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Dear maria, In today's edition we focus on mapping a pathway to a robust recovery, the risks of using Bitcoin as legal tender, how supply disruptions are fueling inflation in Europe, the future of money, how the pandemic is prompting a rethink of a new social contract, why the measurement of inflation matters, and much more.

Global Economy Priorities for a Robust Recovery (PHOTO: ASIANDREAM/ISTOCK BY GETTY IMAGES) The global economy continues to recover but the pace of growth has slowed, IMF Managing Director Kristalina Georgieva said in a blog on Wednesday ahead of a meeting of G20 finance ministers and central bankers in the Indonesian capital, Jakarta. Inflation has been higher than expected in many economies, financial markets remain volatile, and geopolitical tensions have increased sharply. “That is why we need strong international cooperation and extraordinary agility,” Georgieva said. “For most countries, this means continuing to support growth and employment while keeping inflation under control and maintaining financial stability—all in the context of high debt levels.” A new IMF staff report to the G20 underscores the complexity of this obstacle course of challenges and sets out three priorities to help policymakers find a path through it. Read a transcript of Georgieva's statement to the G20 meeting.   El Salvador The Costs of Bitcoin (PHOTO: ISTOCK) Digital means of payment such as El Salvador’s Chivo government e-wallet have an important role to play in promoting financial inclusion, but there are large risks associated with using Bitcoin as legal tender, the IMF’s El Salvador team tell Country Focus in an interview. “We don’t recommend it,” said the team, led by Alina Carare, Deputy Division Chief in the Western Hemisphere Department. “In the short-term, the costs and risks largely outweigh the benefits.” After a sharp decline in 2020, the IMF expects the economy to expand by around 10 percent in 2021, but medium-term growth is likely to slip to around 2 percent, below the historical average, as policy stimulus in the US wanes. --Unsustainable Situation: Persistent budget deficits and continuous expansionary fiscal policies have resulted in a rapidly growing public debt-to-GDP ratio. “Unless decisive policy actions are taken, public debt will continue to grow, demanding more resources from the budget as borrowing costs increase,” the team said. “This situation is unsustainable.”   Euro Area Europe's Supply Squeeze (PHOTO: IMF PHOTO/CYRIL MARCILHACY) When countries asked people to stay at home to control COVID-19, consumers cut spending on services and bought more manufactured goods instead. Shortages of industry inputs from chemicals to microchips caused the manufacturing recovery to stall and prices to spike—sparking a debate about inflation and monetary policy. In a new blog, IMF Managing Director Kristalina Georgieva, Europe Director Alfred Kammer and Oya Celasun estimate that without supply disruptions euro-area GDP last year would have been about 2 percent higher—equivalent to about one year’s worth of growth in pre-pandemic times. About half of the increase in manufacturing price inflation can be explained by supply shocks, the authors say. --Reining in Inflation: If euro-area authorities can overcome supply disruptions, it is less likely that they will have to restrict economic growth to rein in inflation, according to the blog, which is based on an IMF staff paper available here.   F&D The Currency Revolution (PHOTO: ISTOCK/DEM10; GETTY/DEM10; GETTY/ALENGO) In his latest book, The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, Cornell University professor Eswar Prasad describes how digital currencies and other financial technologies are reshaping everything from consumer banking to monetary policy and international payments. In a conversation with F&D’s Chris Wellisz, Prasad lays out the advantages and perils of the new forms of money. "The convenience of digital payments to both consumers and businesses makes it highly unlikely that cash will survive much longer," Prasad says. Read the entire article.    Listen to a new IMF Podcast where Prasad discusses his new book.   Coming Soon: F&D March Issue "Rethinking Fiscal" Our upcoming issue of Finance & Development will focus on how the pandemic has forced a rethink of fiscal policy. Fresh insights and analysis from Vitor Gaspar, Olivier Blanchard, Ceyla Pazarbasioglu, Carmen Reinhart, Arminio Fraga, Ricardo Reis, Emmanuel Saez, Felipe Larraín, and more will delve into issues of spending, debt and the role of government in economic life. The issue will also explore how some countries are innovating in areas of climate, transparency, and digitalization; the role of taxation; and how fiscal policy can be used to curb inequalities.  Take a look back at our December Issue of Finance & Development.   Want to get a print copy delivered to your home or office? Click here to subscribe.

