IMF update

 

Dear maria, In today's edition, we focus on risks to global growth and challenges facing the poor, including in the Middle East and North Africa, the evolution of global financial markets, the dollar's dominance, Ethiopia's economy, Somalia's statistics, central bank digital currencies, Covid's trade spillovers, sovereign debt, and much more. Middle East & North Africa Slower Global Growth Adds to Challenges Why Countries Must Cooperate on Carbon Prices (PHOTO: IMF PHOTO/JAKE LYELL) An escalation of the war in Ukraine and sanctions against Russia mean that global economic growth is likely to be lower than previously expected and are adding to the challenges facing the world’s poor, the IMF’s First Deputy Managing Director Gita Gopinath said in a speech on Thursday. Inflation has broadened beyond energy and food commodity prices in many economies, while strict shutdowns in China are weighing on growth and risk causing further supply-chain disruptions, Gopinath told a conference in the Moroccan capital of Rabat organized by the Bank Al-Maghrib, the IMF, and the IMF Economic Review. 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. An updated outlook will be released in July. “Global growth is likely to be lower than expected, while inflation is higher. We must also not forget that poverty and inequality are increasing,” Gopinath said. --Extreme Poverty: Across the world, 75 million more people are estimated to have been pushed into extreme poverty by the pandemic in 2021. High food prices have added to the challenges facing the poor, especially in the Middle East and Africa, where food accounts for 40 percent of consumers’ spending. A worsening of the situation in Ukraine would heighten human and economic costs, while higher-than-expected inflation could inflame social tensions, Gopinath told the conference, which is part of the Fund’s preparations for the 2023 Annual Meetings in the Moroccan city of Marrakesh. “All of these challenges have immediate consequences.  But they could also leave long-term scars that drag down growth for years to come,” Gopinath said. “The actions we take now could make all the difference for the future.” Watch IMF Live for highlights from the conference, including a panel on the economic effects of the war and sanctions moderated by the IMF’s chief economist Pierre-Olivier Gourinchas.   Financial Markets Monitoring Financial Stability (IMAGE: IMF/ROSE KOUWENHOVEN) The IMF’s Global Financial Stability Report is 20 years old, and the Fund’s financial stability monitoring must keep evolving, the IMF’s Tobias Adrian, Fabio Natalucci and Mahvash S. Qureshi say in a new blog. This semiannual publication by the Monetary and Capital Markets Department has since evolved through years of seismic shifts in the global economic and financial landscape into one of our key multilateral surveillance tools. Though we have made progress, the authors say, the continuous evolution in global financial markets—not least because of the dizzying pace of technological innovation—is always introducing new vulnerabilities and risks that demand constant vigilance. “More than ever, rapid technological change as well as frequent and varied shocks make our surveillance crucial for safeguarding international monetary and financial stability in order to promote growth and inclusion,” they say. “And it’s increasingly clear that, to do so, we must constantly adapt and sharpen our tools for assessing risk to better scan the global financial landscape and strengthen its resilience.” Find all previous GFSRs for assessments of the global financial system and emerging market financing here.   F&D Dollar's Enduring Preeminence (CREDIT: AISIAN13 FROM GETTY IMAGES) “The international monetary system may be at the threshold of significant change from a combination of economic, geopolitical, and technological forces. But it is an open question whether these forces will knock the US dollar off its pedestal as the dominant international currency, which it has been for much of the post–World War II period,” writes Eswar Prasad in the June issue of Finance and Development Magazine. How these forces play out will have major ramifications for the evolution of the world order, because financial power is a key element of soft power, Prasad continues. He explores the changes underway that could affect dollar supremacy and draws wider conclusions for the global order. Read the full article and listen to a podcast on the geopolitics of dollar dominance featuring the IMF's chief economist Pierre-Olivier Gourinchas   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.  