IMF update

 

Dear maria, In today’s edition, we spotlight global food prices, the economic benefits for Latin America of Venezuelan migration, Daniel Yergin on the energy transition, Seema Jayachandran on women’s lives, foreign investment, public debt, Europe’s house prices, fintech and remittances, and much more.

Global Outlook Weather, War and Material to Keep Food Prices Elevated for Longer Why Countries Must Cooperate on Carbon Prices (FOOD AND AGRICULTURE ORGANIZATION/LUIS TATO) Food prices, which reached a record earlier this year, have increased food insecurity and fanned social tensions. They have also strained the budgets of governments struggling with rising food import bills and diminished capacity to fund social protection for the most vulnerable. Weather, war and material costs are the main factors raising prices, the IMF’s Christian Bogmans, Andrea Pescatori and Ervin Prifti write in a blog, based on a special feature box in the latest World Economic Outlook, published in October. To defend against new price surges and allow food and fertilizer to flow to those who need it most, the authors say it is vital that international trade remains free. The Black Sea grain corridor has facilitated cereal exports from Ukraine and brought down prices to pre-invasion levels, mitigating global hunger. “It is important that there’s also global access to fertilizers, by eliminating trade barriers that are limiting global supply, either directly or as a by-product of the international sanctions imposed on Russia.” Read the special feature for more analysis of food prices in the latest World Economic Outlook.   Latin America Venezuela’s Migrants Bring Economic Opportunity (ADOBE STOCK/HUGOALX) More than 7 million Venezuelans have fled their country’s collapsing economy since 2015, with 6 million settling in other Latin American countries. In a Country Focus article, the IMF’s Jaime Guajardo and co-authors say the region’s largest refugee episode in history has the potential to increase GDP in host countries by up to 4.5 percentage points by 2030. The analysis published in a staff paper this week identifies large medium-term growth gains resulting from an increase in the labor force and better alignment of migrants’ skills with jobs. These gains are greater for countries that receive larger and more educated migrant flows relative to the domestic population. With the right support and integration policies, migration from Venezuela has the potential to increase real GDP in Peru, Colombia, Ecuador, and Chile by 2.5 to 4.5 percentage points relative to a no-migration baseline by 2030, the authors say. “To reap the benefits from migration, host countries need to integrate the new arrivals into the formal labor force—and society—by promptly offering them work permits and access to education and healthcare.” Read the staff paper to learn more about the economic opportunities Venezuelan migrants bring to Latin America.   F&D Daniel Yergin: The Energy Transition (ISTOCK/YEVHEN LAHUNOV) The global disruptions in energy markets and the war in Ukraine have added impetus to the push for renewable energy and the drive toward net-zero carbon emissions. Yet, even as the global consensus around the energy transition becomes stronger, the challenges to that transition are also becoming clearer, writes Daniel Yergin in the December issue of F&D Magazine. Four challenges—energy security, macroeconomic impacts, the North-South divide, and minerals—will each have significant effects on how the energy transition unfolds, he writes. “None are easy to grapple with—and they will interact with each other, which will compound their impacts. But recognizing them will promote deeper understanding of the issues and requirements in seeking to achieve the energy transition.” Read the full article   The Scramble for Energy—F&D December 2022 Our latest edition of F&D Magazine focuses on what geopolitical tensions mean for the clean transition. Authors include: Fatih Birol, Daniel Yergin, Ricardo Hausmann, Ted Nordhaus, Thijs Van de Graaf, Andrea Pescatori, Jeromin Zettelmeyer, Oya Celasun, Jason Bordoff, Edward Glaeser, Ratna Sahay, and many more. Want to get a print copy delivered to your home or office? Click here to subscribe.

Middle East's Lessons From the Past Countries in the Middle East and North Africa have resorted to the policies of the past to shield their economies from the spike in commodity prices, but this time subsidies and tax cuts are on a much smaller scale, the IMF’s Filippo Gori and Jeta Menkulasi write in a Country Focus article. Although the current commodity upswing is comparable to those in 2008 and 2011, subsidies this year are estimated to have increased by around half as much as during those previous episodes. Watch a recent webinar on the region's response to volatile commodity prices.

Seema Jayachandran on Women's Lives Economic progress improves lives, but it can also clash with some of the bigger development problems we face, like gender equality and the environment. Seema Jayachandran, a professor of economics at Princeton University, believes striking that balance is key to making economic development work for everyone. In a podcast, Jayachandran talks about her work as part of a special IMF series on extraordinary Women in Economics.

