International Monetary Fund,update

 

Dear maria, We just published a new blog—please find the full text below.  The Time Is Now: Richer Nations Must Step Up Support For The Poorest (Credit: kitzcorner/iStock by Getty Images) By Kristalina Georgieva When finance ministers and central bankers arrive in Washington next week for the IMF-World Bank Spring Meetings, they will have much to discuss, from the global economy’s fragile recovery to the risk of financial instability, from fragmentation to the fallout from Russia’s war in Ukraine. But it is imperative that they don’t forget the increasing needs of the world’s poorest nations. In particular, the IMF’s tried-and-tested instrument to assist these countries—the Poverty Reduction and Growth Trust—is in urgent need of replenishment. Since the pandemic, the IMF has supported more than 50 low-income countries with some $24 billion in interest-free loans via the PRGT—thus helping to stave off instability in a wide range of the world’s poorest nations, from the Democratic Republic of Congo to Chad and Nepal. Now the PRGT must be adequately funded and subsidized so that this vital source of interest-free financing can continue. It is a matter of utmost priority. Why? The challenges facing low-income countries have grown immensely in recent years. They have suffered from the pandemic as well as a succession of economic shocks. And today they face additional challenges from scarcer financing, high inflation, persistent food insecurity, rising debt vulnerabilities and sociopolitical tensions, especially in fragile and conflict-affected states. We have revised down our growth projections for low-income countries, whose per capita income growth is falling further behind the rates needed to catch up with advanced economies. This threatens to reverse a decades-long trend of steadily converging living standards. Without urgent action and more support, there is little chance of them making up the lost ground. In fact, we estimate low-income countries’ additional financing needs—to accelerate growth and put them back on a path to income convergence with advanced economies—to be about $440 billion over the five years through 2026. Domestic reforms to boost growth, strengthen public finances and raise more domestic revenue should help address this financing need. But, as we will spotlight during a special Spring Meetings session of donors and recipients on concessional financing on April 12, more international support is also needed—especially as official development assistance continues to fall short of the United Nations’ target of 0.7 percent of gross national income. Richer nations can assist poorer ones by pooling their resources and funding the work of the IMF, World Bank and other multilateral agencies, as well as through their own bilateral development programs. And the IMF will continue to work with all its development partners to build economic and financial stability in poorer countries. The PRGT is integral to this effort. It provides interest-free loans to support well-designed economic programs that help catalyze additional financing from donors, development institutions, and the private sector. PRGT-supported programs also play a central role in creating the environment for successful debt resolution in distressed countries. And—as seen during the pandemic—the PRGT can also provide rapid emergency support when shocks hit. At the onset of COVID, the IMF rapidly scaled up emergency financing and program support through the PRGT, with new commitments reaching almost $9 billion (6.5 billion special drawing rights) in 2020 alone. And with low-income countries’ financing needs rising fast, demand for PRGT lending is projected to reach nearly $40 billion (SDR 30 billion) in 2020-24, more than four times the historical average. Funding shortfall The success of our 2021 landmark reforms to the PRGT to speed low-income countries’ recovery from the pandemic depends on a funding strategy that identified a need to raise about $16.9 billion (SDR 12.6 billion) in loan resources and $3.1 billion (SDR 2.3 billion) in subsidy resources. So far, pledges amount to around three-quarters of the target for loan resources but less than half that for subsidy resources.  PRGT subsidy resource needs have since risen further on account of record demand for Fund support and sharply higher interest rates. Additional pledges are thus urgently needed to meet the agreed fundraising target by the time of this October’s Annual Meetings in Morocco—the first meetings to be held in Africa for 50 years. The Meetings are a historic opportunity for donor countries to show commitment to the continent by reaching agreement on a medium-term strategy to place the PRGT’s finances on a solid footing. A failure to secure these resources would jeopardize the IMF’s ability to provide much-needed support to low-income countries as they seek to stabilize their economies in an increasingly shock-prone world. The message is clear: Our membership must come together and step up support for these vulnerable countries. Funding the PRGT is the best way to do it. International cooperation Just as international cooperation can address the fundraising shortfall, so it can also help break the debt deadlock that is preventing some countries from accessing concessional financing. Although debt ratios are still lower than before the Heavily Indebted Poor Countries (HIPC) initiative of the mid-1990s, vulnerabilities in low-income countries have risen significantly and the trend is worrying. About 15 percent of low-income countries are already in debt distress and another 45 percent face high debt vulnerabilities. As international interest rates rise, this creates even greater risks and restricts fiscal space. Meanwhile, changes to the creditor landscape make it more difficult for countries to restructure debts they cannot pay. Creditors are more diverse than in the past and coordination mechanisms are largely imperfect. Geopolitical fragmentation is adding to the plight faced by poorer countries by making it harder to forge international consensus on areas of common interest, including debt. Accelerating implementation of the Group of Twenty Common Framework for debt treatment is essential to ensure coordination and confidence among creditors and debtors. Early lessons from the successful case of Chad could be applied to Ghana and Zambia to speed up progress. The Global Sovereign Debt Roundtable, initiated in February by the IMF, World Bank and India (as president of the G20) holds the potential to reach greater consensus among key stakeholders. We are working hard to achieve further progress when all roundtable participants—creditors and debtors—sit down together on April 12, during the Spring Meetings. Clearly, when the finance ministers and central bank governors of our 190 member countries arrive in Washington next week, there will be plenty to discuss. But these leaders must not allow other challenges to crowd out the pressing needs of the world’s poorest nations. Supporting the PRGT is an excellent way to keep this issue at the top of the global agenda. —This blog reflects research contributions by Guillaume Chabert, Kangni Roland Kpodar and Xin Tang. 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!

