IMF update

 

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

Dear maria, In today's edition, we discuss how authorities can protect the vulnerable from rising food and fuel prices, the economic benefits of scraping coal, how the world must rewire multilateralism, fragility and conflict, laws that hold women back, North Africa's shadow economy, supply chains, Argentina, Montenegro, economies seen from outer space, and much more. Food and Fuel Prices Assistance Should Focus on Most Vulnerable Why Countries Must Cooperate on Carbon Prices (PHOTO: FOOD AND AGRICULTURE ORGANIZATION/GIUSEPPE BIZZARRI) Countries should allow rises in international prices for food and fuel to pass through to domestic prices while protecting households that are most in need, the IMF’s David Amaglobeli, Emine Hanedar, Gee Hee Hong, and Céline Thévenot say in a new blog. Russia’s invasion of Ukraine followed last year’s steep gains in commodity markets, pushing food and energy prices to historic highs. Prices for wheat, a staple in which Russia and Ukraine together account for about a quarter of global exports, are up 54 percent from a year earlier. People in low-income countries are most vulnerable to higher prices because food accounts for 44 percent of consumption on average, compared with 28 percent in emerging market economies and 16 percent in advanced economies. --Different Countries, Different Responses: Not all countries are able to follow the same path, the authors say. Where subsidies exist, the pacing of price adjustments and the extent to which social safety nets are used will differ from country to country . A new IMF staff paper provides policy advice for countries depending on individual country circumstances, such as the strength of the social safety net, the level of existing food and fuel subsidies, and the availability of fiscal space. Over the next two to three years, governments should focus on investing in social safety nets and reforming existing subsidies, the authors say. “Such overhauls will help countries improve resilience and promote more productive spending to support inclusive growth.” Climate Change Replacing Coal Could Pay For Itself (PHOTO: IMF PHOTO/LISA MARIE DAVID) International negotiators can’t agree on how to phase out coal, in part because of opposition to carbon taxes, and now even countries that had been able to abandon the fuel are reversing that progress as the war in Ukraine raises energy prices. The most common concern about scrapping coal is that replacing it with renewable energy would be too expensive, but the economic benefits would far outweigh the costs, the IMF’s Tobias Adrian, Patrick Bolton and Alissa M. Kleinnijenhuis write in a new blog. --Great Carbon Arbitrage: The authors analyze the “great carbon arbitrage”, as they call it, and calculate the cost of replacing coal with renewables, as well as the social benefits of this important transition. “The benefits from ending coal use come from avoiding damage from climate change and harm to people’s health,” they say, highlighting the findings of a recent staff paper. “Our estimate is that by doing so the world would yield a net gain of nearly $78 trillion through the end of this century. That’s around four-fifths of global gross domestic product now, and would be equivalent to about 1.2 percent of annual global economic output during the period.” F&D A Perfect Long Storm (CREDIT: PETER REYNOLDS) The pandemic, war in Ukraine, the threat to food security, and the resurgence of global poverty. Heatwaves, droughts, and other extreme weather events. These are not random shocks. Nor are they a perfect storm in the conventional sense, a one-off conjuncture of bad events. We face instead a confluence of lasting structural insecurities—geopolitical, economic, and existential—each reinforcing the other. In an article for the June issue of Finance & Development Magazine, Tharman Shanmugaratnam, senior minister in Singapore, says that we have entered a perfect long storm and must rewire multilateralism. “Our overriding priority must be to accommodate a multipolar world without becoming more polarized,” he says. “A more polarized and fragmented world will ultimately weaken all nations, including the largest ones, and make it difficult if not impossible to meet the interests that all of humanity shares: in a safe, sustainable, and prosperous world, inclusive and equitable for all.” Read the full article   Out Now: F&D June Issue Geo-Economic Puzzle: Policymaking in a More Fragmented World   Our June issue focuses on the economic dimensions of the current geopolitical situation, including the war in Ukraine, refugees, and food prices. Authors include 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.  (PHOTO: ISTOCK/BENEDEK)   Fragility and Conflict Fragility and conflict have worsened in recent years, causing international spillovers that reach countries far and wide, the IMF’s chief economist Pierre-Olivier Gourinchas said on Monday. “The rise in global prices for food, fuel and fertilizer has a cascading effect on global growth and inflation prospects not to mention the potential impact on social stability in lower income countries,” he told a two-day conference to launch a new publication on Macroeconomic Policy in Fragile States. Watch all the sessions here. (PHOTO: ISTOCK/GUENTERGUNI)   Laws That Hold Women Back When women begin to participate more in the economy, good things happen. There’s more growth, less inequality, and greater financial stability. So why is women’s labor force participation still so low in so many countries? Katharine Christopherson is an Assistant General Counsel in the