IMF update

 

Latin America Chile’s New Short-term Liquidity Line to Support Resilience and Recovery Chile’s Central Bank Governor Rosanna Costa: The government’s multi-year fiscal package has helped to safeguard health, protect incomes and jobs, support credit, and buttress the recovery. (Photo credit: Central Bank of Chile) Chile has rapidly recovered from the COVID-19 crisis after a policy response that included an effective vaccination campaign and wide-ranging stimulus measures. As part of its strategy to support resilience, Chile is now accessing the IMF’s Short-term Liquidity Line (SLL)—the first country to benefit from this liquidity backstop—and exiting the Flexible Credit Line (FCL). In an interview with Country Focus, Rosanna Costa, Governor of the Central Bank of Chile, and Ana Corbacho, IMF Mission Chief, talk about the country’s comeback from the pandemic and how the new liquidity line is expected to help Chile achieve its economic agenda and manage risks. Chile’s economy recovered very fast from the pandemic. What policies helped achieve this outcome? Governor Costa: Chile entered the pandemic with a healthy economy, a solid fiscal position, and a sound financial system. The very fast recovery was due to the extensive vaccination campaign and an effective economic policy response to the pandemic that was swift and comprehensive, and anchored in very strong policy and institutional frameworks. Chile also had significant buffers bolstered by its access to the FCL. The government’s multi-year fiscal package has helped to safeguard health, protect incomes and jobs, support credit, and buttress the recovery. To support liquidity, the Central Bank of Chile undertook monetary stimulus and unconventional measures, and adjusted financial sector policies to facilitate the flow of credit, especially to households and small and medium-sized enterprises. Chile is now successfully exiting the FCL. What is the role of the new SLL in the country’s economic strategy? Governor Costa: Chile started preparing the exit strategy from the FCL ever since it gained access in May 2020. As part of this strategy, the Central Bank of Chile purchased international reserves for a total of US$7.4 bn. Chile’s external position was further strengthened by the IMF’s general allocation of Special Drawing Rights, the central bank joining the Fondo Latinoamericano de Reservas (FLAR), and the country’s access to the US Federal Reserve’s REPO FIMA. Considering these tools, the normalization of the exceptional measures implemented during the pandemic, and the lower risks perceived in relation to the public health emergency, the central bank decided to access the SLL to complement its sources of external liquidity. IMF Mission Chief for Chile Ana Corbacho. (Photo credit: IMF) Chile is the first IMF member country receiving an SLL since the facility was created in April 2020. What made Chile a good candidate for the liquidity line and how will it support Chile’s resilience? Ana Corbacho: The SLL is designed to be a liquidity backstop for members with very strong policy frameworks and fundamentals that face potential, moderate, short-term balance of payments needs. It is an innovative instrument that provides predictable, revolving, and renewable liquidity support in foreign exchange. Chile is an excellent candidate for the SLL. It has very strong economic fundamentals and institutional policy frameworks, has shown a sustained track record of implementing very strong policies, and the authorities are committed to maintaining very strong policies in the future. Policy frameworks are anchored in a well-established structural fiscal balance rule, credible inflation targeting with a free-floating exchange rate, and a sound financial system supported by effective regulation and supervision. These features have sustained Chile’s resilience even in the face of very large shocks. The SLL will complement existing buffers, make available predictable and revolving liquidity support, and is a signal of confidence in Chile’s very strong fundamentals and policies. By supporting Chile’s resilience and capacity to respond to shocks, the SLL will also help maintain macroeconomic stability and lay the foundations for sustained and green growth to the benefit of the Chilean people. RELATED LINKS Read the press release SLL Factsheet Regional Economic Outlook Chile and the IMF

