on the one hand, and stability and efficiency on the other—are related. More of one usually means less of the other. A tradeoff exists, and countries—central banks especially—have to navigate it. How much of the private sector to rely upon, versus how much to innovate themselves? Much depends on preferences, available technology, and the efficiency of regulation. So it is natural, when a new technology emerges, to ask how today’s dual monetary system will evolve. If digitalized cash—called central bank digital currency—does emerge, will it displace privately-issued money, or allow it to flourish? The first is always possible, by way of more stringent regulation. The second remains possible, too, by extending the logic of today’s dual monetary system. Importantly, central banks should not face a choice between either offering central bank digital currency, or encouraging the private sector to provide its own digital variant. The two can coincide and complement each other, for example, to the extent central banks make certain design choices and refresh their regulatory frameworks. Read more here about these issues, including what kinds of pressures central bank digital currencies will face in the coming years. LATEST ECONOMIC OUTLOOK FOR EUROPE For 2021, we expect a strong economic recovery in Europe, albeit uneven and partial, said the IMF's Alfred Kammer in recent remarks. Growth is projected at 4.1 percent for Europe and 4.0 percent for emerging Europe. The game changer for 2021 are vaccines. Consistent with announced plans of the EU and other countries, we assume broad vaccine availability in advanced economies and several emerging economies by the summer of 2021. For many other emerging economies, including in Europe, making vaccines broadly available will take longer.  While we are currently seeing inevitable start-up problems in the production and rollout of vaccines, a key concern is the particularly large divergence of non-EU emerging economies. While vaccination in some non-EU countries is progressing at the average EU speed or even faster, others are facing a significant challenge with securing vaccine supply of an adequate amount. Read more here about policy priorities for 2021, chief among them being to scale up the production of vaccines and accelerate their rollout globally. CLIMATE CHANGE AND SOVEREIGN CREDIT RATINGS In a new blog by the IMF's Serhan Cevik and João Tovar Jalles, they explain why climate change vulnerability is bad for sovereign credit ratings. Recent IMF staff research has found that a country’s vulnerability or resilience to climate change can have a direct effect on its creditworthiness, its costs of borrowing, and, ultimately, the likelihood it might default on its sovereign debt. The economic consequences of climate change have been known for years, but research on how climate change affects sovereign risk has been limited. These findings provide evidence on the relationship between climate change and sovereign credit ratings. The research builds on similar analysis that, for the first time, links climate change vulnerability to sovereign default risk. Our research has similarly found a connection between climate shocks and sovereign bond yields. One recurring theme amid all these findings is that financial risks created by climate change are felt more acutely by developing economies, especially those that are not adequately prepared, including because of the lack of policy space, to address climate shocks. Read the full blog to learn more about a climate credit score, debt defaults and building resilience. WHAT'S NEXT FOR THE MIDDLE EAST AND NORTH AFRICA? The road to recovery for the MENA region will hinge on several key factors: ensuring an equitable distribution of vaccines and laying the foundation for a resilient, inclusive post-pandemic recovery, providing healthcare systems the resources they need, bolstering regional and international cooperation, addressing the uneven labor market, strengthening social protections, and fighting corruption. Covering these topics, as well as broader insights about recent economic developments in the region, I highly recommend you watch this discussion between the IMF's Jihad Azour and Maha Yahyaof the Carnegie Middle East Center. Watch in English | Watch in Arabic "SERVICES" VS. "MANUFACTURING" The IMF's Reda Cherif and Fuad Hasanov published an intriguing new blog this week on the language we use in country reports. You might be surprised at what they've learned. First, efforts to revive national manufacturing sectors get a lot of airtime. After all, the sector propelled many East and South East Asian economies—the so-called “East Asia Miracle”—and was a gateway to the middle class for millions of workers. However, for all the obsession with manufacturing, economists for their part seem to be more preoccupied with services. To confirm this, the authors combed through thousands of IMF reports on countries’ economies from 1978 to 2019. Using 113 distinct terms related to growth theory and policy—ranging from “infrastructure” to “liberalization”—we computed the relative weights of each term across countries and years. As shown in their chart of the week, “services” is used more than any other term. The results show that contrary to all the fervor around manufacturing and the industrial sector, discussion of services is much more prevalent than other industries in IMF country reports and has been for more than four decades. This is the case across income groups, and includes periods when manufacturing was a much larger sector in terms of production and employment in many countries. The question is, will this trend continue? SHAPING A DATA ECONOMY The world needs a new system of governance for the buying and selling of data, writes Murat Sonmez of the World Economic Forum in our latest edition of Finance & Development magazine on the future of work and opportunity. Robots are rolling through hospital wards and warehouses, decontaminating rooms with ultraviolet light. Voice-activated and -connected devices are helping people with limited mobility and chronic conditions. Medical professionals are using artificial intelligence (AI) to speed up diagnosis and treatment. Drones are delivering blood on demand, cutting delivery times from hours to minutes and eliminating waste at the same time. These technologies collectively