IMF Weekend Read

 

Dear maria, In today's edition, we highlight: Industrial policy Sri Lanka's $3 billion program Africa's funding squeeze Central bank transparency Conflict's economic causes

FINANCE & DEVELOPMENT Too Much Industrial Policy Can Be Harmful (Credit: Artwell/Adobe Stock) There is renewed debate about the role of industrial policy and government support for firms and industries deemed strategically important, IMF economist Ruchir Agarwal writes in an article for Finance & Development magazine. People are questioning whether we can trust the free market amid concerns that countries are losing their innovation edge. National security hawks worry about relying on adversaries for critical resources such as semiconductors and pharmaceuticals. Although the use of industrial policy to establish national champions has been successful in some cases, it remains controversial, Agarwal writes. “Just like salt in cooking, a pinch of industrial policy can be helpful, but too much can overpower, and prolonged excess can harm.”

OUT NOW: MARCH EDITION New Directions in Monetary Policy The March edition of F&D Magazine focuses on New Directions for Monetary Policy. Authors include Gita Gopinath, Raghuram Rajan, Markus Brunnermeier, Masaaki Shirakawa, Christoffer Koch, Greg Kaplan, Giancarlo Corsetti, Michael Weber, Claudio Borio, and many more.

SRI LANKA Executive Board Approves $3 Billion Program (Credit: Adam Smigielski/iStock by Getty Images) The IMF’s Executive Board has approved a four-year arrangement under the Extended Fund Facility of about $3 billion to support Sri Lanka’s economic policies and reforms. In a statement, IMF Managing Director Kristalina Georgieva said the country faces tremendous economic and social challenges. “For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical.” Sri Lanka has been hit hard by an economic and humanitarian crisis. The economy faces significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead up to the crisis, further aggravated by a series of external shocks. “Today’s Board approval marks an important step towards the resolution of this crisis,” Peter Breuer, the IMF’s senior mission chief for Sri Lanka, told a press briefing, adding that the country will immediately receive an initial disbursement of about $330 million. AFRICA Continent Faces Funding Squeeze (Credit: IMF Photo/Kim Haughton) Africa’s most pressing economic problem is a “brutal" funding squeeze, and neither the international community nor the region’s policymakers are taking it seriously enough, the director of the IMF’s African Department said in a speech. Abebe Aemro Selassie told the Oxford Center for the Study of African Economies that the challenging financing environment is likely to persist because the global fight against inflation has been more complicated than people predicted and the world is becoming a more volatile place. The funding squeeze is all the more problematic because African countries emerged from the pandemic with high public deficits and debts, with fewer resources for primary spending, Selassie said. “What I am trying to get at here is the difficulty that countries are facing in sustaining current levels of per-capita spending on health, education, infrastructure, much less increasing the spending required to meet the Sustainable Development Goals!”  Watch Kristalina Georgieva discuss ways to strengthen resilience with Sierra Leone’s Minister of Finance Sheku Ahmed Fantamadi Bangura, Zambia’s Minister of Finance Situmbeko Musokotwane and European Commissioner for International Partnerships Jutta Urpilainen at the African Fiscal Forum.

Global portfolio investment asset holdings decreased by 15 percent in the first half of last year, the most since 2008. Elevated risk aversion amid increasing energy prices, heightened geopolitical and inflation risks, and tightening monetary policies in advanced economies weighed heavily on capital markets and portfolio investments. As the Chart of the Week shows, the top 10 portfolio investment holding countries, collectively accounting for about two-thirds of global positions tracked by our latest Coordinated Portfolio Investment Survey, experienced a sharp decline. View the interactive chart

DIGITAL TRANSFORMATION The Pandemic Accelerated Digital Work (Credit: Canva/Prisma/Unsplash/Adobe Stock) As the world does its best to move on from the pandemic, one of the lasting legacies for many advanced economies has been greater adoption of digital technologies: working from home is now common and many companies have expanded online operations. In a blog, IMF economists write that there are far-reaching and long-lasting implications for productivity and labor markets of the increasing share of workers using a computer connected to the internet. But with persistent gaps across countries and industries, policymakers must take steps to close the digitalization gap and ensure the gains are broadly shared, as the authors explain in a staff discussion note. “Doing so can build a more resilient and adaptable economy better prepared to navigate future crises.”  Watch the IMF’s Florence Jaumotte discuss how digitalization transformed productivity and labor markets with Visa’s Barbara Kotschwar and the University of Virginia’s Anton Korinek at the Peterson Institute for International Economics.

