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Dear maria, Welcome to the Weekend Read! In today's edition we look at taxation in the digital age, resilience of investment funds, our last, best chance on climate, reform of state-owned enterprise, and the economics of biodiversity; among other things. Global Economy Taxation in the Digital Age The old adage that nothing is certain except death and taxes still rings true even in the digital age. The debate, however, now lies more in how companies with massive cross-border digital footprints can pay their fair share. "The long-term view is the short run priority," Vitor Gaspar, director of the IMF Fiscal Affairs Department, said at an event this week launching a new IMF staff paper on digitalization and taxation in Asia. He stressed that designing tax policies the right way is key, recognizing that digital delivery of goods and services is here to stay. The controversy over a digital services tax (DST) has brought the issue into clear focus. Most major Asian economies were among the 134 members of the Inclusive Framework led by the Organization for Economic Co-operation and Development, agreeing in July to do away with their DST and allocate some taxing rights on profits to countries where consumers and users are located rather than where companies produce or are headquartered. Some countries in Asia have gone further. In this week's event, Febrio Kacaribu, head of Indonesia's Fiscal Policy Agency, explained how his government has leveraged a more traditional value-added tax (VAT) for a digitalized economy. Resolving challenges over how to deploy a VAT may pay off, IMF staff research has found. Requiring nonresident suppliers of digital services and e‑commerce marketplaces to register with local tax authorities and remit VATs on their sales could raise revenue between 0.04 and 0.11 percent of GDP in some countries in Asia, translating to an additional $166 million in Bangladesh, $4.8 billion in India, $1.1 billion in Indonesia, $365 million in the Philippines, and $264 million in Vietnam, the IMF's Era Dabla-Norris, Ruud De Mooij, Andrew Hodge, and Dinar Prihardini write in a blog on the subject.  READ Read the Blog Read the IMF Staff Paper: "Digitalization and Taxation in Asia"  WATCH Watch the IMF Event: "Taxation and Digitalization in Asia" Financial Markets Investment Funds and Financial Stability The pandemic-driven economic shock revealed some fundamental vulnerabilities that could affect global financial stability—notably, the resilience of investment funds. Caught up in the financial market turmoil generated by risk averse investors, many investment funds were heavily affected by the “dash-for-cash” that extended across borders—and which triggered significant outflows from risky assets and from emerging and developing economies. As this happened, and investor capital flowed out of money market and open-end mutual funds, asset managers were forced to fire-sell these assets, which accelerated the drying up of liquidity and the drop in market value of key assets. Safeguarding financial stability: To better protect markets and economies from crippling capital outflows we need to boost the resilience of investment funds. A key part of this involves reducing the scope for their business models to amplify the macrofinancial impact of adverse shocks, so their business operations are less likely to be susceptible to asset fire-sales during stress, the IMF's Tobias Adrian, Antonio Garcia Pascual, Ranjit Singh, and Jay Surti write in a new blog. The blog is based on a new IMF staff paper that outlines the tools policymakers can use to further strengthen risk management, especially liquidity risk management.   READ Read the Blog Read the IMF Staff Paper  WATCH Watch the IMF Event: "Investment Funds and Financial Stability—Policy Considerations" Finance & Development Magazine F&D: Our Last, Best Chance on Climate In our Fall 2021 issue of F&D Magazine, produced in partnership with COP26, Amar Bhattacharya of the Brookings Institution and Nicholas Stern of the LSE connect the dots in their overview piece, linking policy decisions right now at national and international with a post-COVID recovery that is strong and inclusive. At stake is whether we will embark on a new path of sustainable growth. "Decisions made now are crucial in shaping the future of people and the planet. We must not go back to the old normal; it’s imperative to build back better through sustainable, inclusive, and resilient growth," the authors write Read the full article below, on the web, or download the PDF.  READ Read the Full Issue Want to get a print copy delivered to your home or office? Click here.   Quote of the Week My plea is to pay attention to the parts of the world that are not so fortunate. If we don't, we will damage the most valuable resource for the future: our social fabric. —IMF Managing Direct Kristalina Georgieva at the Conference of Montreal   A New Director for the IMF's Western Hemisphere Dept. The IMF announced this week that Ilan Goldfajn will take the helm of the IMF's Western Hemisphere Department starting on January 3, 2022. Goldfajn was governor of the Banco Central do Brasil from May 2016 to February 2019. Read a 2019 F&D Magazine "In the Trenches" Q&A with Goldfajn.   