IMF Legal Department and coauthor of some recent research that looks at the legal impediments to women’s economic activity across the globe. In a new podcast, she discusses outdated laws that hold women back. (PHOTO: IMF PHOTO/RYAN RAYBURN)   North Africa's Shadow Economy The most precious positions in the shadow economy are often held by women, IMF Deputy Director Antionette Sayeh told a conference in Morocco’s capital Rabat on Thursday. The event, which also featured Nadia Fettah, Morocco's economy minister, and Hala El-Said, Egypt's planning minister, discussed the findings of an IMF staff paper on informality in North Africa. About two-thirds of workers in the region operate without any formal arrangement, and about 30 percent of GDP is produced by informal workers and firms. (PHOTO: IMF)   Supply Chains Supply chains should operate seamlessly in the background of the global economy, but we all notice when they break. In a new Back to Basics video, the IMF’s Alex Muller explains how these global assembly have evolved and the pressure they have faced in recent years. Read the full article on the stretch of supply chains in the latest issue of F&D Magazine. WEEKLY ROUND-UP 01. Global Growth The IMF is likely to revise down its projections for global growth when it releases the next update to its outlook in July, the Fund’s Director of Communications Gerry Rice told a press briefing on Thursday. “We're seeing this confluence of crises,” he said. “We see the global economy headed into a growth slowdown...A number countries may be looking at recession.” In World Economic Outlook reports published in January and April, the IMF downgraded its forecasts for global growth in 2022 to 4.1 percent and then 3.6 percent after an estimated expansion of 6.1 percent in 2021. Watch the full briefing which also covered Managing Director Kristalina Georgieva’s upcoming visit to Barbados, Germany’s EUR1 billion contribution to Ukraine’s administered account, Sri Lanka, Argentina, Lebanon, Zambia, and more. 02. Argentina IMF staff and the Argentine authorities have reached agreement on an updated macroeconomic framework and associated policies necessary to complete the first review under Argentina’s 30-month Extended Fund Facility, Julie Kozack, Deputy Director of the Western Hemisphere Department, said in a statement on Wednesday. The staff-level agreement is subject to approval by the IMF Executive Board. 03. Economies From Outer Space Satellite images of Earth at night—often referred to as “night lights”—can be used as a proxy for economic activity. In a new staff paper, the IMF’s Robert Beyer, Yingyao Hu, and Jiaxiong Yao present a framework to estimate the elasticity between night lights and economic activity that minimizes measurement errors. During the pandemic, regions with higher levels of development and population density experienced larger declines in economic activity, the authors conclude. Read Yao’s earlier article from the September 2019 issue of Finance & Developing Magazine which explains how satellite images of the earth at night reveal the pace of economic growth. 04. Fiscal Decentralization Does fiscal decentralization improve a nation’s education and health? The IMF’s Ryota Nakatani, Qianqian Zhang, and Isaura Garcia Valdes answer this question in a new staff paper. Countries can only reap the benefits of decentralization when the quality of their governance arrangements exceeds a certain threshold, the authors conclude. “Our results underscore the importance of strong institutional arrangements and oversight mechanisms being in place prior to fiscal decentralization.” 05. Montenegro Public investment is expected to play a pivotal part in Montenegro's post-pandemic economic recovery. A technical assistance report by IMF staff says the completion of the first phase of the Bar-Boljare Highway should relieve pressure on public resources at a time when government debt of more than 100 percent of GDP is squeezing fiscal space. An improved management framework could maximize the impact of public investment on economic growth, the report adds. 06. Krishna Srinivasan Krishna Srinivasan will succeed Changyong Rhee as Director of the IMF’s Asia and Pacific Department, Managing Director Kristalina Georgieva said on Wednesday. Srinivasan, an Indian national, has almost three decades of Fund experience, starting in the Economist Program in 1994. He is currently a Deputy Director in the Asia and Pacific Department. Rhee’s retirement from the Fund was announced in March. 07. Data Gaps The IMF and Financial Stability Board (FSB) published a report on Thursday to mark the completion of the second phase of the G20 Data Gaps Initiative (DGI-2). The reports says significant progress has been made closing data gaps identified during the global financial crisis of 2007-08 and also sets out priorities for a new initiative to address gaps relating to emerging policy needs, including climate change, fintech, and financial inclusion. Download the full report here. MARK YOUR CALENDAR 01. Governance in Africa IMF Deputy Managing Director Antoinette Sayeh, Botswana’s Minister of Finance Peggy Serame, and the African Union Commission’s Deputy Chairperson Monique Nsanzabaganwa will discuss how Africa can reap the benefits of good governance to improve growth opportunities, create jobs and reduce poverty at a conference on June 13-14. Watch the opening session at 8.00 AM CAT on June 13. 02. Public Banks Public banks remain important across the world. Governments may create them to overcome market failure or to address weak private banks. In times of stress, public banks can play a countercyclical role.

