IMF UPDATE

Dear maria, In today's edition we focus on geopolitical fragmentation and competing systems for cross-border payments, Korea's recovery and stagflation concerns, policy coordination in the euro area, economic expertise in fragile states, the Ukraine war's impact on sub-Saharan Africa, a rise in social unrest, and much more. International Payments Confronting Fragmentation (PHOTO: BLACKDOVFX/ISTOCK BY GETTY IMAGES) Global economic integration has supported growth and lifted more than 1 billion people out of extreme poverty over the past three decades. But the forces of geopolitical fragmentation—including competing systems for cross-border payments—threaten to make the world poorer and more dangerous. In a speech on Tuesday, IMF Managing Director Kristalina Georgieva called for a new public payment system to connect various payment systems and counter fragmentation of the international monetary system accelerated by Russia’s invasion of Ukraine. --Parallel payment systems: Some countries may develop parallel payment systems to mitigate the risk of potential economic sanctions, while private digital money providers are promising cheap cross-border payments, but often within a closed network of users, Georgieva told a conference in Zurich hosted by the IMF and Swiss National Bank. “These ‘payment blocs’ would only worsen the impact of broader ‘economic blocs’—creating new inefficiencies and imposing new costs. This would harm productivity and living standards in all countries.” A new public payment system, which uses technology to connect various forms of money, including commercial bank deposits but potentially also central bank digital currencies and even some stablecoins, could make payments work for all people, in all countries, Georgieva said. --Question of governance: Questions of governance such as who would oversee these platforms will ultimately be decided by countries, but international organizations such as the IMF, the Bank of International Settlements, and the Financial Stability Board could play an important role, she added. “Together, we can put the international payment system on a sounder footing—to support the digital world of tomorrow, to foster an international monetary system that can bring greater stability and prosperity for all.” Watch Georgieva's speech and read a transcript here.   Read a new Fintech Note on the challenges of managing capital flows in the digital age, and find all the IMF's content on Fintech including blogs, papers and videos here.   Country Focus Korea's Resilient Recovery (PHOTO: PEXELS/ETHAN BROOKE) Korea has recovered well from the pandemic and economic output has surpassed pre-crisis levels despite multiple waves of infection, a testament to strong economic fundamentals and appropriate policy responses, the IMF’s Martin Kaufman and Krishna Srinivasan write in a new Country Focus article. Before the war in Ukraine, Korea’s growth was expected to remain robust this year and next, with inflation projected to gradually return to target by next year, as reflected in a recent IMF report. But significant uncertainties were already clouding the outlook, with downside risks arising mainly from pandemic-related disruptions to supply chains, geopolitical uncertainties, and rising interest rates in major advanced economies. Moreover, Korea faced domestic downside risks linked to weakening economic activity from rising COVID-19 infections, elevated household debt and real estate prices, and rising inflation. The effects of Russia’s invasion of Ukraine and related sanctions have exacerbated concerns about stagflation risks. Specifically, the increase in commodity prices, particularly of energy, has been fueling inflationary pressures even as the adverse impact of the war on trading partners and recent developments in China could significantly weigh on economic activity in Korea. So far, however, Korea’s recovery appears relatively resilient. Click here for all the IMF's Country Focus articles and videos.   F&D From Asian Financial Crisis to Today (PHOTO: IMF) July 1997 marked the beginning of the Asian financial crisis, when a combination of economic, financial and corporate problems triggered a sharp loss of confidence and capital outflows from the region’s emerging market economies. In 2000, the Association of Southeast Asian Nations plus China, Japan, and South Korea (ASEAN+3) created a network of bilateral currency swaps intended to provide short-term liquidity in a future crisis. A macroeconomic research office, known as AMRO, conducts regional surveillance and supports the swap initiative. In the latest of our Café Economics series of interviews, F&D Magazine’s Chris Wellisz speaks to Hoe Ee Khor, AMRO’s chief economist and co-editor of a newly published book, Trauma to Triumph: Rising from the Ashes of the Asian Financial Crisis, about the lessons from that crisis, how Asian economies fared in the pandemic, the effect of the Ukraine war on the region, and why he does not believe the world economy is headed toward a period of deglobalization. Read the full article     Visit Us Online For other recent articles, including  Cevat Aksoy, Barry Eichengreen and Orkun on how public health disasters can erode young people’s trust in politicians and scientists for years, check out F&D online.   