A New Social Contract In a new podcast, IMF Director Kristalina Georgieva and London School of Economics Director Minouche Shafik discuss how current economic trends are straining social safety nets and fueling disaffection among people across the globe.

(PHOTO: IMF)   What's Affecting Inflation? What's affecting inflation around the world? The latest in our Charts in Motion series shows how energy, food and exchange rates are fueling inflation across the world and estimates how high prices could rise.

(PHOTO: IMF PHOTO/TAMARA MERINO)   Essential Reading: Climate Change Check out our eLibrary section on issues related to climate change. You can find IMF research on everything from climate information architecture to proposals for an international carbon price floor for large emitters.

Our Chart of the Week by Laurence Ball, Daniel Leigh, Prachi Mishra and Antonio Spilimbergo shows that the traditional core measure of inflation was almost as volatile as headline inflation for most of the past two years. This was because many large price changes occurred in sectors outside of food and energy. The case for moving away from the traditional measure of core inflation towards an alternative has strengthened, the authors say.

WEEKLY ROUND-UP 01. Green Fiscal Policies Green public financial management is the integration of climate and environment-friendly perspectives into fiscal practices, systems, and frameworks. The objective is to promote fiscal policies that are responsive to climate and environmental concerns. Read about the five guiding principles for a successful approach to green PFM in this article. 02. Monetary Finance A new IMF staff paper reviews the theoretical arguments for and against monetary financing and presents an assessment of the risks that it may pose for inflation. Supporters say fiscal stimulus financed by money creation would have a stronger effect than a debt-financed one. But opponents see it as a risk to central bank credibility. 03. Natural Rate of Interest There is a growing consensus among economists that the natural rate of interest (r∗) has declined in recent decades in the United States and other advanced economies. A new IMF staff paper predicts that the natural rate will stabilize at 1 percent in the long run. This remains true even if we take into account soaring public debt levels due to the pandemic. 04. Global Value Chains International trade is mostly priced in a few key currencies and is increasingly dominated by intermediate goods and global value chains. A new IMF staff paper reexamines the relationship between monetary policy, exchange rates and international trade flows. It finds key differences in the response of trade to domestic and foreign shocks depending on the origin and destination of the shipments involved.

Nick Owen Deputy Editor IMF Weekend Read nowen@imf.org   Thank you again very much for your interest in the Weekend Read! Be sure to let us know what issues and trends we should have on our radar.

Current economic trends are straining social safety nets and fueling disaffection among people across the globe.

