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Dear MARIA, We just published a new blog—please find the full text below.  Now Is the Time to Help Countries Faced with Liquidity Challenges (Credit: Kim Haughton/IMF Photo) By Ceyla Pazarbasioglu and Pablo Saavedra Many countries are being squeezed by increasing interest payments and high debt redemptions. The economic scarring of the pandemic, conflicts around the world, and the abrupt rise in global interest rates have hit low-income countries the hardest. The median low-income country is spending over twice as much on debt service to foreign creditors as a share of revenue than it did 10 years ago—roughly 14 percent at the end of 2023 from 6 percent 10 years earlier. Following years of substantial borrowing, debt redemptions in low-income countries over the near term are almost triple their long-term average: about $60 billion compared to an annual average of $20 billion from 2010 to 2020. Improved creditor processes—thanks to the work of creditor committees and the Global Sovereign Debt Roundtable, the Group of Twenty, the Paris Club, and others—helped streamline sovereign debt restructuring and shorten restructuring timelines. However, more work is needed to make these processes faster and further reduce uncertainty. While we avoided a systemic debt crisis so far, higher interest payments and debt redemptions are stifling growth and employment while also placing significant pressures on many countries’ public finances. This comes at a time when countries need critical investment to achieve sustainable and inclusive economic growth and adapt to climate change. Left unaddressed, these liquidity pressures could lead to solvency problems for many vulnerable countries. In other words, what is now a squeeze on public finances could morph into a debt crisis, with substantive implications for growth, job creation, and poverty. The global community must act now to avoid this outcome. The IMF and World Bank together propose a package of actions to support low-income countries and other vulnerable countries as they work to manage these pressures with the aim of creating more room in government budgets to support growth and build resilience. Our approach rests on three pillars: Pillar 1 – Domestic resource mobilization. Governments can boost growth and jobs and generate fiscal space via domestic resource mobilization. Our joint new IMF/World Bank Domestic Resource Mobilization Initiative will provide policy advice and capacity development assistance to help countries implement needed reforms. This means sequencing reforms to accelerate economic growth and create jobs, while strengthening governance and tackling corruption, guided by peer learning and cross-country experiences. It also calls for improving the effectiveness of public spending, increasing government revenues to meet priority needs, and developing domestic financial markets to channel savings to productive uses. Pillar 2 – International support. Financial support can help countries meet their needs as they undertake important reforms. Support from bilateral and multilateral development partners will be needed, including by providing lower-cost financing and grants. Many countries facing refinancing pressures need positive net flows over the next few years. The IMF and World Bank are important parts of this collective effort. 2024 is a critical year to successfully complete the 21st replenishment of the World Bank’s International Development Association and the IMF’s Poverty Reduction and Growth Trust review. Pillar 3 – Reducing debt servicing burdens. New solutions are needed to support countries that do not have solvency problems but need to manage the high debt servicing levels. These include mechanisms by multilateral or bilateral partners to mobilize new financing, including from the private sector, at affordable terms using credit enhancements to refinance existing debt. Countries could also pursue liability management operations, including debt-for-development swaps and debt buybacks where appropriate. We will refine these options before the IMF-World Bank Annual Meetings in October, including through work of the Global Sovereign Debt Roundtable. Ultimately, our three-pillar approach aims to ease liquidity challenges. By mobilizing a set of actions across multiple stakeholders, we can promote cooperative solutions and help create the conditions for lasting growth and resilience.

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!