What is Public Debt? Public debt plays a pivotal role in the world economy by allowing governments to keep their economies afloat during recessions and to finance investments that lift productivity and growth. But this multitrillion, multinational, multicurrency network of debt obligations comes with risks. Learn more about them in F&D magazine’s latest Back to Basics video.

IMF Publications Check out the IMF’s updated publications page to gain economic insights from staff discussion notes, country reports, working papers, books, and more. The new website offers easier navigation, better search, and improved graphic design.

The United States recorded the world’s largest increase of foreign direct investment in 2021, with inflows increasing by $506 billion, or 11.3 percent, according to the IMF’s latest Coordinated Direct Investment Survey. As the Chart of the Week shows, the United States is now the top destination for FDI, but several smaller economies also take prominent positions among the global top 10. The apparent disconnect comes down to the fact that these show cross-border financial flows which can end up as investments in productive activities but can also be purely financial investments with little to no link to the real economy.

WEEKLY ROUND-UP 01. Fintech and Remittances An IMF staff paper investigates whether fintech disrupts the remittances market. It finds that instead of disrupting incumbents, fintechs have increasingly been entangled with them. Therefore, not only there is no evidence of disruption, but it is unlikely to occur in the foreseeable future. Even so, the paper argues that fintechs play an important role in the remittances market. 02. Europe's House Prices Economic, financial and demographic factors explain the changes in real house prices in emerging Europe, with income growth having the most significant impact, according to an IMF staff paper. Increases in short-term or long-term interest rates dampen prices, indicating that a higher cost of borrowing is associated with lower real house prices. This indicates that the downturn in house prices could deepen with the looming economic recession and soaring interest rates. 03. COVID and Consumer Spending An IMF staff paper investigates how the spread of the pandemic and government interventions have affected consumer spending using daily card transaction data in the Baltics. The analysis shows significant effects on the amount and composition of debit and credit card transactions. While public health measures designed to contain the spread of the pandemic have a negative 04. Climate Effects in Central America Central America is one of the regions most vulnerable to extreme climate events. An IMF staff paper finds that a climatic disaster drops monthly economic activity in most countries in the region of around 0.5 to 1 percentage points on impact, with persistent effects on the level of GDP. Remittances increase for most countries in response to an extreme climate event, acting as a shock absorber. MARK YOUR CALENDAR 01. Global Debt Database The IMF's global debt database will be launched on Dec. 12: please join us! The database is a unique dataset covering private and public debt for virtually the entire world dating back to the 1950s. The discussion will focus on the pandemic impact on sovereign, household, and non-financial corporate indebtedness and challenges ahead. 02. Resilience and Sustainability Trust Please join us on Dec. 13 for a conversation about country experiences with the IMF's Resilience and Sustainability Trust. The Trust helps low-income and vulnerable middle-income countries build resilience to external shocks and ensure sustainable growth, contributing to their longer-term balance of payments stability. 03. Lesotho Hackathon Submit a proposal by Dec. 21 to stand a chance of participating in a hackathon co-organized by the IMF’s Fiscal Affairs Department, Lesotho’s Ministry of Finance, the Bill & Melinda Gates Foundation, and Geekulcha. Participants in the hackathon will compete to develop a prototype for digital signatures to improve the efficiency and effectiveness of public financial management processes.

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.