Reforming State-Owned Enterprises in the Middle East, North Africa and Central Asia Given the limited room in their budgets, countries in the Middle East, North Africa and Central Asia do not have the option to delay reforms and revisiting the role of state-owned enterprises (SOEs) should prominently feature in these reforms. During a Sept. 22 webinar, Jihad Azour, Director of the IMF’s Middle East and Central Asia Department, and an esteemed panel will discuss why SOE reforms matter in the region. Register for the Event   Fiscal Policies for a Green Recovery In case you missed it, watch this recent event featuring the IMF's Alfred Schipke, Era Dabla-Norris, and Krishna Srinivasan. The event with leading experts and practitioners discussed how countries in the Asia-Pacific can turn climate ambitions into action while creating inclusive economic opportunities. Watch the Event Here WEEKLY ROUND-UP 01. Podcast: Economics of Biodiversity In a new IMF Podcast, Partha Dasgupta, professor emeritus of economics at the University of Cambridge, discusses the economic benefits of biodiversity and the costs of losing it. In his landmark 600-page study titled the Economics of Biodiversity: The Dasgupta Review he sets out a framework for including nature in our economic thinking and provides a guide for change through three broad, interconnected transitions. Professor Dasgupta published an article about his findings in the September edition of Finance and Development. In this podcast, he says humans are embedded in nature and cannot escape the biosphere through ingenuity.  02. Climate Innovation Challenge The September 30 deadline is approaching to participate in the IMF's Climate Innovation Challenge on the economic and financial stability aspects of climate change. Country authorities/agencies, civil society organizations (including think tanks), and staff from the IMF, World Bank, and international organizations are invited to submit proposals that have the potential to enhance the IMF’s capacity development, policy advice, and operational impact in areas where economic and financial policies intersect with climate change. 03. Civil Society Policy Forum Registration The Civil Society Policy Forum has become an integral part of the International Monetary Fund and World Bank Group Spring and Annual Meetings, providing an open space for Civil Society Organizations (CSOs) to dialogue and exchange views with World Bank Group and IMF staff, their peers, government delegations, and other stakeholders on a wide range of topics. The virtual forum will take place from September 27-October 8 04. IMF Press Briefing The IMF's bi-weekly press briefings are back. This week, IMF Communications Director Gerry Rice provided updates and answered questions on the United Nations General Assembly, the upcoming IMF-World Bank Annual Meetings, Afghanistan, Argentina, Ethiopia, Guinea, Lebanon, and more. 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.  Looking for more information 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. Adam Behsudi Editor IMF Weekend Read abehsudi@IMF.org

Dear maria, We just published a new blog—please find the full text below. Translations coming soon. Happening Now: Tune in to an event on "Investment Funds and Financial Stability--Policy Considerations" by clicking here. To Safeguard Global Financial Stability, Boost the Resilience of Investment Funds     By Tobias Adrian, Antonio Garcia Pascual, Ranjit Singh, and Jay Surti   Investment funds were hit hard by the pandemic; their response amplified its adverse impact on financial markets and capital flows. Our brush last year with one of the biggest economic shocks of our lifetimes revealed some fundamental vulnerabilities that could affect global financial stability. Caught up in the financial market turmoil generated by risk averse investors, many investment funds were heavily affected by the “dash-for-cash” that extended across borders—and which triggered significant outflows from risky assets and from emerging and developing economies. As this happened, and investor capital flowed out of money market and open-end mutual funds, asset managers were forced to fire-sell these assets, which accelerated the drying up of liquidity and the drop in market value of key assets. To safeguard financial stability at the national and global levels—and better protect markets and economies from crippling capital outflows—we need to boost the resilience of investment funds. A key part of this involves reducing the scope for their business models to amplify the macrofinancial impact of adverse shocks, so their business operations are less likely to be susceptible to asset fire-sales during stress. In a new IMF staff paper, we outline the tools policymakers can use to further strengthen risk management, especially liquidity risk management. We show how this can be achieved with a combination of liquidity management tools deployed sequentially—as needed—depending on the intensity of pressures facing a particular fund. Vital to global growth It’s not surprising that investment funds play a central role in global growth and financial stability. Over the past two decades, the