ΙΜF Weekend Read

 

Dear MARIA, In today's edition, we highlight: Managing director on G20 priorities South Africa central bank chief on capital flows Crypto's tax problems UK's investment outlook Seychelles' climate finance

GROUP OF TWENTY Weak Global Economy, High Inflation, Rising Fragmentation Demand Strong Action (Credit: Urbanscape/iStock by Getty Images) When the G20 finance ministers and central bank governors meet in the Indian city of Gandhinagar next week, the world will be looking for joint action to address rising economic fragmentation, slowing growth, and high inflation, the IMF’s managing director writes in a blog. Kristalina Georgieva says that agile multilateral support is vital to tackle common challenges posed by debt vulnerabilities, climate change, and limited concessional financing—especially for countries hit by shocks not of their making. In April, the IMF projected global growth at 2.8 percent in 2023, down from 3.4 percent in 2022. The bulk of it—over 70 percent—is expected to come from the Asia-Pacific region. But Georgieva says recent high frequency indicators paint a mixed picture, with weakness in manufacturing contrasting with resilience in services across the G20 countries and strong labor markets in advanced economies. Financial fragilities uncovered by tight monetary policy require careful management, particularly as restoring price stability remains a priority, she added. “We must act now and act together to get all countries back on a sustainable path to growth and prosperity.”

CAMDESSUS LECTURE Countries Should Channel Capital Flows Productively (Credit: IMF Photo/Kim Haughton) Capital flows create “enormous opportunities”, but countries tend to focus on simply raising cash, instead of developing the capacity to channel capital to productive assets, South Africa’s Reserve Bank governor said in a speech at the IMF’s Washington headquarters on Tuesday. Delivering this year’s Michel Camdessus lecture, Lesetja Kganyago said credible macroeconomic policies, including a reasonable degree of price stability and a resilient financial system, are the bedrock of investor confidence. “Good policymaking starts with implementation,” he said. But, he added, implementation depends on “the quality of institutions as well as the human capital available and empowered to run them.” In South Africa’s “golden years”, the country used capital flows to reduce debt and grow the economy, Kganyago said. From 2010, however, they “have enabled excess and permitted the build-up of a large sovereign debt position.” “If you are going to absorb capital flows,” he stressed, “you need to get allocation right.” Read IMF Managing Director Kristalina Georgieva’s opening remarks on the challenges facing the global economy and how to manage capital flows.

CRYPTO ASSETS Crypto Poses Significant Tax Problems—and They Could Get Worse (Credit: Da-kuk/iStock by Getty Images) Tax systems need updating to cope with crypto assets, whose anonymity and decentralized nature poses challenges, not least for the value added tax, IMF economists write in a blog. Crypto assets that can be used as instruments of payment have proliferated into more than 10,000 variants since the 2009 debut of Bitcoin, the first and still the largest. The bewildering speed with which they have developed and the pseudonymity they can provide have left tax systems playing catch up. In the blog, which discusses the findings of a new paper, the IMF’s Katherine Baer, Ruud de Mooij, Shafik Hebous and Michael Keen explain how governments can address the emerging challenges of taxing these crypto assets while use is still limited to protect the integrity of the tax system. “Policymakers need to develop clear, coherent, and effective frameworks for taxing crypto,” they say.

Since their inception in 2008, the contentious rise of crypto assets has been dramatic, with about $50 million in transactions every day. But what does this brave new world of cryptographically-protected distributed ledgers mean for traditional tax systems? In a podcast, Ruud De Mooij, Deputy Director of the IMF Fiscal Affairs Department, says finding ways to tax crypto will mean fairer global taxes and revenue gains for governments.

