IMF update

 

Dear maria, In today’s edition, we focus on global policy challenges discussed at the IMF’s annual research conference, IEA chief Faith Birol’s call for clean energy in an article for Finance & Development magazine, global fragmentation and risks to world trade, the Middle East’s greenhouse gases, sub-Saharan Africa’s economic outlook, Asia’s digital payments, taxes and elections, and much more. P.S. Think you know what’s happening around the world? Take a new IMF quiz on the global economy to find out!

Global Economy Policymakers Face Challenging Problems Why Countries Must Cooperate on Carbon Prices (IMF) Policymakers face a particularly challenging set of problems as they respond to shock after shock, from Russia’s invasion of Ukraine to rising debt vulnerabilities and exchange-rate volatility, Kristalina Georgieva said at the start of the IMF’s annual research conference on Thursday. Arguably, the biggest challenge for central banks in both advanced and emerging market economies is to bring down inflation and to pursue responsible fiscal policy in an environment of persistent price pressures, the IMF’s managing director said. “Although the priority must be to protect vulnerable households with targeted measures to alleviate the impact of rising food and fuel prices, it should not do so in ways that further fuel inflation and sidetrack the efforts of monetary policy.” The two-day conference in Washington, named after Dutch economist Jacques Polak, a member of the Netherlands delegations to the 1944 Bretton Woods Conference that established the IMF, is a forum for discussing innovative research on a wide range of topics relevant to the global economy. Gita Gopinath, the IMF’s first deputy managing director, told the conference that geo-economic fragmentation was undermining global growth, with some 30 countries restricting trade in food, energy, and other key commodities since Russia’s invasion of Ukraine.   “Improving cooperation and the constructive resolution of disputes is a key challenge.” Visit the conference website to watch speeches by Kristalina Georgieva and Gita Gopinath and read papers covering dollar dominance, interest rates, international trade, financial liberalization, the macroeconomic costs of rare events, and more.     Middle East and Central Asia How Fiscal Policy Can Help Reduce Emissions Most Urgent Challenges (COP27) Countries in the Middle East and Central Asia must choose fiscal strategies that help them meet commitments to curb greenhouse-gas emissions while limiting the disruptions to their economies. In a first-of-its-kind study, IMF staff estimate that countries in the region have pledged to reduce annual emissions by 13 percent to 21 percent in 2030. This means that the region will need to reduce per-capita emissions by as much as 7 percent over the next eight years. “Only a few countries have achieved such a reduction while maintaining economic growth,” Jihad Azour, the director of the IMF’s Middle East and Central Asia Department, writes in a blog. One option is to raise fossil fuel prices, by removing of fuel subsidies and introducing a carbon tax of $4 to $8 per ton of CO2 emissions. Another option is to accelerate the energy transition by increasing investment in renewables. But significant public spending could weaken fiscal positions and macroeconomic stability, leaving fewer resources available to future generations. As Azour writes, “Countries should choose an option that best suits their circumstances and the available budget resources.” On the sidelines of COP27, Kristalina Georgieva spoke to CNBC about the global economic outlook and climate financing gap; Reuters about carbon prices; and Al Arabiya on how the world can survive recession but not climate crisis.   F&D A Call to Green Energy (2E812AC3_768/GETTY IMAGES) The global energy crisis is fueling fierce debate around the world over which new energy projects should or shouldn’t go ahead, writes executive director of the International Energy Agency, Fatih Birol, in an article for Finance & Development magazine. Massive investment in clean energy—including energy efficiency, renewables, electrification, and a range of clean fuels—is the best guarantee of energy security in the future and will also drive down harmful greenhouse gas emissions, he writes. “A new global energy economy is emerging, and the governments and businesses that invest early and wisely stand to reap the benefits.” Read the full article   Finance & Development, the IMF's flagship magazine and online editorial platform, publishes cutting-edge analysis and insight on the latest trends and research in international finance, economics, and development. It is written by both IMF staff and prominent international experts, and is read by leading policymakers, academics, economic practitioners, and other decisionmakers around the world. Want to get a print copy delivered to your home or office? Click here to subscribe.

Global Trade Threats Today’s global trading system is under severe threat amid a rise in restrictions and distortionary subsidies, the IMF’s Kristalina Georgieva said at the China International Import Expo. A division of the world into two trade blocs would cost 1.5 percent of global GDP and more than 3 percent of GDP in Asia and Pacific countries, the managing director said, highlighting the conclusions of the IMF’s latest regional economic outlook. “We must safeguard and promote trade openness—both at home and by cooperating to build a stronger global trading system centered on the World Trade Organization.”

Africa’s Economic Outlook Sub-Saharan African economies are fragile, yet resilient, says the IMF’s Wenjie Chen in a podcast based on the recently published regional outlook, Living on the Edge. Meanwhile, in a Country Focus article, IMF economists explain how Burundi’s economy has been challenged by COVID and Russia's invasion of Ukraine but is showing signs of resilience.

