IMF update

 

Dear maria, In today’s edition, we focus on the ascent of the dollar and the challenges it poses especially for emerging markets, food insecurity and inflation in sub-Saharan Africa, the case for globalization to increase climate cooperation, Bretton Woods reform, the Pacific islands’ potential to raise taxes to stave off an existential threat from rising seas and tropical cyclones, and much more.

Global Economy How To Deal With a Strong Dollar Why Countries Must Cooperate on Carbon Prices (ADOBE STOCK) The US dollar is at its highest level since 2000, having appreciated by 22 percent against the yen, 13 percent against the Euro and 6 percent against emerging-market currencies since the start of this year. Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, the IMF’s Gita Gopinath and chief economist Pierre-Olivier Gourinchas write in a blog. For many countries fighting to bring down inflation, the weakening of their currencies relative to the dollar has made the fight harder. On average, the estimated pass-through of a 10 percent dollar appreciation into inflation is 1 percent. Such pressures are especially acute in emerging markets. The appropriate policy response to depreciation pressures requires a focus on the drivers of the exchange rate change and on signs of market disruptions, the authors say. “Specifically, foreign exchange intervention should not substitute for warranted adjustment to macroeconomic policies.”   Sub-Saharan Africa Inflation Among Most Urgent Challenges Most Urgent Challenges (RUTH ESTHER MBABAZI/IMF PHOTOS) Sub-Saharan Africa faces one of the most challenging economic environments in years, marked by a slow recovery from the pandemic, rising food and energy prices, and high levels of public debt. One of the most urgent issues confronting the region is the need to tackle decade-high levels of inflation while also supporting growth, write the IMF’s Marijn Bolhuis and Peter Kovacs in a blog that draws on the latest regional outlook. There are big differences between countries, but the median of inflation rates increased to almost 9 percent in August. And even though the rise has been less dramatic than in other parts of the world and the drivers are different, inflation is nearly double pre-pandemic levels risking social and political instability and worsening food insecurity, the authors say. “Given sub-Saharan Africa’s fragile recovery, combined with the fact that domestic demand pressures have not so far been an important driver of inflation, policymakers must proceed with caution in coming months while closely monitoring inflation.”  Watch Abebe Aemro Selassie, director of the IMF's African Department, present the findings of the regional outlook at a press briefing during the annual meetings.   F&D People in Economics: Stefanie Stantcheva (TYLER SMITH) In the September issue of F&D, the IMF’s Marjorie Henriquez profiles Harvard’s Stefanie Stantcheva, who uses surveys and experiments to uncover the invisible in traditional economic data. Since earning her PhD from the Massachusetts Institute of Technology (MIT) in 2014, Stantcheva, 36, has become one of the world’s leading young economists. Among a boatload of awards and honors, she won the 2020 American Economic Association’s Elaine Bennett Research Prize, which recognizes outstanding research by a woman within the first seven years of receiving her PhD. She was the first woman to join the editorial board of the influential Quarterly Journal of Economics. Stantcheva says she ultimately hopes her research will give economists and policymakers a greater chance to build consensus around social policies that improve people’s lives. More important, she says, she hopes that by understanding how people process information, economists will be able to provide the tools people need to make better decisions. “Our goal is to find what explanations are useful to improve people’s understanding of core policies that really shape their daily lives,” Stantcheva says. Read the full article   The September 2022 edition of F&D Magazine focuses on THE MONEY REVOLUTION: CRYPTO, CBDCs, AND THE FUTURE OF FINANCE. In this edition, F&D delves into Crypto and CBDCs by drawing on cutting-edge research and analysis from economists and other leading experts including Agustín Carstens, Eswar Prasad, Ravi Menon, Tobias Adrian and many others.

Climate and Globalization Amid growing calls to deglobalize the economy, Raghuram Rajan says not so fast. Rajan, a former Governor of the Bank of India and former IMF chief economist, delivered this year's Per Jacobsson Lecture, in which he argues that continued globalization is our best chance to tackle climate change. Listen to the podcast.

Bretton Woods Reform The IMF’s Ceyla Pazarbasioglu joined Carmen Reinhart, former chief economist of the World Bank, to discuss reform of the Bretton Woods institutions at Atlantic Council. Global fragmentation and the combination of crises that the world faces today means that multilateral institutions such as the IMF matter more than ever, Pazarbasioglu told the council’s Josh Lipsky. Watch the discussion.

Pacific Islands Palau is set to introduce a value-added tax in a move next year that will provide a fillip to public finances. This will also set an example of reform for other cash-strapped governments in the Pacific, creating fiscal space for climate-related spending in a region that faces an existential threat from rising seas and tropical cyclones. Read the blog by the IMF's Sanjaya Panth, Todd Schneider and Mouhamadou Sy.