Also read our three-part series on The Future of Inflation, by Ruchir Agarwal and Miles Kimball.   Want to a print copy delivered to your home or office?    Click here to subscribe.   (PHOTO: BANKA SLOVENIJE)   Policy Coordination in Europe A “fiscal stabilization instrument” would counter the tendency of national authorities in the euro area to run up deficits when economic growth is strong and make monetary policy a better fit for all member states, Alfred Kammer, the director of the IMF’s European Department, said in a speech on Tuesday. “Monetary-fiscal coordination must receive higher priority at both the national and union levels,” Kammer told a conference at Slovenia’s central bank on its 30th anniversary. Watch here. (PHOTO: ICRC)   Scourge of Fragility With violent conflict on the rise, two-thirds of the world's poorest could soon be living in fragile and conflict-affected states. The International Committee of the Red Cross works at the frontline of most conflicts across the globe. In a new podcast, Peter Maurer, the ICRC’s president, discusses the importance of including the expertise of economists in humanitarian work and the IMF's new strategy for fragile and conflict-affected states. (PHOTO: IMF)   Africa and Ukraine In a discussion with Gyude Moore of the Center for Global Development and Amaka Anku of the Eurasia Group, the IMF’s Abebe Selassie identified four “Fs” on the mind of policymakers in sub-Saharan Africa: the prices of food, fuel and fertilizer, and the potential geopolitical fragmentation stemming from Russia’s invasion of Ukraine. (PHOTO: IMF)   Governor Talks During the IMF’s Spring Meetings in April, central bankers and finance ministers discussed the challenges that policymakers face in seeking to navigate slower global growth and faster inflation as economies emerge from the pandemic. Catch up on all the interviews to learn how Chile, Jordan, New Zealand, Sweden, and Zambia are coping. WEEKLY ROUND-UP 01. Social Unrest is Rising Social unrest is on the rise across the world following a sharp decline during the pandemic as governments relax restrictions on freedom of assembly, according to an index of reported social unrest by the IMF’s Philip Barrett. Even so, social unrest remains well below a recent peak seen in late 2019 when a wave of protest swept through Latin America, according to the index, which counts the number of media articles that include terms related to social unrest. 02. Greener Labor Markets Countries that have carbon prices or similar policies in place are more successful in making labor markets greener, but the pace of transition to less carbon-intensive jobs is slow, IMF economists John Bluedorn and Niels-Jakob Hansen told LinkedIn News’s Nina Melendez on Monday. With the right mix of policies, countries should be able to achieve net-zero greenhouse-gas emissions while easing the pain for workers, they said in the interview, based on a chapter in the World Economic Outlook. 03. US Tax Cuts and Foreign Investment The American subsidiaries of foreign-owned firms increased investment financed by retained earnings and investment in property, plant and equipment after the United States cut corporate taxes in 2018. But only the increase in earnings-financed investment appears to have been driven directly by the tax cuts, according to a staff paper by the IMF’s Thornton Matheson, Alexander D Klemm, Laura Power, and Thomas Brosy. 04. French Firms and the Pandemic Older medium-sized French firms with automated production processes and large inventories were more insulated from the global trade shock during the early stages of the pandemic, the IMF’s Mariya Brussevich, Chris Papageorgiou, and Pauline Wibaux say in a staff paper. Firms that relied on air transport to export or import goods suffered more than those that moved goods by sea or roads, they say. MARK YOUR CALENDAR 01. Africa and Global Recovery The IMF's African Department Director, Abebe Aemro Selassie, talks to Carnegie Africa Program Director Zainab Usman about how sub-Saharan African countries can navigate a turbulent global economy on May 18 at 11:30 AM ET. Watch here. 02. Book Launch: Good Governance IMF Deputy Managing Director Antoinette Sayeh will join Olavo Correia, Vice-Prime Minister and Minister of Finance of Cabo Verde, Linda Ofori-Kwafo of the Ghana Integrity Initiative, and Professor Emmanuel Gyimah Boadi of Afrobarometer to launch a new book, Good Governance in Sub-Saharan Africa: Opportunities and Lessons, on May 19 at 11:00 ET. Register here. Nick Owen Editor IMF Weekend Read nowen@imf.org

