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Pierre-Olivier Gourinchas on Geopolitics and Dollar Dominance June 17, 2022 The war in Ukraine and the rise of emerging market economies have opened a new chapter in international relations, with important implications for the global economic order. Like an earthquake, the war has an epicenter, located in Russia and Ukraine, but its seismic waves are impacting economies far and wide and revealing a shift in the underlying geopolitical tectonic plates. In this podcast, IMF Chief Economist, Pierre-Olivier Gourinchas discusses what fragmentation of the global economy might mean for the dominance of the US dollar in the international monetary and financial system. Read the F&D article Pierre-Olivier Gourinchas is the IMF's Economic Counsellor and Director of the Research 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

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

Dear maria, In today's edition, we focus on the outlook for Caribbean economies as the managing director visits Barbados, how crypto can be more energy efficient, inflation, public banks and financial risks, Africa's governance, Asia's carbon prices, Moldova, the world's fastest roads, and much more.  Caribbean Partnership for Resilience Why Countries Must Cooperate on Carbon Prices (PHOTO: IMF PHOTO) The Caribbean faces the most challenging economic circumstances for at least 70 years as countries rebuild COVID-scarred tourism industries, finances are stretched by rising inflation and interest rates, and climate change poses serious threats, IMF Managing Director Kristalina Georgieva said on Tuesday. In an article published in several newspapers ahead of a three-day visit to Barbados, Georgieva called for a strong partnership to overcome these challenges and secure a resilient future. “Together we can define the right economic policies that can tame inflation, protect the most vulnerable, address debt, and fight climate change—so as to reinforce the economic recovery, and build resilience to future shocks.” Caribbean economies contracted three times more than the rest of the world during the pandemic as tourists stayed away, but the IMF expects growth of 3.7 percent this year. However, rising sea levels and more frequent natural disasters pose a significant threat to all Caribbean countries. --Climate change: Georgieva, on her first visit to Barbados since becoming managing director in 2019, pointed to the IMF’s new Resilience and Sustainability Trust designed to help countries address structural challenges including climate change as well as innovative local initiatives such as Belize’s debt-for-climate swap. “Mobilizing climate financing—and safeguarding debt sustainability affected by climate-related and natural disasters—requires a more comprehensive financial framework.” Watch key events from the managing director’s visit to Barbados, including a press conference with Prime Minister Mia Amor Mottley, and discussions of resilience and sustainability, and climate change and technical assistance, plus a conversation with students from the University of the West Indies in Bridgetown.   Crypto Making Crypto Energy Efficient (PHOTO: UNSPLASH/CLAY BANKS) Environmentally conscious design can make a major difference in the energy efficiency of digital currencies, the IMF’s Itai Agur, Xavier Lavayssière and Germán Villegas Bauer say in a new blog. Most of the world’s central banks have already agreed they should help fight climate change, a critical challenge that necessitates reductions in both energy consumption, and the carbon emissions associated with the energy consumed. To meet these aims, it’s important to pay attention to the energy used by the payment systems that central banks regulate and oversee, the authors say, pointing to a new staff paper that establishes the main components and technological options that determine the energy profile of digital currencies. “Digital currencies, from crypto assets to central bank digital currencies, can play a role in the transformation that policymakers envision,” they say. “Policymakers should weigh energy needs along with other benefits and risks when they design CBDCs or consider the regulatory environment for crypto.” Find all the IMF’s coverage of Fintech including blogs, videos, publications here.   