represent the Fourth Industrial Revolution (4IR)—the recent explosion of computing power combined with connectivity that has led to the fusion of our physical and digital worlds. Technology was already speeding ahead when the global pandemic began. Now it is in even higher gear. More than 80 percent of business executives are accelerating plans to digitalize work processes and deploy new technologies. By 2025, employers will divide work equally between humans and machines. Yet the underlying challenges of this revolution remain unaltered. How do we harness the potential of this technology while mitigating the risks? How can we ensure that all of society benefits, and not just the privileged few? Read the full article here to take a deep dive on these issues. IMF AROUND THE WORLD IMF staff reached agreement on financing arrangements with several nations over the past week. A staff-level agreement with Madagascar on an Extended Credit Facility arrangement could provide resources of about $320 million, pending approval by the Executive Board. IMF and Kenyan authorities reached a staff-level agreement on a three-year program under the Extended Fund Facility and Extended Credit Facility that could provide $2.4 billion to help with the next phase of the country’s COVID-19 response. IMF staff also reached an agreement with Pakistan on a package of measures to complete second to fifth reviews of a program supported by the IMF’s Extended Fund Facility, which, pending board approval, would release around $500 million. IMF staff also completed virtual missions this week. Staff complimented Bahrain’s vaccine deployment and other polices to address the pandemic at the conclusion of an Article IV economic assessment of the country. Staff also concluded a virtual mission to San Marino where the pandemic has a significant impact on the country’s tourism and retail sectors. Concluding statements were also published for missions to Canada, Colombia, Uzbekistan, Peru, and the Eastern Caribbean Currency Union. Finally, the IMF Executive Board announced this week the conclusion of an Article IV consultation with Kosovo, where directors encouraged continued support that is targeted and transparent. In the coming week, the board is scheduled to consider program reviews for Mali and São Tomé and Príncipe, as well as Article IV assessments of Malaysia and Bosnia and Herzegovina. 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, 80 countries have been approved for emergency financing, totaling over US$32 billion. 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. Sincerely,

Rahim Kanani Editor, IMF Weekend Read rkanani@IMF.org Dear maria, We just published a new blog—please find the full text below. Translations coming soon.   Public and Private Money Can Coexist in the Digital Age By Tobias Adrian and Tommaso Mancini-Griffoli We value innovation and diversity—including in money. In the same day, we might pay by swiping a card, waving a phone, or clicking a mouse. Or we might hand over notes and coins, though in many countries increasingly less often. Today’s world is characterized by a dual monetary system, involving privately-issued money—by banks of all types, telecom companies, or specialized payment providers—built upon a foundation of publicly-issued money—by central banks. While not perfect, this system offers significant advantages, including: innovation and product diversity, mostly provided by the private sector, and stability and efficiency, ensured by the public sector. These objectives—innovation and diversity on the one hand, and stability and efficiency on the other—are related. More of one usually means less of the other. A tradeoff exists, and countries—central banks especially—have to navigate it. How much of the private sector to rely upon, versus how much to innovate themselves? Much depends on preferences, available technology, and the efficiency of regulation. So it is natural, when a new technology emerges, to ask how today’s dual monetary system will evolve. If digitalized cash—called central bank digital currency—does emerge, will it displace privately-issued money, or allow it to flourish? The first is always possible, by way of more stringent regulation. We argue that the second remains possible, by extending the logic of today’s dual monetary system. Importantly, central banks should not face a choice between either offering central bank digital currency, or encouraging the private sector to provide its own digital variant. The two can coincide and complement each other, for example, to the extent central banks make certain design choices and refresh their regulatory frameworks. Public-private coexistence It may be puzzling to consider that privately- and publicly-issued monies have coexisted throughout history. Why hasn’t the more innovative, convenient, user-friendly, and adaptable private money taken over entirely? The answer lies in a fundamental symbiotic relationship: the option to redeem private money into perfectly safe and liquid public money, be it notes and coins, or central bank reserves held by selected banks. The private monies that can be redeemed at a fixed face value into central bank currency become a stable store of value. Ten dollars in a bank account can be exchanged into a ten-dollar bill accepted as legal tender to settle debts. The example may seem obvious, but it hides complex underpinnings: sound regulation and supervision, government backstops such as deposit insurance and lender last resort, as well as partial or full backing in central bank reserves. Moreover, privately-issued money becomes an efficient means of payment to the extent it can be redeemed into central bank currency. Anne’s 10 dollars in Bank A can be transferred to Bob’s Bank B because they are redeemed into central bank currency in between—an asset both banks trust, hold, and can exchange. As a result, this privately-issued money becomes interoperable. And so it spurs competition—since Anne and Bob can hold money in different banks and still pay each other—and thus innovation and diversity of actual forms of money. In short, the option of redemption into central bank currency is essential for stability, interoperability, innovation, and diversity of privately-issued money, be it a bank account or other. A system with just private money would be far too risky. And one with just