NEW: F&D is now also available in HTML format in languages other than English: Arabic, Chinese, French, Japanese, Russian, and Spanish. Want to get a print copy delivered to your home or office? Click here to subscribe. (PHOTO: UNSPLASH/LESLY DERKSEN)   Ethiopia's Economy The Ethiopian economy has been subject to multiple shocks over the past two and a half years, including the COVID-19 pandemic, drought, conflict in the north of Ethiopia, and the war in Ukraine, says IMF mission chief Sonali Jain-Chandra. “Delivery of a debt treatment for Ethiopia under the G20 Common Framework, as part of a package supported by an IMF program, is essential to reduce debt vulnerabilities. The authorities reiterated their interest in an IMF program to support their reform agenda.” [new photo] (PHOTO: UNSPLASH/KHALID ABDALLA)   Somalia's Essential Statistics In a major milestone for the country’s statistical development, Somalia has joined the IMF Data Standards Initiatives and published essential macro-economic and financial data through a National Summary Data Page. The dissemination system promotes statistical development and the data page is a national portal that serves as a one-stop publication for essential statistics. (PHOTO: ISTOCK/KRECHET)   Egypt's Rising Seas Higher temperatures and extreme weather have inflicted crippling losses in countries across the Middle East. Egypt is highly vulnerable to water scarcity and rising sea levels. To support the move to a greener, climate-resilient economy, the government recently launched a National Climate Change Strategy. Watch this Country Focus video to learn more about it. (CREDIT: IMF/ROSE KOUWENHOVEN)   Tackling Corruption Countries in sub-Saharan Africa have made important strides in tackling corruption, with some outperforming emerging market and even advanced economies. In a Country Focus interview, the IMF’s Deputy Managing Director Antoinette Sayeh talks about the importance of transparency and public integrity for the region’s development.   In sub-Saharan Africa, several central banks are exploring a digital currency, following Nigeria’s October introduction of e-Naira. CBDCs are digital versions of cash that are more secure and less volatile than crypto assets because they are issued and regulated by central banks. As the Chart of the Week by the IMF’s Habtamu Fuje, Saad Quayyum and Franck Ouattarashows, South Africa and Ghana are running pilots while other countries are in the research phase. WEEKLY ROUND-UP 01. COVID-19 Trade Spillovers Bilateral product-level data covering about 95 percent of global goods trade reveals sizable negative international spillovers to trade from supply disruptions due to domestic lockdowns, say the IMF’s Shekhar Aiyar, Davide Malacrino, Adil Mohommad and Andrea F Presbitero in a new staff paper. “These international spillovers accounted for up to 60 percent of the observed decline in trade in the early phase of the pandemic, but their effect was shortlived, concentrated among goods produced in key global value chains, and mitigated by the availability of remote working and the size of the fiscal response to the pandemic.” 02. Income Convergence, Divergence In a new staff paper, the IMF’s Mariya Brussevich, Shihui Liu and Chris Papageorgiou document per-capita income divergence during the period of post-shock recovery, with countries at the bottom of the income distribution falling significantly behind. Findings suggest that higher COVID-19 vaccination rates and targeted virus containment measures are associated with faster recovery in per-capita incomes in the medium term. Evidence on the effectiveness of economic support policies for reducing cross-country income inequality, including fiscal and monetary policies, is mixed especially in the case of developing countries. 03. Sovereign Debt Debt contracts and the sovereign debt market, sovereign debt restructurings, and the empirical and theoretical literatures on the costs and causes of defaults are discussed in a new staff paper by Leonardo Martinez, Francisco Roch, Francisco Roldán, and Jeromin Zettelmeyer. They describe the adverse impact of sovereign default risk on the issuing countries and what explains this impact. The survey concludes with a discussion of policy options to reduce sovereign risk, including fiscal frameworks that act as commitment devices, state-contingent debt, and independent and credible monetary policy. 04. Global Bimetallism to Gold Standard In the early 1870s, the global monetary system transitioned from bimetallism—a regime in which gold and silver currencies were tied at quasi-fixed exchange ratios—to the gold standard that was characterized by the use of gold as the main currency metal by the largest and most advanced economies. The transition occurred against the backdrop of both large supply shifts in global bullion markets in the 1850s and 60s and momentous political events, such as the Franco-Prussian war of 1870/71 and the subsequent foundation of the German empire. The causes for the transition have long been a matter of intense debate, as Johannes Wiegand investigates in a new staff paper. 05. Catastrophe Policy Space What policy space does a country have for a short-term response to a catastrophic event? To quantify this space, José Ferrer and Alexei P Kireyev propose a policy space index in a new staff paper. The index combines a quantitative, albeit relatively limited and narrow, fiscal space concept with the indicators of nominal monetary space and reserve space. Each nominal policy space indicator is then adjusted for individual country’s institutional features, such as the status of its currency, income group, access to capital markets, debt distress level, and the exchange rate regime. The final policy space index is derived as a composite of the three nominal policy space indicators, each adjusted for five institutional features. Nick Owen 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.

