IMF update

 

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

Dear maria, In today's edition, we spotlight the gaps in regulation of the world's capital markets, the US economy's rapid recovery and recession risks, global debt and default dangers, Africa's macroeconomic imbalances, the importance of price stability in Kazakhstan, climate learning, Argentina, Sri Lanka, and the winners and losers from job-switching in Europe. Capital Markets Regulation is Stronger but Gaps Remain Why Countries Must Cooperate on Carbon Prices (PHOTO: NIKADA/ISTOCK BY GETTY IMAGES) Capital markets are like engines that help power the global economy: they perform best with regular tune-ups. But even after historic enhancements in recent years, countries still need to keep pushing to lower risks and strengthen the tools to manage future crises, and ultimately to reduce fluctuations tied to economic cycles. In a new blog, the IMF’s Tobias Adrian and Jay Surti say that countries have made substantial progress toward implementing capital markets regulatory reform, but important gaps remain and new challenges have raised the bar. Drawing on the findings of an IMF departmental paper that assesses financial sector assessment programs in several countries over the past seven years, the authors explain what further improvements are needed amid the rapid expansion of financial services firms that don’t have banking licenses or take deposits, such as insurers, mutual funds, and exchanges, as well as the spread of new financial technologies. --Emerging Challenges: As the authors say, “Emerging challenges like new market technology and a broadening of the regulatory perimeter make it important for regulators to have a wider range of specialist expertise and to ensure that their supervisory techniques and technology keep pace." “We must keep prioritizing our push to make further progress on these key aspects of the institutional and regulatory framework underpinning capital markets.” Read more about the IMF's Financial Sector Assessment Program, which provides comprehensive and detailed analysis of the financial sectors of more than three-quarters of the Fund's member countries.   United States Path to Avoid Recession is Narrowing (PHOTO: IMF PHOTO) The US economy has staged a strong recovery but growth is set to slow this year and the path to avoiding a recession is narrowing, the IMF’s Managing Director Kristalina Georgieva told a press conference on June 24. Discussing the findings of a statement released at the end of an annual Article IV mission to the world’s largest economy, Georgieva said that the positive effects of unprecedented fiscal and monetary support during the COVID-19 crisis were clear, with economic output close to its pre-pandemic trend and 8.5 million jobs created since the end of 2020. But the rapid rebound has had unwelcome side effects, she added. “Most notably, there has been a significant acceleration in wage and price inflation. These pressures are now broad based and go well beyond increases in energy and food prices.” According to the latest IMF projections, US economic growth is set to slow to 2.9 percent this year and 1.7 percent in 2023, after an estimated expansion of 5.7 percent in 2021. “We are conscious that there is a narrowing path to avoiding a recession in the US,” Georgieva said. Watch the press conference on the Article IV consultation, in which Ilan Goldfajn, Director of the IMF's Western Hemisphere Department, takes journalists' questions, and read the concluding statement.   F&D Debt and Fiscal Commitment (CREDIT: ISTOCK:NUTHAWUT SOMSUK) A combination of higher debt and challenging economic conditions has elevated default risks, tightened borrowing constraints, and triggered a wave of debt downgrades, especially in emerging market economies. These developments have heightened the need for deleveraging plans, writes Francisco Roch, an economist in the IMF's Research Department, in an exclusive article for F&D online. Roch looks at the value of credible government commitment to future borrowing plans in the design of fiscal policy. “Overall, these results are indicative of the quantitative importance of enhancing long-term fiscal discipline to reduce sovereign risk and for the success of fiscal programs aiming at reducing debt levels.” 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.  NEW: F&D is now also available in HTML format in languages other than English: Arabic, Japanese, Russian, and Spanish. Chinese and French versions are coming soon. Want to get a print copy delivered to your home or office? Click here to subscribe. (PHOTO: IMF PHOTO)   Where Public Meets Private While international financial institutions work with policymakers to help countries navigate their way through the myriad of disruptions besetting the global economy, the private sector plays a critical role in catalyzing investment that will help bring long-term solutions. In a podcast, Alphabet and Google Chief Financial Officer Ruth Porat and IMF First Deputy Managing Director Gita Gopinath discuss the growing number of challenges facing the global economy and the opportunities where the private sector can help. (PHOTO: IMF PHOTO)   Africa's Imbalances Macroeconomic imbalances are back and this creates a very difficult situation for policymakers in the region, Abebe Aemro Selassie, Director of the IMF's African Department, said in wide-ranging remarks to central bankers on Monday. “We have to rethink traditional policy prescriptions to meet the imbalances we are facing.” These include thinking longer term, spending more selectively, focusing on risk prevention, and getting support. (PHOTO: ISTOCK/OZBALCI)   Price Stability in Kazakhstan In Kazakhstan, raising interest rates has proved essential to avoid a spiral of inflation, currency depreciation and dollarization. In a new article for Country Focus, the IMF’s Nicolas Blancher says the National Bank of Kazakhstan may need to tighten monetary policy further to anchor inflation expectations—even though that could weaken economic growth in the short run. (PHOTO: IMF PHOTO)   Climate Learning The Earth’s temperature is changing at an unprecedented rate and the IMF has identified three broad areas to tackle climate change: mitigation and carbon pricing, adaptation and resilience building, and transitioning to a low-carbon economy. Learn about current strategies and the future possibilities to address climate change in a new series of interactive videos. Also, register for a new course on the Macroeconomics of Climate Change.   Emissions of carbon dioxide and other greenhouse gases plunged 4.6 percent in 2020, as lockdowns in the first half of the year restricted global mobility and hampered economic activity. Many hoped that this would mark the beginning of a more permanent shift downwards in emissions. The latest data, however, dashes those hopes. As the Chart of the Week by P. Bhanumati, Mark de Haan and James William Tebrake shows, annual global greenhouse gas emissions rebounded 6.4 percent to a new record last year. WEEKLY ROUND-UP 01. Argentina’s Economic Reforms The IMF Executive Board has completed the first review of the extended arrangement under the Extended Fund Facility for Argentina, enabling an immediate disbursement of about $4.01 billion. IMF Managing Director Kristalina Georgieva said: “Decisive implementation of program policies will be critical to support Argentina’s economic recovery, strengthen macroeconomic stability, and make further progress in addressing its deep-seated challenges to set the basis for more sustainable and inclusive growth.” 02. Sri Lanka Discussions Discussions will continue virtually with the authorities in Sri Lanka with a view to reaching a staff-level agreement on an Extended Fund Facility arrangement, IMF staff said in an end-of-mission statement on Thursday. “Sri Lanka is going through a severe economic crisis,” the statement said. “We reaffirm our commitment to support Sri Lanka at this difficult time in line with the IMF’s policies.” 03. Support for Haiti IMF management has approved a staff-monitored program for Haiti. These programs are arrangements between country authorities and the IMF to monitor the implementation of the authorities’ economic program but are not accompanied by financial assistance. The authorities have committed to implementing policies that would begin to restore macroeconomic stability and growth, strengthen governance, and start to relieve poverty. Satisfactory performance could lead to an IMF-supported program under a multi-year arrangement that would require approval of the Executive Board. 04. Bahrain's Recovery A gradual post-COVID recovery is underway in Bahrain, with the economy expected to expand by 3.4 percent this year, after 2.2 percent growth in 2021, the IMF Executive Board said in an Article IV consultation on Thursday. With the economic recovery and higher oil prices, the state budget deficit narrowed to 6.8 percent of GDP last year, but declining oil prices will put pressure on the medium-term fiscal deficit and public debt is projected at 127 percent of GDP by 2027. "Significant uncertainty clouds the forecast, including from the uncertain evolution of the pandemic, and the war in Ukraine, as well as the global inflation outlook." 05. Winners and Losers from Job-switching While young workers are more likely to experience earnings gains with on-the-job sectoral and occupational switches, low-skilled workers’ employment transitions are associated with an earnings loss, according to a new staff paper. The authors—John Bluedorn, Francesca Caselli, Niels-Jakob Hansen, Ippei Shibata and Marina Tavares—find that these differences in earnings gains and losses also mask a high degree of heterogeneity related to trends in routinization. Workers, particularly low-skilled and older workers during recessions, experience a severe earning penalty when switching occupations from non-routine to routine occupations. Nick Owen Editor IMF Weekend Read nowen@IMF.org