Introducing Fintech Forward, the IMF's newest podcast series that zeros in on all things fintech.

Tobias Adrian on the Future of Finance June 9, 2022 Welcome to Fintech Forward, a new IMF podcast series with a focus on financial technology. Fintech has grown exponentially in recent years and prompted a paradigm shift in virtually all areas of finance, with significant implications for financial stability. Fintech Forward, hosted by IMF economist Tara Iyer, will draw from the expertise of the IMF Monetary and Capital Markets Department to better understand the impact of emerging technologies on financial systems and local economies around the world. In this 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.  Tobias Adrian is the Financial Counsellor and Director of the IMF's Monetary and Capital Markets Department, and Tara Iyer is an economist in the Global Financial Stability Analysis Division of the Monetary and Capital Markets 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 world may gain an estimated $78 trillion over coming decades by making this energy transition.

Dear maria, We just published a new blog—please find the full text below.  How Replacing Coal With Renewable Energy Could Pay For Itself (PHOTO: IMF PHOTO/LISA MARIE DAVID) By Tobias Adrian, Patrick Bolton and Alissa M. Kleinnijenhuis International negotiators can’t agree on how to phase out coal, in part because of opposition to carbon taxes, and now even countries that had been able to abandon the fuel are reversing that progress as the war in Ukraine raises energy prices. The most common concern about scrapping coal is that replacing it with renewable energy would be too expensive, but we show in new research that the economic benefits would far outweigh the costs. We analyze this great carbon arbitrage, as we call it, in a recent working paper that calculates the cost of replacing coal with renewables, as well as the social benefits of this important transition. The benefits from ending coal use come from avoiding damage from climate change and harm to people’s health. Our estimate is that by doing so the world would yield a net gain of nearly $78 trillion through the end of this century. That’s around four-fifths of global gross domestic product now, and would be equivalent to about 1.2 percent of annual global economic output during the period. It’s sound economic logic to pay for the replacement of coal with renewables to reap a net social gain measuring in the tens of trillions of dollars. To determine both the size of the avoided emissions, as well as any potential losses from their prevention, we use a detailed dataset compiled by Asset Resolution on companies’ historical and projected global coal production based on the aggregation of production at the plant level. The cost estimate for adopting renewable sources includes capital spending for new energy generation capacity equal to what’s lost with coal, plus compensation to coal companies for lost earnings when they are shut down. The cost estimate does not include compensation for affected workers, but this is likely to be small relative to the overall net gains from the transition. Additional compensation to make the switch to renewables feasible could be offered as long as the social benefits of phasing out coal exceed the more comprehensive set of costs. Carbon price We calculate the value of doing so by estimating the reduction in emissions from phasing out coal, and by applying a carbon price to those discharges. This in turn lets us estimate the economic gain from the transition. The difference between the value of the social benefits versus costs of replacement and compensation for missed coal revenues forms our baseline estimate of world’s net gain from finally ending our reliance on the fuel. While our conservative estimate comes with an unavoidable uncertainty, given the decades-long timeframe, the enormous social benefits from what could be thought of as an inexpensive insurance policy are clear: paying a premium offers coverage for significant potential damages. So sizeable are the potential gains that world leaders should pursue a global agreement to finance the phase-out of coal as a complement to carbon pricing or equivalent measures that currently