Dear maria, We just published a new blog—please find the full text below.  Global Food Prices to Remain Elevated Amid War, Costly Energy, La Niña (Credit: Luis Tato/Food and Agriculture Organization of the United Nations) By Christian Bogmans, Andrea Pescatori, Ervin Prifti Food prices, which reached a record earlier this year, have increased food insecurity and raised social tensions. They have also strained the budgets of governments struggling with rising food import bills and diminished capacity to fund extra social protection for the most vulnerable. To better understand the scale of these unprecedented challenges for global policymakers, we quantify in new research the typical impact of four historically important drivers of food commodity prices. Our analysis, published in October’s special feature box in the latest World Economic Outlook, shows that: A 1 percent drop in global harvests raises food commodity prices by 8.5 percent. A 1 percentage point increase in the Federal Reserve’s main interest rate reduces food commodity prices by 13 percent after one quarter. A 1 percent increase in fertilizer prices, which have climbed recently on the surge in natural gas prices, boosts food commodity prices by 0.45 percent. A 1 percent increase in oil prices increases food commodity prices by 0.2 percent. These estimates can be used to better explain recent fluctuations in food prices and help define the outlook as different factors can exert opposing forces. La Niña weather conditions are forecast to return for a third straight year, bringing below-average water temperatures to the east-central Pacific Ocean, according to the UN’s World Meteorological Organization. Similar three-year periods occurred during the first world food crisis between 1973-76 and again between 1998-2001. Moreover, the Black Sea Grain Initiative that provides safe export shipping from Ukraine could cause another shock to cereal supplies if it is suspended again by Russia. This alone would reduce global wheat and corn supplies by 1.5 percentage points, relative to current expectations, and in turn raise cereal prices by 10 percent within a year. In addition, high energy prices raise fuel and fertilizer prices, boosting food production costs, but they also divert output from food to biofuels. Fertilizer prices are double what they were before the pandemic, even after a pullback in recent months. Around 45 percent of any change in fertilizer prices usually feeds directly into global cereal prices within four quarters, IMF research shows. This suggests that part of the effect of high fertilizer prices may yet fully materialize. In poorer countries, where farmers use fertilizer more sparingly, reduced use may diminish harvests. Downward price pressure In addition to slowing global economic growth, which has a modest direct effect on food prices, central bank interest-rate hikes have significantly eased price pressures. The Federal Reserve, for example, is raising borrowing costs at the fastest pace in two decades. Higher rates tend to discourage inventory holdings and reduce speculative activities in commodity futures markets, thus putting downward pressure on food prices. Our estimates suggest Fed tightening has already helped lower cereal prices since April and will continue to put downward pressure on prices through the end of next year. Looking forward It remains uncertain how the combination of harvest disruptions, energy prices, and monetary policy will play out. Trading in futures markets suggests that wholesale cereal prices will only drop 8 percent next year from the current highs. But our estimates indicate supply constraints could outweigh weakening demand, keeping prices elevated for the next few quarters. Higher international food prices are estimated to have added 6 percentage points to consumer food inflation in 2022. However, the passthrough to higher domestic retail food prices could take six to 12 months—another reason why, in addition to the recent weakening of emerging market currencies, many people will have to wait for relief from lower commodity prices. Finally, the risk of food prices increasing again rather than declining during the next couple of quarters remains high. And if these risks weren’t enough, the impact of rising interest rates on food insecurity could be mixed. That’s because a resulting slowdown in economic activity may reduce personal incomes. Combined with still elevated food price levels, this could increase the number of food insecure people. To defend against new price surges and allow food and fertilizer to flow to those who need it most, it remains vital that international trade remains free. In particular, the Black Sea grain corridor has facilitated cereal exports from Ukraine and brought down prices to pre-invasion levels, mitigating global hunger. It is important that there is also global access to fertilizers by eliminating trade barriers that are limiting global supply, as far as possible. Countries should allow the increase in global prices to pass through to domestic prices while also increasing targeted social protection spending, as their budget allows. This is necessary to allow price signals to rebalance food markets and at the same time to protect vulnerable families' purchasing power. External debt relief and grants from international organizations could help finance the expansion of social assistance schemes in developing countries. To help ease supply tensions, countries should stimulate domestic food production, while avoiding stockpiling and using reserves, especially those that have accumulated higher stock levels. Finally, high fuel prices at the pump have led policymakers to keep or increase the mandates for oil refineries to blend biofuels into their national fuel mix, with the intent of increasing supply. This extra demand on crops to produce feedstock for ethanol and other biofuels puts more pressure on food prices. Reducing biofuel mixing mandates would help lessen the impact of higher demand for biofuels on food prices.   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!

David Cutler on Cities After the Pandemic   (Photo: Harvard University) More than half of the world’s population lives in cities, and it’s expected that almost 70 percent will live in urban areas by 2050. People are attracted to cities for the economic and social opportunities they offer. But if the COVID pandemic taught us anything, it’s that population density presents significant health risks. David Cutler is a Professor of Economics at Harvard University’s Kennedy School of Government and the Chan School of Public Health. Cutler and his Harvard colleague Edward Glaeser write about Cities After the Pandemic in the December issue of Finance and Development. In this podcast, David Cutler discusses the article with journalist Rhoda Metcalfe. He says cities now need to put more emphasis on public health to keep economies healthy.  David Cutler is a Professor of Economics at Harvard University’s Kennedy School of Government and the Chan School of Public Health.     Listen to the podcast on: IMF.org | Apple Podcasts | Spotify | Libsyn |  Google Podcasts | Amazon Music   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