= Dear maria, We just published a new blog—please find the full text below. Greenhouse Emissions Rise to Record, Erasing Drop During Pandemic = (PHOTO: AVTG/ISTOCK BY GETTY IMAGES) By P. Bhanumati, Mark de Haan and James William Tebrake Emissions of carbon dioxide and other greenhouse gases plunged 4.6 percent in 2020, as lockdowns in the first half of the year restricted global mobility and hampered economic activity. Many hoped that this would mark the beginning of a more permanent shift downwards in emissions. The latest data, however, dashed those hopes. As the Chart of the Week shows, annual global greenhouse gas emissions rebounded 6.4 percent last year to a new record, eclipsing the pre-pandemic peak as global economic activity resumed. = Emissions from the manufacturing and the energy sectors contributed the most to recent global increases based on updated information from the IMF’s Climate Change Indicators Dashboard—a joint effort among national and international statistical organizations to provide timely data to help monitor the transition to lower carbon use. While total emissions have climbed significantly above pre-pandemic levels, increases from transportation and households were more muted last year as the pandemic weighed on global mobility. This was particularly evident with the emergence of the omicron variant in the fourth quarter of last year. The public health policy measures in many countries drove down the emissions of households and of the electricity sector. It will be important to monitor the emissions of both of these sectors as economies fully reopen in the context of historically high fossil fuel-based energy prices. The Intergovernmental Panel on Climate Change has said that, in the scenarios they assessed, limiting atmospheric warming to the key level of around 1.5 degrees Celsius requires global greenhouse gas emissions to peak by 2025 at the latest. The new data from the climate dashboard underscore what some scientists have warned: time is running out.   We Want To Hear From You! Click here for a 3-question survey on IMFBlog. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org

Amid strong inflationary pressures, it is critical that central banks maintain people’s trust in their ability to keep prices stable.