China China’s Service Sector Is an Underutilized Driver of Economic Growth (Credit: Raul Ariano/IMF Photo) China’s economic development over the last several decades has been remarkable amid rapid growth. We project growth will remain resilient at around 5 percent in 2024, despite the continued property sector adjustment. At the same time, China has relied too much on investment as opposed to consumption. Diminishing productivity and an aging population risk restricting growth, which we expect to slow significantly in coming years, to around 3.3 percent in 2029. Addressing these challenges requires a comprehensive and balanced policy approach. Given these circumstances, the country’s service sector is an underexploited driver of growth—which was also recognized at the Third Plenum. Reallocating resources to services has helped boost productivity over the past two decades. And it can continue doing so in the years ahead if supportive reforms are implemented. Expanding the service sector can also help put more people to work—especially young people, who are disproportionately employed in service sectors like technology and education. Moreover, since emissions are lower in services, expanding the sector would help China reach its climate goals more efficiently. China does have significant further potential for expanding services, as we show in our latest annual review of the world’s second-largest economy. While the sector’s share of value-added to the economy has increased in recent years to just over 50 percent, it is still well below the average of about 75 percent for advanced economies. Even though service sector firms have been highly innovative in China, company-level data indicate that the allocation of capital and labor across firms has been increasingly less efficient in the sector. This means that highly productive firms have been too small on average, suggesting difficulties attracting new capital and labor, while less productive firms were cornering too large a share of the market. China should therefore prioritize reforms to improve the allocation of capital and labor in services. The sector remains subject to more onerous regulations compared with members of the Organisation for Economic Co-operation and Development, including restrictions on domestic and foreign entry as well as significant regulatory hurdles. Easing regulatory requirements, further reducing local protectionism, and allowing more businesses to enter and compete in services—including reduced trade and foreign entry restrictions—can boost productivity and support growth. China should also prioritize rebalancing the economy to strengthen demand for services. Improving social safety nets and making taxes more progressive would reduce the need for precautionary savings, especially by middle- and lower-income households, and allow greater spending on services. Increased coverage and better unemployment and medical benefits would further boost consumption. In this context, this year’s increase in old-age benefits by 19 percent for rural and non-working urban residents is a small but welcome step. Overall, the service sector can create jobs and drive sustainable growth in China. Ideally, policies to help rebalance demand toward consumption would be combined with reforms that lower barriers to entry and ease other regulatory restrictions that have prevented capital and labor from being efficiently allocated in the past. We estimate that a comprehensive package of market-based structural reforms, enhancements to the social safety net, and pension reforms can raise the GDP by close to 20 percent over the next 15 years relative to the baseline, or about 1 percentage point higher potential growth per year over the medium term. **** Sonali Jain-Chandra is the IMF mission chief for China. Siddharth Kothari and Natalija Novta are senior economists for China in the Asia and Pacific Department.  RELATED LINKS Staff Report Press Release China and the IMF

Dear MARIA, In today's edition, we highlight: Helping countries with liquidity challenges China Country Focus US$3.4 billion approved for Ethiopia Egypt's strengthened reforms Euro area recovery, and much more

PUBLIC DEBT Now Is the Time to Help Countries Faced with Liquidity Challenges (Credit: Kim Haughton/IMF Photo) Many countries are being squeezed by increasing interest payments and high debt redemptions. The economic scarring of the pandemic, conflicts around the world, and the abrupt rise in global interest rates have hit low-income countries the hardest, write the IMF’s Ceyla Pazarbasioglu and the World Bank’s Pablo Saavedra in a new blog. The median low-income country is spending over twice as much on debt service to foreign creditors as a share of revenue than it did 10 years ago—roughly 14 percent at the end of 2023 from 6 percent 10 years earlier. Following years of substantial borrowing, debt redemptions in low-income countries over the near term are almost triple their long-term average: about $60 billion compared to an annual average of $20 billion from 2010 to 2020. Improved creditor processes—thanks to the work of creditor committees and the Global Sovereign Debt Roundtable, the Group of Twenty, the Paris Club, and others—helped streamline sovereign debt restructuring and shorten restructuring timelines. However, more work is needed to make these processes faster and further reduce uncertainty, the authors say. The IMF and World Bank together propose a package of actions to support low-income countries and other vulnerable countries as they work to manage these pressures with the aim of creating more room in government budgets to support growth and build resilience, resting on three pillars: 1) domestic resource mobilization; 2) international support; and 3) reducing debt servicing burdens. “Ultimately, our three-pillar approach aims to ease liquidity challenges. By mobilizing a set of actions across multiple stakeholders, we can promote cooperative solutions and help create the conditions for lasting growth and resilience,” the authors conclude, noting that the options will be refined before the IMF-World Bank Annual Meetings in October, including through the work of the Global Sovereign Debt Roundtable. Read the Blog

COUNTRY FOCUS China’s Service Sector Is an Underutilized Driver of Economic Growth (Credit: Raul Ariano/IMF Photo) China’s economic development over the last several decades has been remarkable amid rapid growth; the Fund projects growth will remain resilient at around 5 percent in 2024, despite the continued property sector adjustment. At the same time, China has relied too much on investment as opposed to consumption. Diminishing productivity and an aging population risk restricting growth, which is expected to slow significantly in coming years, to around 3.3 percent in 2029. Addressing these challenges requires a comprehensive and balanced policy approach, say the IMF’s Sonali Jain-Chandra, Siddharth Kothari and Natalija Novta in a new Country Focus article. Given these circumstances, the country’s service sector is an underexploited driver of growth, the authors write. Expanding the service sector can also help put more people to work—especially young people, who are disproportionately employed in service sectors like technology and education. Moreover, since emissions are lower in services, expanding the sector would help China reach its climate goals more efficiently. China does have significant further potential for expanding services, as shown in the Fund’s latest annual review of the world’s second-largest economy, and should therefore prioritize reforms to improve the allocation of capital and labor in services. Overall, the service sector can create jobs and drive sustainable growth in China. Ideally, policies to help rebalance demand toward consumption would be combined with reforms that lower barriers to entry and ease other regulatory restrictions that have prevented capital and labor from being efficiently allocated in the past. The authors estimate that a comprehensive package of market-based structural reforms, enhancements to the social safety net, and pension reforms can raise the GDP by close to 20 percent over the next 15 years relative to the baseline, or about 1 percentage point higher potential growth per year over the medium term. Read the Article