Volatile Commodity Prices Reduce Growth and Amplify Swings in Inflation (Credit: Lazizkhon Tashbekov/Food and Agriculture Organization of the United Nations)

By Adil Mohommad, Mehdi Raissi, Kyuho Lee, and Chanpheng Fizzarotti Food and energy prices surged to near historic highs in recent years amid the pandemic and the war in Ukraine, which prompted major supply disruptions. This was accompanied by a sharp rise in the volatility of commodity prices as well. Worryingly, the up-and-down swings in commodity prices will likely pose economic challenges in coming years. We explore the effects of volatile commodity prices in a new report on food and energy insecurity that was prepared for the Group of Twenty. Specifically, we examine how economic growth and inflation are affected by volatility in commodity terms of trade—that is, the movement in the prices that a country pays for commodity imports and the prices it receives for commodity exports. Such swings in commodity prices can weigh on long-term economic growth, especially for commodity exporters. For example, higher volatility in commodity prices may induce greater volatility in government finances in commodity exporting countries and thereby lead to stop-start public investment. In turn, this would weigh on both physical and human capital investment. What's more, volatility in commodity prices also appears to increase the volatility of domestic inflation over the medium term. This can occur, for example, as greater volatility in the price of imported goods passes through to domestic prices and thereby result in more volatile consumer inflation. The challenges from heightened commodity price volatility come on top of the problems caused by the surge in price levels. World food commodity prices rose nearly 40 percent in the two years just before Russia’s invasion of Ukraine, and the war propelled prices even higher. Wheat prices jumped 38 percent in March 2022 from a month earlier. Energy prices rose sharply, with natural gas prices in Europe tripling. High energy prices also fed into record prices of commonly used fertilizers for food production. While international food and energy prices have moderated since their recent peak, they nonetheless remain elevated. Moreover, the surge has contributed to higher consumer prices and led to economic hardship across the globe. Millions of people, especially in poorer countries, are being pushed into food insecurity. The World Food Programme estimates that 345 million people in almost 80 countries will face acute food insecurity this year—more than double the number in 2020. Amid these challenges, policymakers must remain vigilant. First and foremost, addressing inflation is a key concern, which means that monetary policy must remain focused on bringing inflation down. At the same time, fiscal policy should aim for gradual and steady tightening, and thus reduce the pressure on monetary policy to combat high inflation, while supporting the most vulnerable. As such, costly broad-based policies to mitigate the impact of higher commodity prices, including measures like price subsidies to limit the pass-through to domestic prices, need to be unwound and replaced by targeted measures to support vulnerable households. Such actions would help avoid distortions that would prevent or delay adjustments to higher energy prices. In addition, they would preserve incentives for development of alternative green energy sources, and support fiscal sustainability. This would also have beneficial distributional effects, as energy subsidies tend to also benefit richer households. To minimize longer-lasting adverse effects of volatility in commodity prices, it is also important to ensure strong macro-fiscal institutions that can buffer commodity price volatility. And domestic actions must not stand alone. Multilateral efforts are essential in achieving shared objectives of addressing food and energy insecurity. It is vital to sustain open trade in food. Moreover, free flow of trade in metal and mineral inputs that are critical for the green transition would also support energy security.

How Asia Can Ease Scarring from Lower Investment, Employment and Productivity (Credit: kitzcorner/iStock by Getty Images)