Asia's Digital Payments A revolution in digital technology and telecommunication has had an outsized impact on financial services and payments in the past three decades, but progress on cross-border payments has been much slower, the IMF’s Bo Li told a conference organized by the Singapore Regional Training Institute. “We access our bank accounts from our phones, make instantaneous transfers, and buy goods and services online,” but “moving money from one country to another can still be slow, expensive, and inconvenient.” Read a Country Focus article on how India’s central bank spurred a digital payments boom.

Bangladesh The Bangladesh authorities have reached a staff-level agreement with the IMF to support economic policies with $3.2 billion under an Extended Credit Facility and Extended Fund Facility, as well as $1.3 billion under the Resilience and Sustainability Facility. Bangladesh joins Barbados, Costa Rica and Rwanda in tapping the Fund’s first-ever long-term financing tool. “The RSF is expected to provide affordable, long-term financing to support Bangladesh’s climate investment needs,” a statement said.

WEEKLY ROUND-UP 01. Renewables Can Drive Down Energy Prices An IMF staff paper finds that renewable energy is associated with a significant reduction in wholesale electricity prices in Europe, with an average impact of 0.6 percent for each 1-percentage-point increase in renewable share. The higher the share of renewables, the greater its effect on electricity prices. Policy reforms can help accelerate the green transition while minimizing the volatility in electricity prices. 02. How Elections Influence Taxes An IMF staff paper examining electoral cycles in tax reforms between 1990 and 2018 in 22 advanced economies and emerging markets shows that governments tend to avoid announcing tax reforms during the months running up to elections. In addition, they become more likely to announce those reforms in the first few months following elections, indicating that “political capital” plays a role in the timing of reforms. These patterns are broad-based regarding the changes in tax base and rate, and for various types of taxes. 03. Remittance Transaction Costs Reductions in transaction costs have a short-term positive impact on remittances that dissipates beyond one quarter, according to an IMF staff paper. Reducing transaction costs to the SDG target of 3 percent could generate an additional $32 billion in remittances, higher that the direct cost savings from lower transaction costs. Measures to reduce transaction costs include greater competition in the remittance market, a deeper financial sector, and adequate correspondent banking relationships. 04. How to Enhance Cross-Border Payments An IMF staff paper presents a vision for a multilateral platform that could improve cross-border payments, as well as related foreign exchange transactions, risk sharing, and more generally, financial contracting. The approach is to leverage technological innovations for public policy objectives. A common ledger, smart contracts, and encryption offer significant gains to market efficiency, completeness, and access, as well as to transparency, transaction and compliance costs, and safety.

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.

Africa Ugandan Climate Activists Fight Deforestation by Planting Enjer Ashraf/Ismael Tamale How to finance renewable energy may be the dominant question in global public policy discussions of climate change. But at a very local level, two Ugandan activists are making the case that when communities get involved, climate adaptation doesn’t have to cost much. It all begins with local micro-climates. Prolonged periods of drought and erratic rainfalls have become more frequent due to massive deforestation. In the past 20 years, Uganda has lost over a million hectares of tree cover—nearly a third of the country’s total. The knock-on effects on the country’s biodiversity and climate are large but can be mitigated through rain and flood-resistant infrastructure, improved water mapping, conservation, and thoughtful tree planting. IMF staff estimates that actions like these could reduce GDP losses from natural disasters by two-thirds and almost halve the resulting fiscal gap. With Uganda losing hundreds of hectares of forest every year to population pressures and illegal logging, community involvement is key, and Uganda’s youth are taking the lead. Enjer Ashraf and Ismael Tamale, founders of the My Tree Initiative, have mobilized hundreds of volunteers to plant and care for native trees, hoping to reach the “million tree” milestone by 2023. The IMF’s Resident Representative for Uganda, Izabela Karpowicz, recently met with the founders to learn more about what they do. Karpowicz: How did the My Tree Initiative start? Ashraf: The organization was founded in September 2019.  We wanted to do something to positively impact the environment where we live and to give a hand to people from different parts of the world who are fighting against climate change. So we recruited our fellow students. Right now we have about 30 members volunteering on our committee and around 300 who help with tree plantings and community outreach to help spread the message about how planting trees and caring for them can help conserve the environment. Karpowicz: What’s your mission? Ashraf: To get every person in the world to plant a tree, at least one in their lifetime. That will be enough to save this world. Our goal is to plant 1 million trees by the end of 2023. In Uganda we started with students. Over eight universities have joined the challenge. But we’re also taking this message to communities, government leaders, nongovernment organizations, and businesses. They’ve been supporting us in different ways. The National Forestry Authority is giving us indigenous trees for free. Some individuals are providing land, others are volunteering to plant, prune, and water. Karpowicz: How big a problem is deforestation in Uganda? Ashraf: The majority of Ugandans use firewood from trees for cooking and for construction—roofing and framing, making furniture. We also use trees to make charcoal, which we export to South Sudan, Rwanda, and other neighboring countries. All these goods are from our forests. We lose around 10 football pitches of forests per day in the country, or more.  Governance is an issue. Every day we hear about forests being sold to private companies to grow sugar cane or for construction. For example, the Goma forests. The land crisis is another issue. You can’t easily find a place to plant trees. Some of the land that is meant to be protected and reserved for forests is being taken. And the people who do plant, plant for business. They don’t plant for conservation. They plant trees that are not good for the environment, or they plant in swamps so the tress can grow faster, to cut them down and make money. Karpowicz: How are you getting the word out? Are there similar organizations in Kampala that you’re in touch with?      Tamale: Our major area of focus is to engage people online through our social media platforms. We are working with school administrations and principals to engage students and pupils through the “Green Clubs” that we created.  We empower students with the knowledge and skills to look after trees and be community contact points. We also have a weekly online “Green Talk Show” with government leaders, civil society, private sector, and youth. And we have a website where we post updates on what we’re doing. We are in touch with other organizations but there are not so many. We’re trying to organize something together to inspire other people to join.  You can’t fight climate change alone. There are people fighting against plastic pollution, against use of coal. The goal is the same:  fighting for the environment, fighting against climate change. This interview has been edited for length and clarity. **** Izabela Karpowicz is the IMF’s Resident Representative for Uganda. RELATED LINKS Enhancing Uganda's Resilience to Climate Change Uganda and the IMF The IMF and Climate Change