Countries in the region have made important strides in tackling corruption, with some outperforming even advanced economies

Sub-Saharan Africa Sub-Saharan Africa Reveals Lessons for Governance Photo: IMF/Rose Kouwenhoven By the IMF African Department Countries in the region have made important strides in tackling corruption, with some outperforming emerging market and even advanced economies. A new book by the IMF, Good Governance in Sub-Saharan Africa, features three countries—Botswana, Rwanda and Seychelles—that are leading in the effort to improve governance. A panel discussion moderated by Deputy Managing Director Antoinette Sayeh, was organized as part of the virtual launch. In an interview with Country Focus, Ms. Sayeh, who was in Botswana last week for a high-level conference on the promotion of good governance, and the editors of the book, Monique Newiak, Alex Segura-Ubiergo and Abdoul Aziz Wane, talk about their findings and the importance of transparency and public integrity for the region’s development. What are the key elements of good governance? Antoinette Sayeh: The most successful countries usually have five key elements in place. First, a high level of political commitment to good governance and transparency. You can see that in several ways: by how a country’s budget is formulated and presented; by the degree of independence of the central bank; and whether there is a commitment to declaring the assets of key public officials and publishing audits.    Second, respect for the rule of law and property rights. When foreign investors invest in a country, they do so, knowing that the government will respect the contracts, and property rights will be enforced. The third element is ensuring efficiency, transparency, and public oversight of investments. This is especially crucial given the need to scale up public investment in infrastructure in Africa. The book points to studies that show that when there is not enough government oversight of public procurement processes, project costs tend to be higher. Fourth, access to information, which I’ll let Alex talk a little more about. And finally, innovation and technology, which we believe can play a big role in helping governments deliver on these priorities.  Why does good governance matter for the IMF? Antoinette Sayeh: Poor governance and corruption have a negative impact on economic growth. They distort public spending and undermine domestic revenue mobilization – an estimated tax revenue losses globally of US$1 trillion. Which is why the Fund has been working with countries on this issue for over 20 years. And now, at a time when the world faces multiple crises—the COVID-19 pandemic, the war in Ukraine, and the ongoing challenges of climate change—the need for good governance has become more urgent. It’s about more than wasting money; good governance enables growth. Our efforts focus on reducing vulnerabilities to corruption by strengthening governance in six core state functions: central bank governance, financial sector governance, fiscal governance, market regulation, rule of law, and anti-money laundering. In addition to the policy advice we offer, we work closely with countries and development partners to develop and implement comprehensive governance reform strategies. Much of this effort is coordinated by the IMF’s network of 17 capacity development centers around the world, six of which are in Africa. How can countries in the region reap the benefits? Alex Segura-Ubiergo: To pick up on the point Antoinette raised, first, by making more information available to the public. Access to information facilitates accountability—a key precondition for good governance. When governments produce, gather, and disseminate information, decisions are more transparent, citizens are better informed, and institutions and civil society organizations can hold governments to account. Second, by ensuring that the tax burden is distributed equitably, and public spending is focused on achieving faster progress toward meeting the sustainable development goals: reducing poverty, increasing access to health and education, and protecting the environment. When citizens perceive that governments are using public resources well, they are more likely to view their tax obligations as legitimate. Third, by having political leaders that set an example with their actions: publishing their assets and creating incentives to fight corruption with the assistance of an anti-corruption agency and the court system. Together, these create a governance dividend: higher and more inclusive growth through stronger and more transparent institutions that increase accountability. Are any countries in the region using digitalization to improve the quality of public institutions? Abdoul Aziz Wane: E-government