don’t fully offset the negative effects of the emissions. We have chosen all our parameters, including the social cost of carbon, in a conservative way. The carbon arbitrage could in fact be bigger still for less conservative estimates. Our research shows that ending coal use shouldn’t be seen as too costly because it provides economic benefits from reduced carbon emissions, such as avoiding physical damage to infrastructure caused by climate change. Investments in renewable energy also support economic growth and offer additional attendant benefits from innovation. Significant benefits The analysis shows that phasing out coal isn’t just urgent because it would help limit the global temperature increase to 1.5 degrees Celsius. Importantly, the economic and health benefits are significant enough that we should push harder for global agreements that unleash the potential power of capital markets. The bottom line for policy is that if compensation was built into an agreement to scrap coal, and if innovative financing packages could incentivize advanced, emerging and developing economies alike to end the fuel’s use, the net social gains from such an agreement would be enormous. To better understand just how large the payments would need to be, we broke down the costs for different regions. The present value of total financing that’s conditional on commitments to scrap coal is around $29 trillion globally, in line with what other studies estimate. That works out to between $500 billion and $2 trillion annually, with a front-loaded $3 trillion investment this decade. Of the global financing need of around $29 trillion, we estimate that 46 percent is in Asia, 18 percent in Europe, 13 percent in North America, 13 percent in Australia and New Zealand, 8 percent in Africa, and 2 percent in Latin America and the Caribbean. It’s a major funding challenge. But despite arguments that no government can afford such investments and that the private sector should steer its funding to renewable energy, most of the backing can indeed come from the private sector, once risks are reduced by sufficient public funds via so called blended finance, which could mean public funding of around 10 percent. Broadly speaking, it’s in the interest of a government to finance 10 percent of its country’s total costs to replace coal with renewables if this amount is less than its resulting social benefits in terms of lower climate damages. A back-of-the-envelope calculation suggests this holds true for nearly all countries. Considerations of fairness, a country’s fiscal position, or both, may in certain cases call for foreign contributions to finance 10 percent of a country’s costs to phase out coal. Energy transition We view global carbon taxation at the social cost of carbon as a first-best solution. Public-private partnerships to finance the replacement of coal with renewables could accelerate the green transition and complement incomplete carbon pricing by helping to achieve the Paris Agreement’s aim of making finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development. For their part, economists have two different approaches to what the profession calls internalizing negative externalities. That loosely translates as making companies pay more of the costs imposed by some harmful result of their activity, such as pollution. One, associated with Arthur C. Pigou, uses taxation or some other pricing to fully reflect the social cost of an economic activity. The other, linked to Ronald H. Coase, seeks an efficient social outcome through bargaining and contracting. Clearly, both approaches are needed for a global strategy to combat climate change. Our research concludes that, under the kind of approach Coase pioneered, it’s sound economic logic to pay for the replacement of coal with renewables to reap a net social gain measuring in the tens of trillions of dollars. Phasing out coal is not only a matter of urgency for the planet. It also makes economic sense because, as we show, the social gains far outweigh the costs of climate financing to end coal. 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!

Countries should allow international prices to pass through to domestic prices while protecting households that are most in need.

