IMF update..

 

Dear maria, In today's edition we focus on why negative interest rates policies have worked, the 9th African Fiscal Forum, which took stock of the health, economic and social impact of the pandemic on sub-Saharan African countries, which new measures are required to support European businesses, our latest issue of F&D magazine on the digital future, new podcasts on Indian migration and nurturing global talent, and much more. On that note, let's dive right in.  But first, in celebration of International Women’s Day on Monday March 8th, Managing Director Kristalina Georgieva will welcome US Treasury Secretary Janet Yellen to the Fund for a virtual conversation on women in economics and finance, and their respective career journeys, challenges, and role models. Watch the discussion on YouTube and click "Set Reminder" to be notified. NEGATIVE INTEREST POLICIES HAVE WORKED "Interest rates are low, and “lower for longer” has become something of a mantra among policy makers, regulators, and other market watchers," write Luis Brandao-Marques and Gaston Gelos in a new IMF Blog. "But negative interest rates raise an entirely new set of questions." After eight years of experience with negative interest rate policies, the initial skepticism (paying interest to borrowers rather than savers was certainly unprecedented) has proven largely misplaced. The evidence so far suggests that negative interest policies have worked. Since 2012, a number of central banks introduced negative interest rate policies. Central banks in Denmark, euro area, Japan, Sweden, and Switzerland turned to such policies in response to persistently below-target inflation rates (most central banks set rates as part of their broader mandate to keep prices stable, thereby supporting jobs and economic growth). These banks were also responding to a very low “neutral real interest rate”—that is, the real interest rate at which monetary policy is neither contractionary nor expansionary. The move reflected the central banks’ struggle to boost inflation even when they had already pushed interest rates to zero. The effects of the COVID-19 crisis, in an environment where many central banks are constrained, have brought back negative interest rate policies to the forefront. Overall, these policies have eased financial conditions, and, in the process, likely supported growth and inflation. However, negative rate policies remain politically controversial, partly because they are often misunderstood. Interested in learning more? Read the full blog here. AFRICAN FISCAL FORUM The European Commission and the IMF hosted the Ninth African Fiscal Forum earlier this week. Held virtually, the discussion took stock of the health, economic and social impact of the pandemic on sub-Saharan African (SSA) countries and the reforms required to alleviate it, identify the resulting short and medium-term fiscal challenges faced by countries, and highlight the necessary fiscal reforms to address them. Roundtable participants included Kristalina Georgieva, Managing Director, IMF; Jutta Urpilainen, Commissioner for International Partnerships, European Commission; Vera Daves de Sousa, Minister of Finance, Angola; Amadou Hott, Minister of Economy, Planning, and Cooperation, Senegal; Albert M. Muchanga, Commissioner for Economic Development, Trade, Industry and Mining Representing the Chairperson of the African Union Commission; and Tidjane Thiam, African Union Special Envoy for COVID-19. Watch the 90-min discussion here. Discussion Context Since the start of the pandemic, IMF financial assistance to SSA countries totaled over $17.5 billion. Team Europe has contributed €6.2 billion to the external response to COVID-19. More than €1 billion was provided through European Union budget support to create fiscal space for COVID-19 response efforts. Despite these concerted efforts, 2021 is likely to be another very challenging year for the region. Even if vaccines become widely available, daunting development challenges remain. If unaddressed, extreme poverty and inequality will inevitably continue to rise, and education achievements will be held back, with critical implications for social stability and security, especially in more fragile environments. NEW MEASURES TO SUPPORT EUROPEAN BUSINESSES Much of Europe rang in the start of 2021 with new lockdowns and weak economic activity. This same period saw the roll out of effective vaccines. While the end of the pandemic will remain a race between the virus and vaccines, there is now light at the end of the tunnel, write Alfred Kammer and Laura Papi in a new IMF Blog. At the same time, government programs aimed at supporting lives and livelihoods have been highly successful. Amid the pandemic’s enormous human toll, these measures provided critical lifelines to people and have preserved the structure of the economy and the income of workers. The massive policy support saved millions of European firms, accounting for over 30 million jobs. However, as the pandemic persists and measures—such as loan repayment moratoria—expire, bankruptcies could rise, leading to a surge in unemployment and nonperforming loans. To support a rebound and strong recovery in 2021, emergency programs and lifelines will need to be maintained, but they also need to adapt. Public support so far is estimated to have filled 60 percent of European firms’ liquidity needs because of the COVID-19 shock, but only 30 percent of the equity shortfalls (the extent to which firms’ debt exceeds their assets). Even with this scale of support, the share of insolvent firms as a share of total firms is estimated to have increased by 6 percentage points. Equity shortfalls are largest for micro firms and small businesses, with current policies absorbing only one quarter of the equity gaps versus over two fifths for larger corporations. Without additional equity support, some 15 million jobs are at risk. About 2 to 3 percent of GDP will be needed to close the equity gap and provide firms sufficient equity so they would no longer be in difficulty, focusing only on the firms that were solvent before COVID-19. Both private and public sector action is required. How can this be done? Liquidity support cannot address equity shortfalls. Policymakers will have to move the dial from debt-increasing liquidity support