services—a proxy for digitalization and the use of big data—are expanding in Sub-Saharan Africa, though the region still lags others. The trend accelerated during the COVID-19 pandemic, as digital services played a critical role in policy responses to save lives and livelihoods. Examples include: (i) South Africa’s Western Cape online platform for remote teaching; (ii) online applications launched in Sierra Leone to improve the government’s ability to track quarantine periods and other services like food delivery; (iii) robots and drones deployed in Rwanda to reduce health workers’ exposure to potentially positive COVID-19 patients, and (iv) South Africa’s chatbots to reduce the spread of false information about the virus. More generally, digitalization can have a crucial impact on institutions. The book documents how strongly institutional quality and e-government are interrelated and how digitalization can reduce the perception of corruption. Digital reforms to enhance institutional quality can make a difference but it is important to sequence them, including by prioritizing education, to ensure people benefit. The pandemic highlighted the need for greater transparency and oversight in how emergency funds are spent.  What practices were put in place in Sub-Saharan Africa that other countries can learn from? Monique Newiak: Generally, we’ve seen that additional controls are needed to ensure money is well spent in times of crises. More specifically: Public Financial Management (PFM) processes need to be clearly defined: In countries where such funds are not guided by the regular PFM process, it is essential to develop and publish standard operating procedures for the whole process, from proposal submissions to reporting requirements as well as well-defined roles and responsibilities. Ghana is a good example of a country that included elements of sound PFM into the operations of their COVID-19 fund. The agility of checks and balances is critical: Rapidly identifying issues when they occur can help fix issues as the emergency response develops. Supreme audit institutions (SAIs) have an important role to play in this regard as they can produce “real-time” audits. The reports published by SAIs in Kenya, Sierra Leone and South Africa were good examples of this early in the crisis. RELATED LINKS Good Governance in Sub-Saharan Africa High-Level Conference on the Promotion of Good Governance and Fight Against Corruption Regional Economic Outlook

The IMF’s GFSR was a step toward a more comprehensive assessment of risks in financial markets and cross-border capital flows.

View as a webpage Dear maria, We just published a new blog—please find the full text below.  From 1980s Debt Crisis to Crypto Era, Financial Stability Monitoring is Always Evolving (IMAGE: IMF/ROSE KOUWENHOVEN) By Tobias Adrian, Fabio Natalucci and Mahvash S. Qureshi Twenty years ago, the IMF released its inaugural Global Financial Stability Report to strengthen surveillance of financial markets after a series of crises in emerging market economies and the dot-com bust. This semiannual publication by the Monetary and Capital Markets Department has since evolved through years of seismic shifts in the global economic and financial landscape into one of our key multilateral surveillance tools. Along with the World Economic Outlook and the Fiscal Monitor, this flagship report aims to foster international monetary and financial stability. The beginning Monitoring the health and outlook of the global economy and member countries is the bedrock of the Fund’s work. This surveillance role, outlined in amendments to our Articles of Agreement first adopted at the 1944 Bretton Woods Conference, charges us with overseeing and safeguarding the international monetary system. In the early years, surveillance focused on the macroeconomic and exchange-rate policies of member nations, but growth in international banking in the early 1970s highlighted a need to better track global capital markets and assess financial-stability implications. Consequently, the Fund started discussions with monetary authorities in major financial centers and in 1974 initiated internal reports on market developments and prospects. Starting in 1980, the report known as International Capital Markets became our main vehicle to monitor conditions in financial markets, warn of risks, and analyze disruptions like Latin America’s debt crisis of the 1980s or Europe’s exchange-rate mechanism crisis in the early 1990s. But that era’s rapid expansion and integration of global capital markets, and the ensuing financial crises in Asia and several other emerging markets, highlighted the need to better assess systemic risks. The introduction of the Global Financial Stability Report marked an important step toward a more comprehensive