ANALYZE THIS! Interest Rates and Currencies

When interest rates go up, the value of a country’s currency—your money—usually also goes up relative to other currencies. Watch the latest Analyze This! to learn why.

CENTRAL BANKS Enhanced Transparency Would Build Trust (Credit: SochAnam/iStock by Getty Images) Economic and financial turbulence calls for greater transparency from policymakers. As central banks raise interest rates to curb inflation, stakeholders increase their scrutiny. In some countries policymakers face growing calls to rein in their autonomy. To maintain public trust, safeguard independence and enhance policy effectiveness in the face of such challenges, monetary authorities must focus on transparency and accountability, Tobias Adrian, the director of the IMF’s Director of the Monetary and Capital Markets Department, writes in a blog. The IMF has recognized the importance of transparency and actively promoted it. Based on a code adopted by the Executive Board in 2020, the Fund offers central banks the opportunity to participate in a review of their transparency practices. Future transparency reviews will be available to all IMF members as a voluntary tool to improve transparency and accountability, Adrian says. “The new tool will help reinforce trust in central banks, as well as their credibility and effectiveness in an increasingly complex world.”

Julie Kozack, director of the IMF’s Communications Department, answers questions on banking stress, Ukraine, Sri Lanka, Argentina and many other issues at a press briefing.

Weekly Roundup UKRAINE Staff Agree $15.6 Billion Program IMF staff have reached agreement with the Ukrainian authorities on $15.6 billion Extended Fund Facility arrangement. “The staff-level agreement reflects the IMF’s continued commitment to support Ukraine and is expected to help mobilize large-scale concessional financing from Ukraine’s international donors and partners,” a statement said. The agreement must still be approved by the IMF’s Executive Board. YEMEN Information Exchange Teams from Africa, Asia and Europe participated in a 30-hour hackathon challenge in Amman, Jordan, to provide an intuitive, innovative, scalable and secure mechanisms to exchange information between Yemen’s finance ministry and spending units without internet connectivity. The work undertaken during the hackathon was part of the IMF’s overall public financial management capacity development program in Yemen. Learn more. STAFF PAPER European Debt Mutualization A paper by IMF staff draws lessons from the United States’ debt assumption in 1790 to outline a conceptual framework for a one-off mutualization of some European legacy debt. The framework suggests that a European Debt Management Agency could issue up to 15 percent of euro-area GDP, helping to put national debts on a sounder trajectory. Without mutualization, some euro area countries are likely to see decreasing debt-to-GDP ratios. But this is not the case for at least five economies. STAFF PAPER Do Capital Controls Work? Capital flight can pose significant challenges. Faced with a crisis, many emerging market and developing economies have imposed capital controls to prevent a free fall of their currencies. In a paper, IMF staff conclude that countries with pervasive capital controls before the start of a crisis are more shielded than those with open capital accounts. By contrast, the effectiveness of capital controls introduced during a crisis is weak. STAFF PAPER Conflict’s Economic Causes Do economic crises cause conflict? A negative terms-of-trade shock leads to an increase in the number of conflicts and fatalities, according to a paper by IMF staff that examines 133 low- and middle-income countries over a 30-year period. The authors say that the paper’s results point to the presence of a fragility trap—a vicious cycle of worsening economic conditions and deteriorating conflicts.

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.

Nick Owen Editor IMF Weekend Read nowen@IMF.org