to more equity support for those firms that have good prospects after the pandemic. Learn more by reading the full blog here. JUST LAUNCHED: NEW ISSUE OF F&D ON THE DIGITAL FUTURE Our spring 2021 issue of Finance & Development magazine, once again produced by a team of teleworkers, was just printed and published. In this edition of F&D, we explore the possible consequences—the good, the bad, and the gray—of the digital future. Gita Bhatt, editor-in-chief writes: For millions, technology has been a lifeline, changing the way we work, learn, shop, and entertain ourselves. In a year like no other, it has spurred game-changing digital shifts. Governments moved quickly, using mobile solutions to provide cash assistance; financial technology has helped the survival, and in some cases, growth of small- and medium-sized businesses; and the first national digital currency, in The Bahamas, provides a glimpse of the future of money. Despite the promise of digital transformation, it can also drive unequal outcomes in education, opportunities, and access to health care and financial services. Automation has destroyed jobs, some permanently. The chasm between the digitally connected and the unconnected—across and within countries and between rural and urban areas—has amplified social and economic inequalities. Daron Acemoğlu underscores that the government can and should play a regulatory role, with incentives for innovation toward “human-friendly” technologies that produce good jobs. Hyun Song Shin and coauthors elaborate on smart policies that can bring more people—particularly the poorest—into the financial system. And Sierra Leone’s Minister of Education, David Sengeh, describes in an interview how he has made his country’s education system both more digital and more inclusive. Clearly for such initiatives to succeed, as Cristina Duarte emphasizes, countries must scale up investment in digital infrastructure, such as access to electricity, mobile and internet coverage, and digital ID. Still, there are real risks: Tim Maurer focuses on addressing cyber threats to the financial system. Yan Carrière-Swallow and Vikram Haksar suggest that commercial interests must be balanced with protection of privacy and data integrity. Other contributors illuminate digital taxation, data bias and ethics, and the need for global tech cooperation. NEW PODCASTS ON INDIAN MIGRATION, GLOBAL TALENT Economists have long studied economic migration between rich and poor countries, but India's large population and significant divergence in per capita incomes between its rich and poor states make it an interesting case study on the implications of economic migration within a fast-growing emerging economy. In this new podcast, economists Prakash Loungani and Sriram Balasubramanian discuss how consumption levels in India's rural and urban areas may be driving the migration trends within its borders. Interested in digging deeper? Read the underlying working paper. There are talented people everywhere, with ideas that could make the world a better place to live in. But what does it take for a promising young innovator to reach their full potential? In this new podcast, IMF economist Ruchir Agarwal says global scientific output could be more than 40 percent higher if talented youth around the world had equal opportunities to nurture their abilities. Don't forget to check out Agarwal and coauthors Ina Ganguli and Patrick Gaule's new article in the new Spring 2021 issue of F&D magazine on embracing the gift of global talent. INDONESIA HAS AN OPPORTUNITY TO BOOST GROWTH After several years of strong growth, Indonesia’s GDP fell 2.1 percent in 2020. While large, this downturn was smaller than other countries in the Asia-Pacific region, reflecting less stringent containment measures and lower dependence on highly impacted sectors like tourism. In a new Country Focus, the IMF's Minsuk Kim and Robin Koepke explore our latest yearly assessment of Indonesia’s economy, which shows that the country has the firepower to boost its economic recovery. To start, Indonesia’s comprehensive response to the pandemic was crucial in preventing a deeper downturn. The National Economic Recovery Program aimed at strengthening health care capacity and providing financial support to vulnerable households and businesses. The central bank supported these efforts by purchasing government bonds in the primary market, an exceptional but appropriate and temporary move that has ensured financial market stability. To support this plan, Indonesia temporarily suspended its pre-pandemic budget deficit ceiling of 3 percent of GDP until 2023. Considering the relatively low public debt ratio and the ongoing recovery, the envisaged return to it should be gradual and complemented by a well-specified, medium-term fiscal strategy. Check out these five charts on Indonesia's outlook to learn more. IMF AROUND THE WORLD The IMF Executive Board this week announced the approval of a 36-month, $1.778 billion arrangement with Costa Rica under the Extended Fund Facility, and concluded its 2021 Article IV consultation, which assessed recent economic developments in the Central American nation. The board also recently announced the conclusion of Article IV consultations with Tunisia, Bosnia and Herzegovina, Vietnam, and Indonesia, while also concluding a regional consultation with the West African Economic and Monetary Union. The board completed its sixth review of Mauritania’s arrangement under the Extended Credit Facility and approved an additional disbursement of $23.8 million. The board also completed a second review of the Extended Credit Facility arrangement with São Tomé and Príncipe, allowing for an immediate disbursement of $2.73 million. IMF staff this week completed a review mission for the Republic of Congo’s Extended Credit Facility arrangement. Staff also issued a concluding statement for an Article IV mission for Kiribati. 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 P.S. Join us on March 10 for a discussion with Dr. Carl Frey, Director of the Future of Work Programme at Oxford University, on the history of technological progress and how it has radically shifted the distribution of economic and political power among society’s members. Click here for the YouTube stream and press "Set Reminder" to be notified.