and frequent assessment of cross-border capital flows and financial market risks. In his forward to the first GFSR, the then-Managing Director Horst Köhler noted how the report had its roots in crisis. “The rapid expansion of financial markets has underlined the importance of a constant evaluation of the private sector capital flows that are the engine of world economic growth, but sometimes at the core of crisis developments as well,” he wrote. “Opportunities offered by the international capital markets for enhancing global prosperity must be balanced by a commitment to prevent debilitating financial crises.” Turning point The GFSR has since focused on identifying cyclical and structural vulnerabilities in the bank and nonbank sectors of advanced and emerging market economies, the risks they pose, and the policy options to mitigate these risks. Vulnerabilities such as leverage tend to build up when financial conditions are easy and investor risk appetite is strong. And in times like that, our stability reports place more emphasis on potential threats we see building. One of the most pivotal moments for the GFSR arrived in 2007, when contagion from the US housing slump shook the world’s economies and markets. In a tightly integrated world, the global financial crisis underscored just how critical it is to better connect the dots between institutions, sectors, and countries. Since then, the Fund has increased its efforts to analyze and understand interlinkages and systemic risks, cross-border interconnectedness and spillovers, and the role of macroprudential policies in strengthening financial system resilience. In recent years, we have adopted a conceptual framework for more systematic assessment and monitoring of financial stability risks. It centers around vulnerabilities that amplify negative shocks, creating an adverse feedback loop between falling asset prices and tightening financial conditions, deleveraging by financial firms, and weakening economic activity. The empirical implementation of the framework relies on two tools: a broad set of key vulnerability indicators for the financial and real sectors (such as debt-servicing capacity and the ratio of liquid assets to short-term liabilities) that can serve as intermediate targets for macroprudential policies (such as capital buffers and liquidity coverage ratios); and an aggregate measure of how financial stability risks could affect expected global economic activity, which we call “growth at risk.” These tools are complementary for monitoring and policymaking purposes, as a granular analysis of specific exposures provides the necessary nuance and depth to the summary measure of threats to economic growth. The GFSR has also actively called for an overhaul of the international regulatory landscape to address the gaps revealed by the global financial crisis. In addition, it has backed strengthening oversight of nonbank financial institutions, which have taken on a bigger role in intermediation since the crisis and could make the system more vulnerable. Constant vigilance Though we have made progress, the continuous evolution in global financial markets—not least because of the dizzying pace of technological innovation—is always introducing new vulnerabilities and risks that demand constant vigilance. For instance, the advent of fast and highly sophisticated computer technology has facilitated the growth of high-frequency trading, which can improve market efficiency but can also be a source of market instability. Other emerging technologies such as artificial intelligence and distributed ledger are revolutionizing financial markets through fintech and crypto assets that carry opportunities but also fundamental risks that the GFSR is bringing to the fore. Climate change poses another stability threat that we are increasingly analyzing, along with the role that sustainable finance and the private sector can play in fostering a green transition. And now, as our recent reports have highlighted, the enduring pandemic and war in Ukraine have further compounded financial risks by exacerbating pre-existing fragilities, contributing to the greatest inflationary pressures in decades, and confronting international capital markets with greater risk of fragmentation. More than ever, rapid technological change as well as frequent and varied shocks make our surveillance crucial for safeguarding international monetary and financial stability in order to promote growth and inclusion. And it’s increasingly clear that, to do so, we must constantly adapt and sharpen our tools for assessing risk to better scan the global financial landscape and strengthen its resilience.   We Want To Hear From You! Click here for a 3-question survey on IMFBlog. 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!