F&D Shifting Geopolitical Tectonic Plates (CREDIT: ISTOCK/GEARSTD) The Russian invasion of Ukraine has opened a new chapter in international relations, with important implications for the global economic order, writes IMF economic counselor Pierre-Olivier Gourinchas in the June issue of Finance & Development Magazine. The war is affecting countries across the globe, with rising commodity prices and inflation, heavily disrupted trade flows, a refugee crisis in Europe, and tightening financial conditions. Even more fundamentally, the “geopolitical tectonic plates” are shifting, raising the risk of global economic fragmentation. “We must recognize that a fragmented world is a more volatile and vulnerable world, where access to safe assets is more restricted and the global financial safety net is less comprehensive. This is a world that needs the IMF more, not less. As an institution, we must find ways to deliver on our mission to provide financial assistance and expertise when needed and to maintain and represent all our members, even if the political environment makes it more challenging.” Read the full article   F&D June Issue Our June issue focuses 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, who examine the rare confluence of geopolitical, economic, and technological forces now confronting the world may reverberate for generations.  Want to get a print copy delivered to your home or office? Click here to subscribe. (PHOTO: IMF PHOTO)   Support for Moldova The war in Ukraine and the continued influx of refugees have had a significant impact on Moldova and led to increased external financing needs, Kenji Okamura, the IMF’s Deputy Managing Director, said in a statement on Tuesday. “I call on the international community to continue supporting Moldova’s integrative approach to refugees and its efforts to forge ahead with reforms,” Okamura said at the end of a two-day visit during which he met President Maia Sandu, Prime Minister Natalia Gavrilita, and spoke to refugee children at a school. (PHOTO: IMF PHOTO)   Good Governance in Africa “The issue of good governance and transparency is more than just about wasted money – it is about the erosion of a social contract and the corrosion of the government’s ability to grow the economy in a way that benefits all citizens,” said IMF Deputy Managing Director Antoinette Sayeh at a conference on good governance and corruption, held in Botswana. Watch or read more about the two-day conference. (CREDIT: IMF)   Fintech Forward Fintech Forward is a new IMF podcast series with a focus on financial technology. Hosted by IMF economist Tara Iyer, the series draws from IMF staff expertise to better understand the impact of emerging technologies on financial systems and local economies around the world. In the first episode, Tobias Adrian, Director of the IMF's Monetary and Capital Markets Department, says fintech is causing nothing less than a revolution in the global financial system. (CREDIT: IMF)   What is Inflation? What is inflation, why is it rising, and what can governments do about it? IMF economist Sandile Hlatshwayo answers these questions in our new video series, Ask an Economist. Read more about inflation at IMF Blog and F&D. Send your questions to AskanEconomist@IMF.org and we’ll answer them in our next episode.    High-speed roads that can carry goods to customers in far-off markets raise productivity, reduce poverty and are an important driver of economic development. IMF staff have developed a novel measure using data from Google Maps to determine the average time it takes to drive between large cities across 162 countries. As the Chart of the Week by Mariano Moszoro and Mauricio Soto shows, the world’s fastest roads are found in richer economies including the United States, Portugal, Saudi Arabia and Canada. The slowest roads are found in the poorest countries—another obstacle to inclusive growth. An interactive version of the map can be viewed here. WEEKLY ROUND-UP 01. Inflation in Central, Eastern Europe Central bankers in the “three seas” countries of central and eastern Europe must tighten monetary policy to rein in inflation even though it implies some loss of economic output, IMF Deputy Managing Director Kenji Okamura said in a speech on June 10. Speaking at a conference hosted by the National Bank of Poland, Okamura said that central banks cannot do much about the supply shocks that are driving inflation, but nor can they simply wait for these shocks to somehow ease over time. “So even though tightening always implies some output losses, in order to combat inflation, monetary policymakers have little option but to tighten,” he said. “Timely and clear communication will be essential to reduce the harms of this tradeoff.” 02. Public Banks and Financial Risks Public banks remain important across the world despite waves of privatization, IMF Deputy Managing Director Bo Li told a panel discussion on Tuesday. “During the Covid-19 pandemic many governments relied on public banks to…boost credit to households and firms in the face of retrenchment by private banks,” he said. The discussion, featuring New York University’s Viral Acharya, a former Deputy Governor at the Reserve Bank of India, Jonathan Fiechter of the National Academy of Public Administration, Alexandre Tombini, Chief Representative for the Americas at the Bank for International Settlements and former Governor of the Central Bank of Brazil, and Tarisa Watanagase, former Governor of the Bank of Thailand, launched a IMF staff paper that says countries must have carefully designed prudential policies to counter financial risks from publicly owned banks. 