SEYCHELLES Seychelles Is Tapping Innovative Climate Finance Instruments (Credit: iStock by Getty Images) Seychelles is successfully balancing conservation and economic development by tapping innovative financing instruments. The East African island nation relies largely on tourism and fishing for revenue and was the first country to issue a blue bond and to designate its fragile coastal areas for protection in return for a novel deal relieving it of part of its sovereign debt. It is now also the second African country, after Rwanda, to access the IMF’s Resilience and Sustainability Facility—funding aimed at helping countries with limited room in their budget address long-term challenges, such as climate change and pandemic preparedness. In an interview with Country Focus, Naadir Hassan, Seychelles’ Minister of Finance, National Planning and Trade, and Calixte Ahokpossi, IMF Mission Chief, talk about the RSF and Seychelles’ innovative approach to financing its climate goals. Watch the IMF’s Calixte Ahokpossi speak to CNBC Africa about RSF support in Seychelles.

UNITED KINGDOM Lasting Prosperity Hinges on Ambitious Reform (Credit: iStock by Getty Images) Prior to the global financial crisis, the United Kingdom had been a strong performer among the Group of Seven countries. But the economy lost momentum in the middle of the last decade. By 2022, real business investment was still slightly lower than in 2016—in contrast to the 14 percent increase among other G7 economies. In a Country Focus article, the IMF’s UK team spotlights policies that could add momentum to the government’s push to strengthen the economy’s productive potential and remain a global innovation leader. A stable, long-term strategy to promote business investment—including a permanent set of tax incentives—would strengthen investor confidence, the authors say.

FINANCE & DEVELOPMENT Health Without Borders (Credit: IMF Photo/Esther Ruth Mbabazi) Mounting concerns about cross-border spillovers from new infectious diseases are adding to global security worries, the UN’s Rupa Chanda writes in an online exclusive for Finance & Development Magazine. Global trade in health goods has assumed greater significance. Yet dependence on trade has downside risks too, as revealed during the pandemic. Imports of essential health products and related inputs can make countries highly vulnerable to restrictive trade policies, ad hoc protectionist measures, supply chain disruptions, and regulatory divergence, Chanda writes. “The critical role of trade in delivering public goods such as health care, along with the need to mitigate risks, calls for urgent coordination of trade and health policies and cooperation of stakeholders from both sectors.”

ASK AN ECONOMIST What is economic growth?

What is economic growth, why is it important, and how is it measured? We answer these questions in our newest episode of Ask an Economist.

Weekly Roundup PAKISTAN IMF Board Approves $3 Billion Program The IMF’s Executive Board on Wednesday approved a nine-month Stand-By Arrangement of about $3 billion for Pakistan to support the authorities’ economic stabilization program. The move allows for an immediate disbursement of about $1.2 billion. In a statement, IMF Managing Director Kristalina Georgieva said the arrangement offers Pakistan an opportunity to regain macroeconomic stability and address imbalances through consistent policy implementation. PRESS BRIEFING Global Trade Tensions Julie Kozack, Director of the IMF’s Communications Department, answered reporters’ questions on global trade tensions, inflation, Argentina, Pakistan, Ukraine and much more at a press briefing. “China, the US and other major trading partners should continue to work together to address core issues that risk fragmenting the global trade and investment system,” Kozack said. STAFF PAPER Eurosystem’s Large Losses Are Recoupable The Eurosystem, the monetary authority of the euro area, comprising the European Central Bank and the national central banks of member states whose currency is the euro, confronts a loss-making period. A new IMF staff paper projects the net income of the Eurosystem and its top-five national central banks over a ten-year horizon. It finds that losses, while large, will be temporary and recoupable. This obviates any need for capital contributions or indemnities from the state, instead allowing losses to be offset against future net income. STAFF PAPER Monetary Policy Transmission in Emerging Markets A new IMF staff paper investigates Malaysia’s transmission of monetary policy, including the role of external factors, and highlights findings that could be relevant for other emerging markets. The authors find an important role for credit and exchange-rate channels, as well as a complementary role for policy tools including foreign-exchange intervention. While global commodity prices do not impair monetary policy transmission, global monetary policy tightening could complement domestic efforts to achieve price stability by inducing a global disinflation.

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