central bank currency could miss out on important innovations. Each form of money builds on the other to deliver today’s dual money system—a balance that has served us well. Central bank currency in the digital age will face pressures And tomorrow, as we step squarely into the digital age, what will become of this system? Will the digital currencies issued by central banks be so enticing that they overshadow privately-issued money? Or will they still allow for private sector innovation? Much depends on each central bank’s ability and willingness to consistently and significantly innovate. Keeping pace with technological change, rapidly evolving user needs, and private sector innovation is no easy feat. Central bank digital currencies are akin to both a smart-phone and its operating system. At a basic level, they are a settlement technology allowing money to be stored and transferred, much like bits sent between a phone’s processor, memory, and camera. At another level, they are a form of money, with specific functionality and appearance, much like an operating system. Central banks would thus have to become more like Apple or Microsoft in order to keep central bank digital currencies on the frontier of technology and in the wallets of users as the predominant and preferred form of digital money. Innovation in the digital age is orders of magnitude more complex and rapid than updating security features on paper notes. For instance, central bank digital currencies may initially be managed from a central database, though might migrate to distributed ledgers (synchronized registries held and updated automatically across a network) as technology matures, and one ledger may quickly yield to another following major advancements. Phones and operating systems too benefit from major new releases at least yearly. In addition, user needs and expectations are likely to evolve much more quickly and unpredictably in the digital age. Information and assets may migrate to distributed ledgers, and require money on the same network to be monetized. Money may be transferred in entirely new ways, including automatically by chips imbedded in everyday products. These needs may require new features of money and thus frequent architectural redesigns, and diversity. Today’s, or even tomorrow’s, money is unlikely to meet the needs of the day after. Pressures will come from the supply-side too. The private sector will continue innovating. New eMoney and stablecoin schemes will emerge. As demand for these products grows, regulators will strive to contain risks. And the question will inevitably arise: how will these forms of money interact with the digital currencies issued by central banks? Will they exist separately, or will some be integrated into a dual monetary system where the private and central bank offerings build on each other? A partnership with the private sector remains possible Keeping with the pace of change of technology, user needs, and private-sector competition will be challenging for central banks. However, they need not be alone in doing so. First, a central bank digital currency may be designed to encourage the private sector to innovate on top of it, much like app designers bring enticing functionality to phones and their operating systems. By accessing an open set of commands (“application programming interfaces”), a thriving developer community could expand the usability of central bank digital currencies beyond offering plain e-wallet services. For instance, they could make it easy to automate payments, so that a shipment of goods is paid once received, or they could build a look-up function so money can be sent to a friend on the basis of her phone number alone. The trick will be vetting these add-on services so they are perfectly safe. Second, some central banks may even allow other forms of digital money to co-exist—much like parallel operating systems—while leveraging the settlement functionality and stability of central bank digital currencies. This would open the door to faster innovation and product choice. For instance, one digital currency might compromise on settlement speed to allow users greater control over payment automation. Would this new form of digital money be a stable store of value? Yes, if it were redeemable into central bank currency (digital or non-digital) at a fixed face value. This would be possible if it were fully backed by central bank currency. And would this form of digital money be an efficient means of payment? Yes again, as settlement would be immediate on any given digital money network—just as it is between accounts of the same bank. And networks would be interoperable to the extent a payment from Anne’s digital money provider to Bob’s would be settled with a corresponding move of central bank currency, just as in today’s dual system. This form of digital money (which we have called synthetic currency in the past) could well co-exist with central bank digital currency. It would require a licensing arrangement and set of regulations to fulfill public policy objectives including operational resilience, consumer protection, market conduct and contestability, data privacy, and even prudential stability. At the same time, financial integrity could be ensured via digital identities and complementary data policies. Partnering with central banks requires a high degree of regulatory compliance. A system for the ages If and when countries move ahead with central bank digital currencies, they should consider how to leverage the private sector. Today’s dual-monetary system can be extended to the digital age. Central bank currency—along with regulation, supervision, and oversight—will continue to be essential to anchor stability and efficiency of the payment system. And privately-issued money can supplement this foundation with innovation and diversity—perhaps even more so than today. Where central banks decide to end up on the continuum between private-sector and public-sector involvement in the provision of money will vary by country, and ultimately depend on preferences, technology, and the efficiency of regulation. Tobias Adrian is the Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department. Tommaso Mancini-Griffoli is a Deputy Division Chief in the IMF's Monetary and Capital Markets Department. ****** 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