Dear maria, We just published a new blog—please find the full text below.  Middle East and North Africa’s Commodity Importers Hit by Higher Prices By Jihad Azour, Jeta Menkulasi and Rodrigo Garcia-Verdu The war in Ukraine and related sanctions have triggered a sharp increase in commodity prices, which will add to the challenges facing countries in the Middle East and North Africa—particularly the region’s oil importers. After leaping to a peak of $130 per barrel following Russia’s invasion, oil prices are expected to settle at an annual average of around $107 in 2022, up $38 from 2021, according to the IMF’s latest World Economic Outlook. Similarly, food prices are expected to increase by an additional 14 percent in 2022, after reaching historical highs in 2021. This surge in prices comes at a precarious time for the region’s recovery. In our Regional Economic Outlook, we revised up our forecast for growth in the Middle East and North Africa as a whole by 0.9 percentage points to 5 percent, but this reflects improved prospects for oil exporters helped by rising oil and gas prices. For oil-importing countries, we marked down our projections, as higher commodity prices add to the challenges stemming from elevated inflation and debt, tightening global financial conditions, uneven vaccination progress, and underlying fragilities and conflict in some countries. The effect of high commodity prices Higher inflation is one of the most direct impacts of rising commodity prices. Food prices accounted for about 60 percent of last year’s increase in headline inflation in the Middle East and North Africa, excluding the countries of the Gulf Cooperation Council. Hence, we project inflation to remain elevated in the region in 2022 at 13.9 percent—a significant upward revision relative to our previous projections in October. This is no surprise given the high dependence of many economies in the region on shipments of foreign food (about one-fifth of total imports), and the heavy weighting of food in consumption baskets (more than one-third on average) and even higher in the case of low-income countries. The war has also heightened concerns about food insecurity, given the region’s dependence on wheat imports from Russia and Ukraine and the rise in prices, which makes it harder for people to afford food. The situation is particularly concerning for fragile and conflict-affected states, since strategic reserves cover less than 2.5 months of net domestic consumption. Overall, rising food prices and potential wheat shortages affect the poor more because they allocate a higher share of their expenditure to food. This will add to poverty and inequality and heighten the risk of social unrest. Commodity price increases will also have a significant negative impact on oil importers’ external accounts. We project that these countries’ current account balances will deteriorate by 1 percentage point of GDP, on average. For low-income countries, higher wheat prices alone will be a significant blow, worsening current accounts by around 1.2 percent of GDP on average. How are countries responding? Some are using targeted measures to ease the burden on their people, while others have resorted to more subsidies and price controls to limit the inflationary effects of higher international prices—but this will worsen fiscal balances in the absence of offsetting measures. Energy subsidies alone could increase by up to $22 billion for oil-importing countries in 2022. This represents money that could otherwise have been spent on more targeted support or other priority measures. In addition to existing subsidies, some countries have introduced measures to smooth the impact of higher prices, such as direct transfers and lower tariffs on food, which will add to fiscal costs. What should policymakers do? Near-term policy trade-offs have become increasingly complex for oil-importing countries in the Middle East and North Africa. Containing inflation is a key priority, despite fragile recoveries. In countries where there are risks of inflation expectations rising or price pressures broadening, policy rates need to increase. Clear and transparent communication will be critical to guide markets. It is also urgent that countries address food security risks and mitigate the impact of high international prices on the poor. The most effective way is to ensure vulnerable households are protected with targeted, temporary, and transparent transfers. Where safety nets are less strong, prices could be raised gradually. For low-income countries, sustained financial support from the international community is crucial. For countries with high debt, these measures should be accompanied by offsetting measures elsewhere—for example, cutting unnecessary spending, promoting additional tax equity, or a combination of the two—to safeguard debt sustainability given limited fiscal space. Coordinating fiscal and monetary policies and anchoring them in credible medium-term policy frameworks will help ease these trade-offs. These challenges underscore the importance of pressing ahead with structural reforms, which will help countries weather future macroeconomic shocks and accelerate recovery. Measures that bolster the efficiency of government expenditure and revenue collection, including through digitalization, promote private sector activity, and strengthen social safety nets will all be important priorities. As countries throughout the Middle East and North Africa work to adapt their macroeconomic policies to new geopolitical realities, the IMF will continue to help through policy advice, financing, and capacity development. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!