Dear maria, We just published a new blog—please find the full text below.  Response to High Food, Energy Prices Should Focus on Most Vulnerable (PHOTO: ©FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS/GIUSEPPE BIZZARRI) By David Amaglobeli, Emine Hanedar, Gee Hee Hong, and Céline Thévenot Governments confront difficult policy choices as they try to shield their people from record food prices and soaring energy costs driven higher by the war in Ukraine. Countries introduced a variety of policy measures in response to this unprecedented surge in prices of the most crucial commodities. Our survey of these announced measures by member nations shows that many governments tried to limit the rise in domestic prices as international prices increased, either by cutting taxes or providing direct price subsidies. But such support measures in turn create new pressures on budgets already strained by the pandemic.  Limiting the price pass-through is not always the best approach. According to a new IMF note, policymakers should allow high global prices to pass through to the domestic economy while protecting vulnerable households affected by the increases. That’s ultimately less costly than keeping prices artificially low for all irrespective of their ability to pay. Not all countries are able to follow the same path. Where subsidies exist, the pacing of price adjustments and the extent to which social safety nets are used will differ from country to country. That’s why our note offers nuanced policy advice for countries depending on individual country circumstances, such as the strength of the social safety net, the level of existing food and fuel subsidies, and the availability of fiscal space.  Soaring prices  Russia’s invasion of Ukraine followed last year’s steep gains in commodity markets, pushing food prices to a record and natural gas to historic highs. Prices for wheat, a staple in which Russia and Ukraine together account for about a quarter of global exports, are up 54 percent from a year earlier. With food and energy imports from these sources disrupted, countries face high costs and uncertainty about supplies.  People in low-income countries are most vulnerable to higher prices because food accounts for 44 percent of consumption on average, compared with 28 percent in emerging market economies and 16 percent in advanced economies. Oil prices have also seen steep gains, which impose different burdens on consumers. Higher-income households tend to use more fuel than lower-income households, and they are bigger users of gasoline compared with poorer households, which in many developing countries tend to consume more kerosene. Government policies to mitigate the social impact of rising prices must take these differences into account and ensure that the burden is not disproportionately felt by the poor. Policy responses The pass-through of international fuel prices to domestic consumers has been lower in the first four months of this year than last year. Moreover, the pass-through has been highest in advanced economies and lowest in oil-exporting emerging and developing countries. Fuel subsidies prevalent in many oil-exporting countries in the Middle East, North Africa, and sub-Saharan Africa are a big part of the reason why consumers in those regions may be feeling less pain at the pump, albeit at the expense of mounting fiscal costs and thus, in many cases, future cuts in other public services. More than half of the 134 countries we surveyed had announced at least one measure in response to higher energy and food prices. Emerging and developing economies announced fewer new policy measures, likely because they continue to rely on existing energy and food subsidies and limiting—or avoiding—adjustments in domestic prices.  They might also have less fiscal room to react or more difficulty in quickly scaling up their social safety nets. In advanced economies, cash and semi-cash transfers (including vouchers and utility bill discounts) were announced by the greatest number of countries. In emerging and developing economies, reductions in  consumption taxes were the most frequently announced measures. Social safety-net considerations  Although most countries are limiting international price pass-throughs, this is not advisable. Price signals are crucial to letting demand and supply adjust and inducing a demand response, in which high prices encourage people to be more energy efficient. On the other hand, subsidized prices encourage more consumption, putting further pressures on energy prices. At the same time, countries should provide temporary and targeted transfers to most vulnerable households.  A demand response can be sizable for energy, but much less so for food because people need to eat about the same amount. Still, countries should refrain from preventing domestic prices from adjusting because such measures, which result in subsidies, are not efficient in protecting the most vulnerable. They also are costly, crowd out more productive spending, and reduce producer and distributor incentives. We advise allowing price pass-through on food, provided that the vulnerable are protected and food security is not at risk. We also stress that countries should consider the strength of social safety nets when setting policies: Countries with strong social safety nets could use targeted, temporary cash transfers to lessen the impact on vulnerable people. These countries can provide targeted transfers relying on existing social programs. Countries where safety nets are not strong enough to support the most vulnerable can expand their most efficient existing programs by increasing benefit levels and coverage as needed. Digital tools can be used, for instance, to register beneficiaries and deliver benefits. Countries with existing energy or food subsidies should gradually pass international prices through to consumers while committing to eliminating subsidies in coming years. The pace of pass-through should be carefully calibrated based on the gap between retail and international prices, the available fiscal space, and the ability to implement measures to protect the vulnerable. In countries where food security is a concern and all other options have been exhausted, governments can consider other temporary steps, such as price subsidies or import taxes with clear sunset clauses for basic food staples. Governments should also try to increase food supply by supporting production, avoiding stockpiling, and using food reserves when available. Where food security is at risk, direct distribution of staple foods may be necessary. Over the next two to three years, governments should focus on investing in social safety nets and reforming existing subsidies. Such overhauls will help countries improve resilience and promote more productive spending to support inclusive growth. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org