IMF Weekend Read

 

Dear maria, In today's edition, we highlight: Uncomfortable truths about inflation Challenges of economic forecasting Europe's corporate profits Caribbean climate crisis Sovereign wealth funds

GLOBAL INFLATION Three Uncomfortable Truths (CREDIT: IMF PHOTO) Central banks face increasingly complex challenges and economic growth may have to slow more before inflation is defeated, the IMF’s first deputy managing director told the European Central Bank’s annual conference in a speech on Monday. Spelling out three “uncomfortable truths” about inflation at the ECB’s conference in Sintra, Portugal, Gita Gopinath said that inflation is taking too long to get back to target. The second uncomfortable truth is that financial stresses could generate tensions between central banks’ price and financial-stability objectives, and the third is that central banks are likely to experience more upside inflation risks in the future, she said. Gopinath said that the fight against inflation wouldn’t be easy, and financial stresses may intensify and growth may have to slow more. “Even so, we know that we can’t have sustained economic growth without a return to price stability.” Alfred Kammer, the director of the IMF’s European Department, told the conference that large recent shocks have made economic forecasting even more challenging than usual. Kammer explained how the Fund had adapted its forecasting methods during volatile periods. Gita Gopinath sat down with the ECB's Katie Ranger to talk about the state of the global economy and the risks of a more fragmented world in a podcast.

Rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than the spiking costs of imported energy. Now that workers are pushing for pay rises to recoup lost purchasing power, companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank’s target. As the Chart of the Week shows, higher inflation in the euro area so far mainly reflects profits and import prices, with profits alone accounting for 45 percent of price rises since the start of 2022. Read the blog

FINANCE & DEVELOPMENT Financing Peace and Stability (CREDIT: ISTOCK / YOH4NN) The Sudan crisis that exploded in April is a stark reminder of the far-reaching spillovers of violent conflict in today’s integrated global economy, the IMF’s Franck Bousquet writes in a new article for Finance & Development Magazine. Sadly, Sudan is just one recent flashpoint in a worsening global fragility and conflict landscape aggravated by Russia’s invasion of Ukraine. More than 60 percent of the world’s poor could live in fragile and conflict-affected states by 2030, Bousquet says. “The international community must scale up assistance and develop financing solutions that support peace and stability as global public goods.” The June edition of F&D focuses on Trade, Disrupted. Leading thinkers discuss economic security, geoeconomic fragmentation, industrial policy, export controls, regional trade agreements, tech’s effect on trade, green trade tensions, trade’s impact on women, and much more.

CLIMATE CHANGE Caribbean Climate Crisis Demands Urgent Action (CREDIT: WORLD METEOROLOGICAL ORGANIZATION) The Caribbean is the most exposed region to climate-related natural disasters, with estimated adaptation investment needs of more than $100 billion, but the current level of private climate finance in the Caribbean region falls well short of what is needed, write the IMF’s Alejandro Guerson, James Morsink and Sònia Muñoz in a blog. Access to private climate financing has been low due to several factors including limited capacity and expertise for project preparation, the multifaceted nature of climate finance operations, and data gaps, the authors write. The blog explains how addressing these obstacles to private climate finance requires coordinated action by all those involved, including governments, financial markets, and international financial institutions. Read more about Jamaica’s exposure to natural hazards, including cyclones, floods, and droughts, and the IMF’s assistance to the Caribbean island nation through a Climate Public Investment Management Assessment.

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Weekly Roundup PAKISTAN Agreement on $3 Billion Program IMF staff and the Pakistani authorities on Thursday reached agreement on policies to be supported by a $3-billion Stand-By Arrangement. The staff-level agreement is subject to approval by the IMF’s Board by mid-July. The new program will support the authorities’ immediate efforts to stabilize the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners. UKRAINE Successful Review Unlocks $890 Million The IMF’s Executive Board has completed the first review of Ukraine’s Extended Fund Facility arrangement, allowing the authorities to draw the equivalent of about $890 million. The program was approved by the Board in March and forms part of a $115-billion total support package for Ukraine. “Russia’s invasion of Ukraine continues to have a devastating economic and humanitarian impact,” IMF Managing Director Kristalina Georgieva said in a statement. “Despite the war, program performance has been strong.” COSTA RICA Climate Change Reforms The IMF’s Board has concluded the first review under Costa Rica’s Resilience and Sustainability Facility arrangement, making about $246 million available in support of the country’s ambitious climate-change agenda. Kenji Okamura, IMF deputy managing director and acting chair of the board, said the authorities had completed all RSF reform measures and are intensifying efforts to attract climate financing from official and private sources. Costa Rica was the first country in the world to benefit from the RSF to support climate-change reforms. STAFF PAPER New Evidence on Sovereign Wealth Funds Sovereign wealth funds can help smooth government consumption by reducing fiscal volatility associated with commodity price fluctuations, a new IMF staff paper finds. Fiscal performance in most commodity-exporting countries is typically shaped by shifts in commodity prices and economic activity, often resulting in procyclical fiscal policy. One way to minimize the procyclicality of fiscal policy is to set up a stabilization sovereign wealth fund, although previously the empirical evidence of their value was inconclusive. ANNUAL MEETINGS Marrakech Essential Reading The IMF and the World Bank Group will hold their Annual Meetings this year from October 9-15 in Marrakech, Morocco. The Marrakech 2023 Essential Reading Guide features the latest publications on the region and on the key themes of building resilience, securing a transformational recovery, and reinvigorating global cooperation.

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