Dear maria, In today's edition, we discuss how fragmentation is hindering the global response to a “confluence of calamities” besetting the world economy, globalization and resilience, the Middle East and North Africa’s divergent recoveries, Chile’s $3.5-billion liquidity line, corporate debt, inflation drivers and expectations, “nowcasting” in developing economies, and much more.   Global Outlook Confluence of Calamities Why Countries Must Cooperate on Carbon Prices (PHOTO: IMF) Today's “confluence of calamities” represents perhaps the greatest test for the global economy since the Second World War, IMF Managing Director Kristalina Georgieva said on the eve of this week’s World Economic Forum in the Swiss resort of Davos. “Geoeconomic fragmentation” is hindering a coordinated response to shocks from the Ukraine war, supply chain disruptions, surging commodity prices, higher interest rates, volatile financial markets, and climate change, Georgieva said in a blog co-authored with the IMF’s First Deputy Managing Director Gita Gopinath and Ceyla Pazarbasioglu, director of the Strategy, Policy and Review Department. "To restore trust that the rules-based global system can work well for all countries, we must weave our economic fabric in new and better ways." In World Economic Outlook reports published in January and April, the IMF downgraded its forecasts for global growth this year to 4.1 percent and then 3.6 percent after an estimated expansion of 6.1 percent in 2021 to reflect rapidly deteriorating prospects. --International mobilization: While economic recovery in the United States remains relatively robust, recession fears are already materializing in some countries, Georgieva told Fox Business. “It is a very different picture in different parts of the world.” Speaking to the BBC, Georgieva said governments should provide targeted support to the most vulnerable as food and fuel prices soar. Strong international mobilization could save lives, she told France 24, and warned against export restrictions such as one on wheat shipment imposed earlier this month by India in an interview with NDTV. Gopinath, meanwhile, pointed to weakening growth in China and Europe as evidence of the challenges facing the world economy, but said it was premature to talk of a global recession in an interview with Bloomberg. Major central banks are looking to raise interest rates much faster than was expected just a couple of months ago, she told CNBC. In a video on Twitter, Georgieva reflected on this week's World Economic Forum. Watch her three takeaways.   Middle East and North Africa Disruption and Divergence (PHOTO: IMF PHOTO/RYAN-RAYBURN) The war in Ukraine and related sanctions have triggered a sharp increase in commodity prices, which will add to the challenges facing countries in the Middle East and North Africa—particularly the region’s oil importers. In a new blog, the IMF’s Jihad Azour, Jeta Menkulasi and Rodrigo Garcia-Verdu say that policy trade-offs have become increasingly complex for oil-importing countries seeking to control inflation without snuffing out fragile recoveries. In the April Regional Economic Outlook, the IMF revised down growth projections for the Middle East and North Africa’s oil-importing economies as higher commodity prices add to challenges stemming from elevated debt, tightening financial conditions, and underlying fragilities and conflict in some countries. “This year’s outlook is a story of disruption and divergence,” Azour told a panel discussion on Tuesday moderated by CNN’s Eleni Giokos, pointing to radically different prospects for the oil exporters of the Gulf Cooperation Council on the one hand and the region’s low-income countries on the other. --Food prices: Food prices accounted for about 60 percent of last year’s increase in headline inflation in the Middle East and North Africa, excluding the countries of the Gulf Cooperation Council. The blog authors say inflation is likely to remain elevated this year at 13.9 percent—a significant upward revision relative to previous projections in October. The situation is particularly concerning for fragile and conflict-affected states. Overall, rising food prices and potential wheat shortages affect the poor more because they allocate a higher share of their expenditure to food. This will add to poverty and inequality and heighten the risk of social unrest, the authors say. Watch Azour discussing the outlook for the Middle East and North Africa with Chatham House's Creon Butler.   All the IMF's Regional Economic Outlook reports, covering Asia and the Pacific, Europe, the Middle East and Central Asia, Sub-Saharan Africa, and the Western Hemisphere, are available to read here.   F&D Globalization and Resilience (PHOTO: ISTOCK/PIXELPROF) For the two major economic disruptions so far this century—the global financial crisis starting in 2008 and the COVID-19 pandemic starting in 2020—economists’ answers to questions around globalization and its impact on resilience were largely wrong, say the IMF’s Prachi Mishra and Antonio Spilimbergo in a new F&D online exclusive article. “As for the financial crisis, most of them underestimated the risks of financial globalization, and when it came to the pandemic, most overestimated the risks of sprawling, intricate production networks and trade globalization,” they write. “As the Russian invasion of Ukraine and the sweeping sanctions that followed now threaten to ignite a third great crisis, it’s important to understand where economic analysis goes wrong and the adjustments practitioners need to make to get things right.” Read the full article     COMING SOON Geoeconomic Puzzle: Policymaking in a More Fragmented World. F&D’s June edition will focus on the economic dimensions of the current geopolitical situation, including the war in Ukraine, refugees, and food prices. Authors include Tharman Shanmugaratnum, Pierre-Olivier Gourinchas, Eswar Prasad, Raj Chetty, Barry Eichengreen, Patricia Clavin, and many others.   Click here to subscribe.   (PHOTO: CENTRAL BANK OF CHILE)   Chile's Liquidity Backstop Chile’s capacity to respond to shocks will be supported by a new $3.5-billion liquidity line from the IMF, Rosanna Costa, Chile's central bank governor, said in a Country Focus interview. Chile has recovered rapidly from the COVID-19 crisis and, as part of its strategy to support resilience, has become the first country in the world to benefit from the Fund's Short-term Liquidity Line. (PHOTO: IMF)   Corporate Debt Very high levels of private debt could complicate the global recovery as central banks raise interest rates to control inflation, the IMF’s Ceyla Pazarbasioglu said in a conversation on Wednesday with Guntram Wolff of the Bruegel think-tank. Corporate vulnerabilities could be exposed as governments scale back support they gave stricken firms during the pandemic, Pazarbasioglu said, expanding on a chapter in the latest World Economic Outlook. (PHOTO: IMF)   Soaring Shipping Costs Most of the goods we purchase travel the oceans in steel containers aboard the largest ships ever to sail the seas, but the pandemic and ensuing lockdowns knocked the wind from their sails and disrupted the global shipping network. In a new podcast, IMF economist Yan Carrière-Swallow says soaring shipping costs are an important driver of inflation around the world. (PHOTO: IMF)   Charts in Motion Consumer-price inflation in advanced economies will reach a 38-year high of 5.7 percent in 2022, according to IMF projections. In emerging markets and developing economies, consumer prices will rise by 8.7 percent. The latest in our Charts in Motion series explains the factors that have shaped these projections. Read more about the outlook for inflation here.   Economists are turning to new technologies that help track indicators such as growth and inflation in real time to sharpen their forecasts. "Nowcasting", or forecasting of the present, is especially promising for developing economies where statistical authorities may not release indicators frequently. As the Chart of the Week by the IMF’s Seung Mo Choi and Tara Iyer shows, the nowcasting framework offered invaluable information for Botswana when pandemic closures hit in the second quarter of 2020. WEEKLY ROUND-UP 01. Inflation Expectations Advanced-economy central banks need to remain very alert to shifts in inflation expectations, and they need to take decisive policy action to rein in inflation and ensure that expectations remain appropriately anchored, Tobias Adrian, the IMF’s Financial Counsellor and Director of the Monetary and Capital Markets Department, said in a speech on Monday. “A closer look at recent developments in household inflation expectations in Canada, Germany, the United States, and the United Kingdom suggests that expectations have started to shift,” Adrian told the European Banking Institute. “Recent moves in five-year expectations in the United States and the United Kingdom and Germany may be particularly concerning.” 02. Sri Lanka An IMF staff team on Tuesday concluded a virtual mission with the Sri Lankan authorities to discuss an economic program that could be supported by an IMF lending arrangement. A statement said: “The IMF team held technical discussions on a comprehensive reform package to restore macroeconomic stability and debt sustainability. The team made good progress in assessing the economic situation and in identifying policy priorities to be taken going forward.” 03. Roads and Speed Road connectivity is key for inclusive development—access to improved roads can reduce transport time and costs, increase productivity, and reduce poverty. Yet cross-country measures of how efficient road networks are in moving people and goods within countries are lacking. In a staff paper, the IMF’s Mariano Moszoro and Mauricio Soto develop a novel measure of cross-country quality based on the mean speed between large cities from Google Maps, finding that mean speed is a strong proxy for road quality and access. 04. Fragility, Employment, Inflation Countries lagging the furthest behind in progress towards achieving the sustainable development goals are those in conflict, post-conflict, or fragile situations. In a staff paper, the IMF’s Patrick A. Imam, Oumar Diallo of the UN, and Steve Loris Gui-Diby of the World Bank assess how monetary policy outcomes affect fragility. They examine the relationships between monetary policy outcomes and fragility—and find that reduced inflation and lower unemployment best promote peace and social cohesion. 05. Corruption in Procurement Public procurement can be highly vulnerable to corruption. Estimates of losses through procured spending amount to about 10-20 percent, even in European Union countries whose procurement systems are of relatively high integrity. The IMF’s Olivier Basdevant and others analyze how price differentials in public procurement contracts can be explained by corruption risk factors. In a staff paper they provide a guiding tool to assess where corruption risks would have the biggest budgetary impact. MARK YOUR CALENDAR 01. Green Finance The IMF's Kristalina Georgieva, Tobias Adrian and Bo Li will explore the implications of climate change for financial stability, central bank and regulatory policies, and the greening of financial markets in Asia and the Pacific alongside central bank governors from Malaysia, Singapore and Samoa on June 1 at 7:30 AM ET. Watch the event, moderated by Bloomberg's Haslina Amin, here.

Yan Carrière-Swallow says any disruption in shipping networks has global implications on prices.

Shipping Costs and Inflation with Yan Carrière-Swallow May 26, 2022 (Photo: Weijia Yao) Most of the goods we purchase travel across the oceans in steel containers aboard the largest ships ever to sail the seas. But the pandemic and ensuing lockdowns knocked the wind from their sails and disrupted the entire global shipping network, causing supply shortages and soaring shipping costs. IMF economist Yan Carrière-Swallow has studied the macroeconomic impact of shocks to ocean freight, and in this podcast, he says shipping costs are an important driver of inflation around the world. Yan Carrière-Swallow is coauthor along with Pragyan Deb, Davide Furceri, Daniel Jimenez and Jonathan Ostry, of Shipping Costs and Inflation available at IMF.org. Yan Carrière-Swallow is a Senior Economist in the Asia and Pacific Department. 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