03. Carbon Prices in Asia Only a fraction of the revenues raised by a carbon tax would shield Asia and the Pacific’s most vulnerable households from the impact of higher energy prices, the IMF’s Cristian Alonso and Joey Kilpatrick say in a new staff paper. In several countries, the resources raised by a carbon tax would make more than half of the households better off after the reform. In India, for instance, it would cost only 23 percent of the resources raised by a carbon tax to provide a cash transfer or “carbon dividend” to all households. “Incorporating these compensation schemes as part of the carbon tax design is not only feasible and affordable but could just as importantly foster public and political support.” 04. Unemployment in the United States In a new staff paper, the IMF’s Andrew Fieldhouse, Sean Howard, Christoffer Koch, and David Munro present a newly constructed monthly unemployment dataset for U.S. states beginning in January 1947, stretching almost three decades farther back than alternative measures. The authors use this claims-based series to show that faster recoveries are associated with greater diversity in the recovery rate of unemployment and slower recoveries tend to be more uniformly paced across states. The pace of unemployment recoveries is also strongly correlated with manufacturing’s share of state output. “Our dataset would allow for more comprehensive analysis of the evolving network of economic integration across U.S. states…over a longer time horizon than has typically been studied.” 05. Summer School Gita Gopinath, the IMF’s First Deputy Managing Director, has launched the 2022 edition of the Fund’s Summer School. Initiated in 2021, the school is a series of half-hour courses livestreamed on YouTube over July and August. This year, we cover the macroeconomics of climate change, debt management, tax administration, and the consumer price index, among other things. Sign up. MARK YOUR CALENDAR 01. Customs Matters IMF Managing Director Kristalina Georgieva will kick off a lively discussion of how to strengthen customs administration with Fiscal Affairs Department Director Vitor Gaspar and Deputy Director Katherine Baer as well as leading trade and customs experts. Register here to watch the event, which starts at 10:30 AM ET on June 21.

Environmentally conscious design can make a major difference in the energy efficiency of digital currencies.

Dear maria, We just published a new blog—please find the full text below.  How Crypto and CBDCs Can Use Less Energy Than Existing Payment Systems (PHOTO: CLAY BANKS/UNSPLASH) By Itai Agur, Xavier Lavayssière and Germán Villegas Bauer Most of the world’s central banks have already agreed they should help fight climate change, a critical challenge that necessitates reductions in both energy consumption, which is our focus here, and the carbon emissions associated with the energy consumed. To meet these aims, it’s important to pay attention to the energy used by the payment systems that central banks regulate and oversee. Monetary authorities now have a unique opportunity to improve efficiency as the way people pay is undergoing rapid changes worldwide. Digital currencies, from crypto assets to central bank digital currencies, can play a role in the transformation that policymakers envision. With a desire to limit the energy consumption comes a need to understand what drives it. Policymakers confront researchers like us with several questions yet to be fully explored. These include how crypto assets compare with existing payment systems, what factors influence the energy use of the networks, and how new technology can make payments cleaner and greener. Choice matters News coverage of digital currencies and energy often spotlights Bitcoin, which is infamous for its reliance on raw computing power and electricity. Our new paper goes beyond these discussions by establishing the main components and technological options that determine the energy profile of digital currencies. We draw on academic and industry estimates to compare digital currencies to one another and to existing payment systems. This research is at the intersection of digital currencies and climate change, two important subjects for policymakers, and the conclusions are especially pertinent for many central banks planning new digital currencies while also considering their environmental impact. Our research shows how the technological design choices for digital currencies make a major difference for their energy consumption. Depending on the specific details of how they are configured, CBDCs and some kinds of crypto assets can be more energy efficient than much of the current payment landscape, including credit and debit cards. Credit and debit cards are important for comparison because they account for about three-quarters of cashless transactions, according to the most