Kazakhstan Why Kazakhstan’s Central Bank Must Protect Price Stability—Even If It Weakens Growth in the Short Run Photo: Ozbalci & unsplash / simonsun2017 By Nicolas Blancher As inflation soars around the world, central banks are racing to tighten monetary policy to deliver on their mandates of maintaining price stability. In Kazakhstan, raising interest rates has proved essential to avoid a spiral of inflation, currency depreciation and dollarization, as noted in our recent Article IV report. Indeed, the National Bank of Kazakhstan may need to tighten monetary policy further to bring inflation back to target and anchor inflation expectations—even though that could weaken immediate economic growth. Price stability is a condition for macroeconomic stability and sustainable economic growth. It also preserves standards of living. Inflation, by contrast, is the worst tax on the poor. It is critical that central banks maintain people’s trust in their ability to keep prices stable. This is why, across the world, price stability is their overriding objective. As we see today, situations inevitably arise when countries face a trade-off between preserving price stability and supporting growth. This is when the independence and credibility of central banks is tested, and there is a risk that people lose trust in the monetary authorities’ ability to prevent prices from spiking. Interest rates may then have to rise even higher to achieve the same stabilizing effect. Targeting inflation in Kazakhstan Kazakhstan has had a positive experience of transitioning to inflation targeting, where the central bank is mandated to maintain a certain level of price increases, rather than target growth, the money supply, or the exchange rate. The NBK’s increased focus on domestic price stability and reliance on exchange rate flexibility has helped anchor inflation expectations and absorb external shocks since 2015. Yet the transition remains incomplete. More progress is necessary, including to diversify the economy, reduce dollarization, and limit exposure to external shocks. The long-term benefits are substantial, and the NBK’s Monetary Policy Strategy 2030 lays out comprehensive reforms to address many of these challenges. At the same time, care must be taken to avoid broadening the NBK’s mandate or diluting its independence. Pursuing multiple objectives amid the challenges of keeping prices stable could hinder monetary policy effectiveness and accountability. International experience suggests a more streamlined mandate for the NBK is desirable. Phasing out non-core activities, such as subsidized lending programs and other quasi-fiscal roles, would increase the effectiveness of monetary policy and the independence and credibility of the NBK. Multiple shocks, multiple policies Today’s economic environment—in Kazakhstan and the wider world—is characterized by multiple shocks: the COVID-19 pandemic, supply chain disruptions, the war in Ukraine and sanctions against Russia. Many public institutions have a role in implementing policies to lessen the immediate pain, especially for the most vulnerable, and support long-term growth and inclusion. Governments can use fiscal policy to prop up domestic demand and growth, especially when high inflation limits the scope for monetary expansion. This is the case in Kazakhstan, where elevated oil revenues provide room for increased spending. Fiscal policy must, of course, strike a balance between supporting the economy, preserving fiscal sustainability, and maintaining macroeconomic stability. In the long term, structural reforms are critical to growth, and this is certainly true in Kazakhstan where the state has a predominant role in the economy. The business environment must be improved to continue the transition to a market-based economy and to private sector-led diversification and job creation. In this context, there should be no change to the central bank’s primary contribution as the guarantor of price stability. The NBK is more likely to achieve this if it has a clear mandate, strong credibility, and inflation expectations are firmly anchored. **** Nicolas Blancher is a Division Chief in the IMF's Middle East and Central Asia Department. RELATED LINKS Read the AIV Consultation Report Kazakhstan and the IMF Regional Economic Outlook

Credibility is essential for sound fiscal policies

(CREDIT: ISTOCK:NUTHAWUT SOMSUK) Dear maria, The combination of higher debt and challenging economic conditions has elevated default risks, tightened borrowing constraints, and triggered a wave of debt downgrades, especially in emerging market economies. These developments have heightened the need for deleveraging plans, writes Francisco Roch, an economist in the IMF's research department, in an exclusive article for F&D online. Roch looks at the value of credible government commitment to future borrowing plans in the design of fiscal policy. “Overall, these results are indicative of the quantitative importance of enhancing long-term fiscal discipline to reduce sovereign risk and for the success of fiscal programs aiming at reducing debt levels.” 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 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 that may reverberate for generations.  Want to get a print copy delivered to your home or office? Click here to subscribe.   Have Your Say What do you think of this article? Please write to us directly and let us know your thoughts. We would love to hear from you. Nick Owen Senior Editor F&D Magazine nowen@IMF.org