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

Dear maria, We just published a new blog—please find the full text below. Translations coming soon.   Staying Afloat: New Measures to Support European Businesses By Alfred Kammer and Laura Papi Much of Europe rang in the start of 2021 with new lockdowns and weak economic activity. This same period saw the roll out of effective vaccines. While the end of the pandemic will remain a race between the virus and vaccines, there is now light at the end of the tunnel. At the same time, government programs aimed at supporting lives and livelihoods have been highly successful. Amid the pandemic’s enormous human toll, these measures provided critical lifelines to people and have preserved the structure of the economy and the income of workers. The massive policy support saved millions of European firms, accounting for over 30 million jobs. However, as the pandemic persists and measures—such as loan repayment moratoria—expire, bankruptcies could rise, leading to a surge in unemployment and nonperforming loans. To support a rebound and strong recovery in 2021, emergency programs and lifelines will need to be maintained, but they also need to adapt. Relief policies for businesses Almost a year into the pandemic, many European companies, especially micro and small enterprises in high-contact sectors, continue to reel from the shock of COVID-19. With containment measures preventing many firms from operating at full capacity or at all, government support programs—such as job retention schemes, which at their peak benefitted 54 million people—have been essential for businesses and people to survive. Liquidity (ready cash) provided to companies prevented cascading bankruptcies. It allowed banks to extend loans rather than amplify the downturn by adding a credit crunch. In a recent IMF staff study (see presentation here), which covers 26 European countries (of which 21 are EU members), we estimate that without policy support, the share of illiquid firms in Europe would have more than doubled and that of insolvent firms would have almost doubled by end-2020. But many companies are still short of equity Public support so far is estimated to have filled 60 percent of European firms’ liquidity needs because of the COVID-19 shock, but only 30 percent of the equity shortfalls (the extent to which firms’ debt exceeds their assets). Even with this scale of support, the share of insolvent firms as a share of total firms is estimated to have increased by 6 percentage points. Equity shortfalls are largest for micro firms and small businesses, with current policies absorbing only one quarter of the equity gaps versus over two fifths for larger corporations. Without additional equity support, some 15 million jobs are at risk. About 2 to 3 percent of GDP will be needed to close the equity gap and provide firms sufficient equity so they would no longer be in difficulty, focusing only on the firms that were solvent before COVID-19. Both private and public sector action is required. How can this be done? Liquidity support cannot address equity shortfalls. Policymakers will have to move the dial from debt-increasing liquidity support to more equity support for those firms that have good prospects after the pandemic. Individual countries are coming up with innovative equity programs, but they face many implementation challenges. The public sector is not well placed to assess the viability of a large number of small businesses nor to monitor their performance. This will involve avoiding that public support is more attractive for bad than good firms—adverse selection—and preventing firms from mismanaging their business once they have received state support—moral hazard. Targeting support—something that is hard to do—will be critical to avoid wasting taxpayers’ money and should be improved. Mechanisms that target firms more accurately are likely to be more complicated, reducing take-up and timeliness of the aid. Another difficulty is how to ensure that the private sector does its part. Involving banks, which know their clients and routinely assess business plans, is an important principle that can help address adverse selection. Incentivizing private investors to contribute equity mitigates moral hazard. Here are some examples: France’s proposed program of participatory, subordinated loans envisions a central role for banks in selecting viable firms and retaining a share of these loans on their books—ensuring “skin in the game.” In Italy’s program for small and medium-sized enterprises, private equity injections are encouraged by tax incentives and the government’s contribution is capped to a fraction of the private investors’ capital increase, who have to remain invested for some years. Adequate contributions and burden sharing by investors is required by Ireland’s support scheme for small businesses, whereby Enterprise Ireland—a government agency—assesses firms’ plans to restore long-term viability with the help of market appraisals. Healthier firms, stronger recovery Europe now needs to gradually change the support to firms from providing liquidity toward strengthening their equity. For those firms that have to restructure debt or be liquidated, out-of-court debt restructurings and insolvency regimes will need to be enhanced. Healthier firms will forestall a return of “doom loops” between Europe’s real and financial sectors. Most importantly, healthier firms will create more jobs. Upskilling, training, and job search programs should help displaced workers find new jobs in sectors that are expanding. Countries will also need to invest in the green and digital transitions to boost resilience and productivity. This course of action will ensure a strong and lasting recovery after the pandemic. Alfred Kammer is the Director of the IMF's European Department. Laura Papi is Assistant Director in the IMF's European 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