Inclusive Growth The Middle East and North Africa face recession risks, high inflation and climate challenges, the IMF’s Jihad Azour said at the launch of a new book on inclusive growth in the region. Speaking at the Carnegie Endowment, Azour said he hoped the book’s recommendations would provide a policy template to build new social contracts and transform existing economic models. Watch the launch.

The IMF’s World Economic Outlook released last week forecasts that global economic growth will slow from 3.2 percent this year to 2.7 percent next year. The 2022 projection was unchanged from the previous estimate, in July, but next year’s was cut by 0.2 percentage point. Countries accounting for about a third of the global economy are estimated to have a two-quarter contraction in real gross domestic product this year or next. The Chart of the Week brings together all GDP forecasts in our latest assessment. Click an economy to see projections. Move the slider for historical data or future estimates.

WEEKLY ROUND-UP 01. Europe's Regional Disparities While the level of disparities across regions in ten advanced European economies mostly reflects productivity gaps, the increase since the Great Recession has resulted from diverging unemployment rates, according to an IMF staff paper. Following the pandemic, this could be further exacerbated given that rates of remote working are lower in poorer regions than in high-income ones. 02. Insurers and Risk European life insurance companies are important bond investors and have traditionally played a stabilizing role in financial markets by pursuing “buy-and-hold” investment strategies. But since the onset of the ultra-low interest rates in 2008, observers noted a decline in the credit quality of insurers’ bond portfolios. An IMF staff paper argues that factors such as credit-rating downgrades, bond revaluations, and changes to regulations played a key role. 03. Inflation Expectations An IMF staff paper documents five facts about inflation expectations in the euro area. For instance, individual inflation forecasts overreact to individual news. Another observation is that disagreement about future inflation increases in response to news when the inflation is high, and declines when inflation is low. And overreaction of individual inflation forecasts to news increased after the global financial crisis. 04. Debt Distress Debt vulnerabilities have risen and an increasing number of low-income countries and emerging-market economies are in debt distress or at high risk of it. The IMF held a Capacity Development Partnership Dialogue on the need to strengthen technical assistance and training on debt sustainability, transparency and management through global partnerships. Read more.