Middle East and North Africa As Commodity Prices Surge Again, MENA Countries Can Draw Lessons from the Past Photo credit: Meron Abebe/Getty Images The current commodity price boom is affecting the region’s commodity exporters and importers differently. Commodity exporters are benefiting from a marked improvement in their terms of trade, while commodity importers are feeling the pain of higher imported energy and food prices. A key question is how countries are managing this boom relative to past experience, particularly as the current commodity price shock is occurring in a global and regional context that is distinct from previous episodes.  Our latest Regional Economic Outlook examines how MENA countries are responding to high commodity prices and protecting the vulnerable. This task is much harder for commodity importers, where fiscal space is limited. In contrast, the challenge for commodity exporters is to leverage the surplus from high energy prices to build buffers against future shocks and make progress with their transition and diversification plans. We take a closer look at how MENA countries responded to commodity price surges in the past, the policy actions they are taking this time around, and what should be done next. Previous responses proved costly In the past, MENA emerging market and middle-income economies reacted to commodity price surges with increased government spending that often persisted for years, leaving them more indebted and less resilient to future shocks. Similarly, oil exporters experienced marked increases in spending at the time of oil price upswings to then face abrupt adjustments to their budgets when prices eventually fell. With social safety nets relatively weak, policymakers typically relied on subsidies, tax cuts, and public wage increases to offset real income losses. These policies were poorly targeted, failing to protect those most in need. For instance, past IMF studies found that the bottom 40 percent of the population in Egypt, Jordan, Lebanon, Mauritania, Morocco, and Yemen received less than 20 percent of funds spent on subsidies for diesel and gasoline. These policies were also hard to reverse—implying that government budgets became more rigid, and governments became locked in a vicious cycle of relying on costly fiscal interventions. More cautious this time around Amid the current commodity price shock, MENA countries have again resorted to the policy responses of the past, particularly subsidies and tax cuts, to shield their economies from high commodity prices. But this time, the response has been on a smaller scale. Although the current commodity price upswing is broadly comparable to those observed in 2008 and 2011, in 2022, subsidies are projected to increase by less than in past episodes—roughly 50 percent of their peak during these past episodes for the region’s oil exporters and emerging market and middle-income economies. This reflects limited fiscal space in the latter, improved targeted support in some countries, and progress on subsidy reform. For example, Jordan, Mauritania, Morocco, Pakistan, Saudi Arabia, Tunisia, and the United Arab Emirates have allowed domestic gasoline prices to increase. And, importantly, most oil exporters have saved their oil profits so far. An opportunity to draw lessons from the past The outlook is highly uncertain. Risks include commodity prices remaining high for longer, tighter and volatile financing conditions, and a sharper-than-expected slowdown in external demand. If not managed properly, price shocks could threaten social stability. Meanwhile, oil exporters may face pressures to spend the surplus from oil revenues, particularly in areas that would be difficult to reverse once oil prices fall, such as public sector hiring and wage increases. Past experience underscores the importance of responding differently this time to provide the most effective protection to the vulnerable while ensuring debt sustainability and avoiding new budgetary rigidities, given the challenges of rolling them back. Thus, it will be important to break the unsustainable cycle of relying on higher, untargeted government spending and instead opt for measures focused on the neediest to cushion the impact of eroded real incomes. At the same time, enacting reforms would improve resilience to future commodity price shocks. These include gradually removing regressive energy subsidies while strengthening social safety nets, which will enhance equity and create fiscal space for pro-growth capital spending; transitioning toward a greener and more efficient energy utilization to reduce energy dependency and exposure to oil price fluctuations; and bolstering revenue mobilization through tax reforms to increase fiscal space for oil importers and diversify revenue away from hydrocarbons for oil exporters. Finally, MENA countries should continue enhancing governance and public financial management by improving transparency and accountability, moving toward medium-term fiscal frameworks, and adopting fiscal rules. These actions will prevent the costly and untargeted fiscal expansions of the past while creating the needed fiscal space to enhance social spending. **** Filippo Gori is an Economist and Jeta Menkulasi is a Senior Economist. Both authors are in the IMF's Middle East and Central Asia Department. RELATED LINKS Regional Economic Outlook Country Focus: Gulf Cooperation Council