recent Red Book statistics from the Bank for International Settlements. Deeper examination Our conclusions about energy efficiency stem from a detailed look at the new technologies that are shaking up how global consumers make purchases and send money. Digital currencies often rely on distributed ledgers for validating and recording transactions. In those cases, how much energy they use mainly depends on two factors: The first is how network participants agree on transaction histories. Some crypto assets like Bitcoin use a proof-of-work consensus mechanism that needs substantial calculation power, and energy, to obtain the right to update the transaction trail. Other crypto types use different approaches for their ledger updates that don’t require as much computing muscle. The second is access to distributed-ledger systems. Some of these are permissionless, allowing anyone to join and validate transactions. Entry to others requires permission from a central authority, which offers greater control over key aspects of energy consumption such as the number of network participants, their geographic location, and software updates. Our study of digital currencies’ energy use relies on academic and industry estimates for different processing technologies. The research shows that proof-of-work crypto uses vastly more energy than credit cards. Replacing proof-of-work with other consensus mechanisms is a first green leap for crypto, and using permissioned systems is a second. Together, these advances put crypto’s energy consumption well below that of credit cards. But there’s more to payment systems than processing technologies. Total energy use varies by technology, payment-chain size, and other additional features. Considerations like these resonate with central banks considering digital currencies. Many CBDC projects build on energy efficient distributed-ledger systems under which only permissioned institutions like commercial banks can join and validate without proof-of-work. Other options that don’t feature distributed ledgers are also being considered, and some of these are seen as promising from an energy-consumption standpoint. That means CBDCs have the potential to reduce the power needs for digital payments, and even be more energy efficient than the credit card networks now widely used. CBDCs are still in their early days, and it’s hard to know how far and how fast they might go, but it is clear that central banks will adopt new technologies that impact power use. Their energy-saving potential will depend on the use associated with other design features that may be added for compliance, to aid security and integrity, or to facilitate universal access. For example, some central banks are considering whether CBDCs should be accessible through physical cards, like credit cards. Card payments use more energy than those with digital wallets, which is how most crypto transactions are made. But cards can help adoption and inclusion, particularly when digital literacy or mobile network connectivity are a concern. As payment systems increasingly use distributed ledgers, there’s a clear case for those more energy-efficient options that are permissioned and don’t rely on proof-of-work mechanisms. And though the debate on the future of money is still in its early stages too, power use is just one among many considerations. Policymakers should weigh energy needs along with other benefits and risks when they design CBDCs or consider the regulatory environment for crypto. —This blog also reflects research contributions by Jose Deodoro, Soledad Martinez Peria, Damiano Sandri and Hervé Tourpe. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org

Egypt is among the countries most impacted by climate change. The government is taking action.

Egypt Egypt Adapts to Climate Change Rising sea levels threaten Egypt’s port city of Alexandria. Photo: krechet/iStock Higher temperatures and extreme weather have inflicted crippling losses in countries across the Middle East and Central Asia. Egypt is highly vulnerable to water scarcity, droughts, rising sea levels, and other adverse impacts of climate change. Without adaptation, agriculture, tourism, and coastal communities will be at particular risk. To support the move to a greener, climate-resilient economy, the Egyptian government recently launched the National Climate Change Strategy. The private sector is scaling up adaptation efforts and will play a key role in this transition. To develop the green finance market, Egypt has also issued the region’s first sovereign green bond to finance projects in clean transportation and sustainable water management. As host of COP27, Egypt is also coordinating global action on climate adaptation, mitigation, and finance. Watch the video here.   RELATED LINKS Without Adaptation, Middle East and Central Asia Face Crippling Climate Losses Feeling the Heat: Adapting to Climate Change in the Middle East and Central Asia