Nick Owen Editor IMF Weekend Read nowen@IMF.org

Dear maria, We just published a new blog—please find the full text below.  Africa’s Inflation Among Region’s Most Urgent Challenges (Photo: AdobeStock) By Marijn Bolhuis and Peter Kovacs Sub-Saharan Africa faces one of the most challenging economic environments in years, marked by a slow recovery from the pandemic, rising food and energy prices, and high levels of public debt. One of the most urgent issues confronting the region is the need to tackle decade-high levels of inflation—which are devastating incomes and food security—while also supporting growth. While there are big differences between countries, the median of inflation rates in the region increased to almost 9 percent in August. And even though the rise has been less dramatic than in other parts of the world, and the drivers are different, inflation is nearly double pre-pandemic levels, risking social and political instability and worsening food insecurity. Despite a rebound last year, the fallout from the pandemic has kept domestic economic activity in sub-Saharan Africa relatively muted, and we expect growth in the region to slow this year. Most countries in the region have lacked the resources to support and stimulate growth, in sharp contrast to richer countries elsewhere that could inject trillions of dollars into their economies. In sub-Saharan Africa, inflation has been driven less by domestic activity than in advanced economies. Instead, external developments have shaped the path of inflation since the start of the pandemic. They include the sharp spike in global commodity prices, swings in the exchange rate, global supply chain disruptions, and natural disasters. In the case of food, the prices of key staples such as maize and wheat have increased since 2019, contributing two-thirds of overall inflation in fragile states and one-half elsewhere in the region. Higher global energy prices and the strong dollar have also fed through to inflation indirectly, via transportation and tradable goods like household products. By contrast, there have been only modest increases for the prices of goods and services that most reflect domestic demand pressures, so-called nontradables—which typically include any locally-produced services, such as in the hospitality, health, or education sectors. With food and energy accounting for half of household consumption in sub-Saharan Africa, living costs across the region have spiraled. The IMF estimates that 12 percent of the region’s population will face acute food insecurity by the end of this year. Many countries have therefore turned to subsidies and tax cuts to alleviate the squeeze in household incomes. These measures should be temporary and as well targeted as possible to maximize their impact and minimize their costs on already-stretched budgets. Central banks across the region had already started raising interest rates in response to rising inflation, capital outflows and currency depreciation resulting from monetary policy tightening in advanced economies. Examples include Ghana, Malawi, Mozambique, Nigeria, Uganda and the economic and monetary unions for both Central and West Africa. Monetary authorities also find themselves facing an increasingly delicate trade-off: raising rates to keep inflation in check will risk choking off credit for investment, depressing economic activity, and reducing incomes. Meanwhile, fiscal consolidation and the global slowdown weigh on domestic economic activity. That means central banks should proceed with caution and raise interest rates gradually so as not to jeopardize the recovery. But policymakers must also not be complacent: countries where domestic demand pressures are acute, or inflation is very high may need to tighten faster or more decisively. The same applies to countries where monetary policy credibility is weak, the currency is depreciating rapidly, or foreign exchange reserves are shrinking. While countries with exchange rates that are fixed or heavily managed have, so far, experienced lower inflation than those with more flexible regimes, their ability to control the pace of interest-rate increases is constrained by their currency arrangement. There are some concerns that monetary policy could still be too accommodative, given that rate increases have not kept pace with inflation. Policy coordination can help. Fiscal consolidation has a role to play in countries where policy is too loose, as can a combination of rate increases and currency depreciation. Given sub-Saharan Africa’s fragile recovery, combined with the fact that domestic demand pressures have not so far been an important driver of inflation, policymakers must proceed with caution in coming months while closely monitoring inflation. — This blog, which draws on the October 2022 Regional Economic Outlook for Sub-Saharan Africa, reflects additional research contributions from Seung Mo Choi, Samson M’boueke, and Cleary Haines.   Pacific Island Countries Have Untapped Tax Potential (Photo: Norimoto/iStock by Getty Images) By Sanjaya Panth, Todd Schneider and Mouhamadou Sy Palau is set to introduce a value-added tax in a move next year that will provide a fillip to public finances. This will also set an example of reform that other cash-strapped governments in the Pacific could follow. Palau’s tourism-dependent economy shrank by almost 10 percent in 2020 as the government sealed the borders to stave off COVID infections. The national budget sank into deficit equal to 11 percent of gross domestic product. The government could raise an additional 1 percent of GDP in annual revenue when it starts to collect the new taxes, including VAT, known locally as the Palau Goods and Services Tax, approved as part of a wide-ranging reform package in September 2021. Other Pacific nations could follow Palau’s example. A recent IMF paper shows that the average tax gap—the difference between current and potential tax revenue—is about 3 percent of GDP in the Pacific region. Closing this gap could play a critical role in creating space for social-development and climate-related spending in a region that faces an existential threat from rising seas and tropical cyclones. Pacific islands must on average spend an additional 6.3 percent of GDP over the next decade to meet the United Nations Sustainable Development Goals and about 3.1 percent to build new climate-resilient infrastructure, IMF staff estimate. International support on concessional terms, such as through the IMF’s Resilience and Sustainability Trust, should play an important part in meeting these spending needs. But the region itself can do more, too. As a group, the Pacific islands have implemented some major tax reforms and made progress in raising tax revenue in recent years. Fiji, for instance, invested in technology upgrades at its tax office and a new website that allows taxpayers to register online. Micronesia made its corporate tax structure more progressive, while Vanuatu increased its VAT rate from 12.5 percent to 15 percent. But in many cases progress has come through windfall gains, particularly from corporate income taxes. There has been a lack of momentum towards more durable tax-policy and revenue-administration reforms. Missing momentum Tax offices are often understaffed, underfunded and work with outdated technology. This makes it a challenge to raise compliance and collect all the taxes that are owed. Policy reforms often languish in legislatures. Meanwhile, government relief measures to mitigate the impact of the pandemic and higher prices for imported food and fuel following Russia’s invasion of Ukraine are piling pressure on public finances. Well-designed VAT systems can encourage compliance and lift receipts from other types of taxation. However, many Pacific islands do not have yet a VAT system and those that do are not exploiting its full potential. The gap between the current VAT collection and what could potentially be collected is on average about 50 percent—pointing to significant room for improvement. All VAT rates in the region are below the world’s average ,and there are widespread exemptions. IMF research suggests there could be significant revenue gains by reforming VAT systems. Key steps should include a focus on a single broad-based VAT rate and increasing VAT rates in some Pacific islands. Improving compliance through better enforcement could also boost collection. Countries such as Marshall Islands without a VAT should consider adopting one. Given that poor households tend to spend a larger proportion of their current income, VAT implementation should be accompanied by efforts to support the vulnerable and poor through well-targeted fiscal measures. Beyond VAT, the Pacific islands should make domestic resource mobilization a priority as part of a broader strategy to reduce public debt, restore fiscal space, and finance climate and development spending. A comprehensive approach, rooted in a medium-term revenue strategy and supported by technical assistance from the IMF and others, could be one of the most effective pathways to tackling daunting structural issues and financing development spending.   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!