Asia Strong Policies Help Korea Navigate Uncertain Times Korea’s economy faces headwinds but remains resilient (Photo: Pexels/Ethan Brooke). By Martin Kaufman and Krishna Srinivasan   Korea has recovered well from the pandemic, a testament to its strong economic fundamentals and appropriate policy responses. Economic output has surpassed pre-crisis levels despite multiple waves of infection. The recovery was supported by the effective containment of the pandemic, including rapid vaccination last year, and proactive economic policy support, which helped minimize economic scarring, sustain income growth, and maintain financial stability. Given Korea’s high global integration, strong external demand also provided support to the recovery. Before the war in Ukraine, Korea’s growth was expected to remain robust this year and next, with inflation projected to gradually return to target by next year, as reflected in the recent IMF report. But significant uncertainties were already clouding the outlook, with downside risks arising mainly from pandemic-related disruptions to supply chains, geopolitical uncertainties, and rising interest rates in major advanced economies. Moreover, Korea faced domestic downside risks linked to weakening economic activity from rising COVID-19 infections, elevated household debt and real estate prices, and rising inflation. The effects of Russia’s invasion of Ukraine and related sanctions have exacerbated concerns about stagflation risks. Specifically, the increase in commodity prices, particularly of energy, has been fueling inflationary pressures even as the adverse impact of the war on trading partners and recent developments in China could significantly weigh on economic activity in Korea. So far, however, Korea’s recovery appears relatively resilient. Against this backdrop, policy normalization remains appropriate, given Korea’s relatively advanced recovery and rising inflation, but the pace should consider the fast-evolving global conditions. In particular, the pace of monetary policy normalization should continue to be calibrated to ensure that inflation stabilizes at its target and expectations remain well-anchored. Fiscal policy should be broadly neutral while continuing to provide targeted support for affected sectors and vulnerable households, as needed. Macroprudential policies should continue to guard against systemic financial risks, notably to contain the buildup of vulnerabilities owing to a red-hot housing market and elevated levels of household debt. As global risks abate, the policy focus should shift to structural reform priorities to reinvigorate potential growth and foster greater inclusion, including in the context of the Korean New Deal. This requires recalibrating policies to support productivity growth and innovation. It also demands providing transitory support amid reforms to address product, services, and labor market rigidities, and ensuring that Korea’s human capital remains a central pillar of the transformation process. In this context, fiscal policy should be anchored in a medium-term framework that stabilizes public debt, considering the expected implications of demographics, structural transformation costs, and the potential need for additional fiscal support when necessary. RELATED LINKS Read the Article IV Consultation Report Republic of Korea and the IMF

ICRC President Peter Maurer says economic development is critical to fulfill its mandate of stabilizing societies through humanitarian work.

View as a webpage ICRC's Peter Maurer on the Scourge of Fragility and Partnerships to Fight It May 12, 2022 (Photo: ICRC) Fragility and conflict have forced hundreds of millions of people to live outside of state control without access to basic services. And with violent conflict on the rise, two-thirds of the world's poorest could soon be living in fragile and conflict affected states. The International Committee of the Red Cross is one of the world's most important providers of humanitarian assistance and works at the front line of most conflicts across the globe. In this podcast, ICRC President, Peter Maurer discusses the importance of including the expertise of economists in their humanitarian work and the significance of the IMF's new strategy to strengthen its support to fragile and conflict affected states. Peter Maurer is the President of the International Committee of the Red Cross. Listen to the podcast Read the transcript   ***** 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