By Siddharth Kothari and Nour Tawk The pandemic, coupled with trade disruptions and Russia’s war on Ukraine, caused lasting harm to Asia-Pacific economies, damaging growth, productivity, and investment. Specifically, it left deep and long-lasting scars which, without swift and bold policy action, could restrain growth well into the future. Our recent research shows Asia is likely to experience the biggest output loss from the pandemic of all five major world regions. Scarring to Asian economies We measure the magnitude of these medium-term output losses by comparing 2022 forecasts of growth to projections for the same period made in January 2020. For Asia, we expect an average gross domestic product loss of 9.1 percent through next year, with greater losses for the region’s emerging and developing economies. To explain Asia’s deeper and more persistent scarring, we examine three critical factors: investment, employment, and productivity growth. Investment losses are an important contributor to scarring in Asia: a quarter of the region’s expected output losses result from reduced spending on investment projects. The effects are especially large in emerging economies, where we expect investment as a share of GDP to be 3 percentage points lower next year versus pre-pandemic projections. One likely cause for this steep drop is Asia’s high corporate debt. Businesses that borrow more are less likely to be able to expand or further invest, as this would add servicing costs to existing obligations. That would reduce overall capital spending, in turn reducing growth. This dynamic is important in the context of historically high corporate debt in Asia, which increased further during the pandemic, and is especially elevated in emerging economies compared to other regions. Using a new, detailed database of corporate balance sheets to estimate the effects of debt on investment, our research suggests that while recessions leave a large and persistent negative effect on firm-level investment, the effect is greater for those with high debt. Highly indebted firms, on average, see investment fall by 6 percent more than low-debt firms three years after a recession. Greater borrowing alone accounts for at least 28 percent of the average drop in investment after recessions. Of these, smaller and less profitable firms with high debt tend to see the biggest investment declines. This reflects their difficulty securing external funding without collateral, as well as the limited internal funds these firms need to finance investment. For employment, our calculations suggest that lower job growth would contribute about 2 percentage points to output losses in Asia. Employment could remain depressed for many years because of both the long-term loss of labor force quality and the reduced quantity of workers. Regarding labor force quality, protracted school closures have caused severe learning losses among students, with classrooms closed longest in Asia’s low-income economies. We expect these education losses to significantly hamper the acquisition of valuable skills, leading to lower human capital than would have been without school closures and hence lower long-term productivity. Regarding labor force quantity, we expect the COVID crisis to reduce the number of people entering the workforce, as evidence shows that pandemics can reduce fertility rates: epidemics over the past two decades, though smaller in scale, led to persistent declines in fertility rates of about 2.5 percent. Mitigation policies To mitigate scarring, economic reforms are essential to reduce corporate debt, boost labor outcomes, and raise productivity: First, an orderly reduction of corporate sector debt should be prioritized, to improve resilience to future shocks. Reforms to the insolvency framework can also allow a reallocation of resources to more productive firms. In addition, losses from school closures must be recouped: governments should assess learning setbacks and invest in teaching marketable skills to students. This may require more in-person training or longer school years, but retraining and other programs that can return people to the workforce would deliver economic benefits. Another priority is to boost slowing productivity growth, which accounts for about half of Asia’s scarring. Here, digitalization can be essential, especially after the pandemic, as companies and industries harnessing digital technology can better connect with customers and employees, and as remote work and online sales protect workers, students, and businesses. Empirical evidence from before and during the pandemic confirms how digitalization is building resilience and limiting scarring. Pre-pandemic data show that firms in more digital-oriented industries see a smaller decline in revenues following a recession than other firms. During the pandemic, labor markets also favored digital sectors: high-frequency data from job sites like Indeed and LinkedIn shows that digital jobs remained robust and recovered more quickly, even in emerging economies. Promoting digitalization is especially important in emerging economies, which have generally lagged advanced economies when it comes to online commerce, patents, and other digital innovation. Conclusions Asia could suffer significant long-term output losses from COVID-19, given diminished investment, productivity growth, and labor force participation. Economic reforms are essential to mitigate this scarring. Asia should prioritize addressing the investment scarring from high corporate debt by promoting deleveraging, and mitigating education losses. Finally, digitalization can help mitigate scarring and boost productivity growth. Though Asia has invested rapidly in this, more can be done. Enhancing digital connectivity should be a priority, especially in low-income developing countries, and for disadvantaged groups and regions. With a bold, concerted push, economies in the region can return to growth and better protect themselves against future shocks.

(Photo: IMF Photo) The last few months have witnessed tensions in Europe's housing markets as the cost-of-living crisis has eroded real incomes and the surge in interest rates has made borrowers more vulnerable to financial distress. Laura Valderrama is a macro-financial expert and coauthor of new research that suggests house prices across Europe are overvalued, and housing markets are at risk of a price correction that could undermine the region's economic recovery. Read the paper Laura Valderrama is a senior economist in the IMF European Department.     Listen to the podcast on: IMF.org | Apple Podcasts | Spotify | Libsyn |  Soundcloud | Google Podcasts   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

Dear maria, Central bankers of industrialized countries have fallen tremendously in the public’s estimation, writes University of Chicago professor, Raghuram Rajan, for F&D Magazine. Not long ago, central bankers were heroes, supporting feeble growth with unconventional monetary policies, promoting the hiring of minorities by allowing the labor market to run a little hot, and even trying to hold back climate change, all the while berating paralyzed legislatures for not doing more. Now they stand accused of botching their most basic task, keeping inflation low and stable. Politicians, sniffing blood and mistrustful of unelected power, want to reexamine central bank mandates, writes Rajan. “Did central banks get it all wrong? If so, what should they do?”  Read the full article F&D: New Directions for Monetary Policy The latest 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. Want to get a print copy delivered to your home or office? Click here to subscribe

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