Minouche Shafik and Kristalina Georgieva on a New Social Contract February 17, 2022 As part of the IMF Exchange speaker series, London School of Economics Director, Minouche Shafik and IMF Managing Director, Kristalina Georgieva discuss how current economic trends are straining social safety nets and fueling disaffection among people across the globe. In her latest book What We Owe Each Other, Shafik argues the need for a new social contract. The discussion is moderated by CNN Anchor and Correspondent Eleni Giokos. The podcast is an abridged version of the conversation, you'll find a webcast of the entire event at IMF.org. Listen to the Podcast   ***** Thanks for listening to the podcast. We're always looking to improve your experience so let us know if you have any suggestions! Send your comments to me at bedwards2@imf.org.   Bruce Edwards Producer, IMF Podcasts   An increase in public debt will put a damper on medium-term growth prospects El Salvador El Salvador's Comeback Constrained by Increased Risks Street scene in Santa Ana, El Salvador. (Photo: iStock) By the El Salvador country team, IMF Western Hemisphere Department   El Salvador’s increase in public debt will constrain medium-term growth prospects given the risks associated with high and growing financing needs. In an interview with Country Focus, the IMF El Salvador team, led by Alina Carare, talks about the country’s rebound and challenges, and the decision to make Bitcoin legal tender. How is the economy rebounding from the pandemic? After a sharp decline in 2020, we expect the economy to grow by around 10 percent of GDP in 2021, and 3.2 percent in 2022. This has a lot to do with the pick-up in external demand, and El Salvador’s response to the pandemic. Though it is one of the most densely populated countries in Latin America, El Salvador had one of the lowest reported rates of COVID-19 infections and fatalities in the region and has a relatively high vaccination rate.  US real GDP growth is also an important growth driver because of the large Salvadoran diaspora. About one-fifth of the population is living in the US. They contribute to the Salvadoran economy by sending remittances to support their families—more than 25 percent of GDP in 2021.      What are the top challenges and priorities going forward for El Salvador? We expect medium-term growth rates in El Salvador to decline to around 2 percent as policy stimulus in the US wanes. This is below the historical average, and it is because of high public borrowing costs. Persistent budget deficits and continuous expansionary fiscal policies—despite the strong economy—have resulted in a rapidly growing public debt-to-GDP ratio. Unless decisive policy actions are taken, public debt will continue to grow, demanding more resources from the budget as borrowing costs increase. This situation is unsustainable—it crowds out private investment, and limits resources for social and infrastructure spending, all impediments to growth. To increase growth rates in the long term, more private investment is needed. Healthier public finances would help. Because of this, we recommend a permanent reduction in the fiscal deficit (the difference between government revenue and spending), to be implemented over a 3-year period. This was agreed by the authorities and is in line with efforts made by other countries. It would put the debt-to-GDP ratio on a firm downward trend, creating the required fiscal space to implement the authorities’ ambitious social and inclusive growth agenda. Measures to support the vulnerable together with improvements to governance frameworks and efforts to minimize risks from Bitcoin are critical to ensuring higher growth and macroeconomic stability. Failure to take prompt action would only complicate policy choices in the future and increase risks. We have proposed policy options to restore the confidence of the market and ensure sufficient resources to service the country’s debt and finance its large development needs. What are the risks of using Bitcoin as legal tender? How can these risks be addressed? Digital means of payment such as Chivo (government e-wallet) have an important role to play in promoting financial inclusion, especially if used in US dollars. But as noted by our Executive Board, there are large risks associated with using Bitcoin as legal tender, especially given the high volatility of its price. We don’t recommend it. In the short-term, the costs and risks largely outweigh the benefits. These include risks to: Financial stability: Banks and other financial institutions could be exposed to massive fluctuations in crypto-asset prices. Banks will need to introduce new prudential rules, such as capital and liquidity requirements to fully hedge Bitcoin exposures or ban deposits in Bitcoins. Additionally, as the payments ecosystem is highly concentrated in Chivo, we recommend strengthening its regulation and supervision. Financial integrity: Crypto assets could open the door to illicit money, terrorism financing, and tax evasion, because of the anonymity they provide. Despite efforts to identify Chivo users, there are financial integrity risks. Theft or cybercriminals could jeopardize the stability of the system affecting relationships with foreign countries and correspondent banks. Because anti-money laundering and combating the financing of terrorism requirements are not uniformly implemented, a lot is left to the discretion of Bitcoin-service providers. International standards for virtual assets providers are needed. For these reasons, we recommend more intense and uniform regulation for all entities. Consumer protection: Households and businesses who hold Bitcoin balances and save in Bitcoin could lose wealth through large swings in value, and in a digital environment, cybercrime and theft is always a risk. With a quarter of the population already living in poverty, it is important that the use of Chivo does not lead to further destitution. For these reasons we recommend: (i) strengthening legal requirements for e-wallets, particularly Chivo, to fully safeguard users' funds (in both Bitcoins and US dollars); (ii) setting legal limits on Bitcoin transactions and holdings; and (iii) boosting the consumer protection framework with stricter transparency requirements, higher institutional involvement, and clearer disclosure of Bitcoin use and the risks it carries due to price volatility. Contingent fiscal liabilities: The adoption of Bitcoin as legal tender is fully funded by public money, through a trust fund. If the price of Bitcoin was to plummet, the resources in the trust could be rapidly depleted. For the government to continue guaranteeing the convertibility between the Bitcoin and the US dollar, it would need to fund the trust through additional resources or the issuance of debt.  ***** Alina Carare is Deputy Division Chief in the Western Hemisphere Department   Jaime Ponce is a Senior Financial Expert in the Monetary and Capital Markets Department Javier Kapsoli is a Senior Economist in the Western Hemisphere Department   Juan Francisco Yépez is an Economist in the Western Hemisphere Department   Justin Lesniak is a Research Assistant in the Western Hemisphere Department Laura Doherty is a Senior Economist in the Fiscal Affairs Department Lorena Rivero del Paso is a Technical Assistance Advisor in the Fiscal Affairs Department Yorbol Yakhshilikov is an Economist in the Western Hemisphere Department   RELATED LINKS Read the Article IV The IMF and El Salvador Crypto-assets as National Currency? A Step Too Far