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Dear maria, We just published a new blog—please find the full text below.  How Fiscal Policy Can Help Middle East, Central Asia Reduce Emissions By Gareth Anderson, Jihad Azour, and Ling Zhu Nearly all 32 countries in the Middle East and Central Asia have pledged to contain greenhouse gas emissions as part of the Paris Agreement. To meet these commitments, countries now need to urgently integrate climate policies into national economic strategies.  Our new study, the first of its kind for the region, assesses its commitment to reduce GHG emissions and identifies fiscal policy options to realize this goal. We estimate that countries in the Middle East and Central Asia have collectively pledged to reduce annual GHG emissions in 2030 by 13 percent to 21 percent, relative to the current trend, depending on the availability of external support. This means that the region will need to reduce its per capita emissions by as much as 7 percent over the next eight years. Only a few countries have achieved such a reduction while maintaining economic growth. In our outline of policy options to meet the region’s mitigation commitment, we focus on two categories of fiscal policies—and trade-offs between them—to curb GHG emissions: first, measures that raise the effective price of fossil fuels and, second, public investments in renewable sources of energy. Raising fossil-fuel prices For the first, the region’s 2030 mitigation targets could be met through a gradual removal of fuel subsidies in addition to a phased introduction of a carbon tax of $8 per ton of CO2 emissions in the Middle East, North Africa, Afghanistan, and Pakistan, or MENAP, and $4 per ton in the Caucasus and Central Asia, or CCA. Some countries are already taking steps in this direction. For example, Kazakhstan introduced an emissions trading scheme, Jordan has been steadily phasing out fuel subsidies, and Saudi Arabia recently established a regional carbon credit market. Raising the effective price of fossil fuels has near-term challenges because it calls on the current generation to bear the burden of the energy transition. Vulnerable people and businesses that rely on cheap energy would be particularly affected. Though additional fiscal resources from tax revenues and reduced subsidies could ease these side effects, economic growth could temporarily slow, and inflation could increase. In the long term, however, such a transition will leave future generations an economy that’s cleaner, more energy efficient, and potentially more competitive because it would inherit fewer distortions, stronger public finances, and a more efficient resource allocation. Investing in renewable energy For the second, additional public investments in renewable energy of $770 billion in MENAP and $114 billion in the CCA—more than a fifth of the region’s current gross domestic product—between 2023 and 2030 could achieve the region’s emission reduction targets with fuel subsidies reduced only by two-thirds and without any carbon tax. Large-scale renewable projects are already taking off in the region. For example, Qatar developed the world’s largest solar plant, with an 800-megawatt capacity that can meet about a tenth of the country’s peak demand, while Dubai built a 5,000-megawatt single-site solar park that’s also the biggest project of its kind. This option has several advantages for the current generation. Families and businesses wouldn’t be as hard pressed to change energy consumption habits because of a smaller price increase. Moreover, targeted investments in renewable energy sources will create more jobs and faster growth, while improving the energy security of oil-importing countries. But this approach also has some long-term costs. Remaining fuel subsidies are likely to keep distorting energy prices, limiting energy efficiency gains and leaving emissions in many parts of the economy largely unabated. Significant public spending to accelerate the energy transition could weaken fiscal positions and macroeconomic stability, leaving fewer resources available to future generations. We estimate that net government debt in 2030 could rise by 12 percent of GDP in MENAP and 15 percent in the CCA. Thus, a smoother transition now could set future generations on a path of lower long-term growth. Time to act Governments in the region face a difficult decision: how to share the economic burden of climate mitigation across generations. Other combinations of these fiscal strategies are also compatible with reaching countries’ emissions targets. Countries should choose an option that best suits their circumstances and the available budget resources. Regardless of the choice, early adoption of a fiscal strategy will help meet mitigation pledges on time while minimizing potential economic disruptions. Starting sooner would provide sufficient time for domestic public discourse, for the private sector to adjust to expected policy changes, and for the authorities to implement policies to address potential side effects, including improving social safety nets. Finally, an early start will gear up other policies and structural reforms, helping countries in the region navigate a smoother path toward greener economies.

Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org