rapid growth in the amount of capital flowing into investment funds has been a key driver of nonbank financial institutions increasing their share of global financial assets to about 50 percent. This benefits everything from entrepreneurs growing their businesses, to families buying their first home, to saving for retirement. Investment funds are vital engines of prosperity—coming in all shapes and sizes, such as money market funds and a wide range of mutual funds. And increasingly a key feature of most investment funds is to offer daily liquidity to investors, like that offered by banks on their demand deposits. But many funds have ventured far beyond their traditional offering of large cap equity and ultra-safe government bonds to investors, into higher-risk investments such as high-yield private debt and real estate. As these funds shifted into offering exposure to these riskier and less liquid assets to investors, their ability to make good on their promise of daily liquidity has sometimes come under pressure in the face of adverse shocks—evident during the turmoil triggered by the onset of the global COVID-19 pandemic that accelerated markedly in March 2020. Unlike banks, investment funds generally do not benefit from public backstops, such as dedicated central bank liquidity facilities or deposit insurance. This increases the likelihood of them amplifying the adverse impact of shocks on financial markets through asset fire-sales that exacerbate illiquidity in markets and occasionally, may even generate runs. Policies—what do we need, and how will we get there? In this context, we identify four key objectives. First, address incentives of investors to front-run others when adverse shocks occur. Second, decrease the existing tension between daily liquidity and exposure to illiquid assets. Third, explore options to increase structural and cyclical liquidity in some important asset markets. Fourth, decrease cross-border spillovers to emerging market and developing economies. We then identify specific tools targeted to address these objectives. Investors’ early-exit incentives can be best addressed by decreasing the value of selling fund shares early on. Various policy mechanisms could decrease the cost for investors of waiting to sell fund shares, thereby blunting early-exit incentives, which can precipitate sell-off episodes. We argue that a “waterfall” of liquidity management tools is needed to reduce the risks inherent in liquidity transformation by investment funds. Under this approach, a sequence of liquidity management tools of increasing intensity can be deployed in combination depending on the level of stress or shock. For money market funds, for example, increasing liquidity buffers and making them countercyclical (the first line of defense) could be sequentially combined with locking in a proportion of investors’ shares for a minimum period of time and offering to redeem investor withdrawals in securities held by the fund instead of in-cash. To strengthen market liquidity, policies should encourage alternative trading arrangements, such as ensuring all market participants are able to trade with each other (“all-to-all trading”). Larger and more robust liquidity backstops should also be explored—here, market-based solutions, such as dealer pre-commitments to make markets, should be the first line of defense. Policy reform through these various measures would go a long way in limiting the need for central bank emergency liquidity support to extremely unlikely (“tail”) events. Moreover, with careful calibration, the reforms would limit moral hazard while recognizing that public liquidity backstops may be required on rare occasions given the macrocritical role of this sector. By strengthening the resilience of these investment funds to shocks, these policies would benefit emerging market and developing countries, which our estimates suggest received 75 percent of their capital inflows following the Global Financial Crisis through these funds. When combined with appropriate domestic macroeconomic and macroprudential policies in these countries, policy action strengthening investment funds can lessen cross-border contagion, which is increasingly a risk to financial stability in emerging market and developing economies By helping reduce the risk of market turmoil and financial instability, our policy recommendations would be wins for both issuers and investors alike, more than offsetting any adjustment costs borne by them. International cooperation remains crucial Our analysis underscores the importance of the ongoing Financial Stability Board-led process of identifying policy options, involving national supervisory authorities and central banks and the International Organization of Securities Commissions. The global nature of the investment fund business and fungibility of financial flows means consistent global policies precluding regulatory arbitrage are needed to secure financial stability. Policymakers worked together to make banks safer following the global financial crisis over a decade ago—now we must do the same for investment funds.

Glenn Gottselig Blog Editor IMF Weekend Read ggottselig@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!