ETHIOPIA IMF Board Approves US$3.4 Billion to Support the Authorities’ Homegrown Economic Reform Agenda (Credit: CanYalicn/AdobeStock) The IMF Board approved a US$3.4 billion (SDR 2.556 billion) Extended Credit Facility (ECF) arrangement for Ethiopia this week, enabling an immediate disbursement of about US$1 billion (SDR 766.75 million), the Fund said in a statement. "This is a landmark moment for Ethiopia," IMF Managing Director Kristalina Georgieva said in the statement. "The approval of the ECF is a testament to Ethiopia’s strong commitment to transformative reforms. The IMF looks forward to supporting these efforts to help make the economy more vibrant, stable, and inclusive for all Ethiopians." The four-year financing package will support the authorities’ Homegrown Economic Reform (HGER) Agenda to address macroeconomic imbalances, restore external debt sustainability, and lay the foundations for higher, inclusive, and private sector-led growth. The program is expected to help catalyze additional external financing from development partners and provide a framework for the successful completion of the ongoing debt restructuring, the statement noted. Read the Statement

EGYPT Strengthened Reforms Yielding Positive Results (Credit: www.rogeranis.photo) This week, the IMF Executive Board completed the third review under the Extended Arrangement under the Extended Fund Facility (EFF) for Egypt, allowing the authorities to draw the equivalent of about US$820 million (SDR 618.1 million). Macroeconomic conditions have started to improve since the approval of the combined first and second reviews of the program in March, the Fund said in a statement. Inflationary pressures are gradually abating, foreign exchange shortages have been eliminated, and fiscal targets (including related to spending by large infrastructure projects) were met. These improvements are beginning to have a positive effect on investor confidence and private sector sentiment. At the same time, the difficult regional environment generated by the conflict in Gaza and Israel and tensions in the Red Sea, as well as domestic policy and structural challenges, call for continued implementation of program commitments.  “Strengthened reforms under the EFF-supported program are yielding positive results,” said IMF Deputy Managing Director and Acting Chair Antoinette M. Sayeh at the conclusion of the Board’s discussion. “The unification of the exchange rate and the accompanying monetary policy tightening have curtailed speculation, brought in foreign inflows, and have moderated price growth. With signs of recovery in sentiment, private sector growth should be poised for a rebound.” Read the Statement

EURO AREA Recovery Gradual, Modest Acceleration of Growth Projected for 2024 (Credit: Alex Domanski/Newscom) The Executive Board of the International Monetary Fund (IMF) concluded the 2024 discussions on common euro area policies with member countries this week, the Fund said in a statement. The euro area is recovering gradually, with a modest acceleration of growth projected for 2024, gathering further speed in 2025. Increasing real wages together with some drawdown of household savings are contributing to consumption, while the projected easing of financing conditions is supporting a recovery in investment. Inflation is also coming down as past monetary tightening and the decline in commodity prices are having an effect on prices in the euro area. However, disinflation will continue to be gradual, and the inflation is projected to return to target in the second half of 2025, the statement noted. Risks to growth are on the downside while they are two-sided for inflation. Past monetary policy tightening could put a stronger drag on output than expected. Adverse external developments—such as intensifying geopolitical tensions and/or weaker global demand—could also hold back growth, said the statement.

LATIN AMERICA Okamura on Raising Productivity Growth in Central America, Panama and the Dominican Republic (Credit: IMF Photo/Joshua Roberts) While growth in Latin America is projected to average just 2 percent over the next 5 years, Central America, Panama, and the Dominican Republic this year outperformed the rest of Latin America and other emerging markets with stronger growth and lower inflation, said IMF Deputy Managing Director Kenji Okamura at the IMF’s 18th Regional Conference on Central America, Panama, and the Dominican Republic. In the medium-term, growth in these countries is projected to be about double that of the Latin American and Caribbean region—more in line with other emerging market economies, he noted. Addressing policymakers at the conference, which was co-hosted with the Central Bank of Costa Rica, he added that much of the credit for the remarkable outcomes should go to this cohort. “Your policies have stabilized public debt and brought inflation under control, while strengthening social support systems,” said Okamura. But there is still work to be done, he continued. “Poverty and inequality persist, with ample room to raise living standards. And in a more shock-prone, low-growth world, building economic resilience and igniting productivity is essential.” To address these challenges, Okamura provided four recommendations: 1) rebuild fiscal buffers; 2) continue to strengthen monetary policy frameworks to keep inflation within central bank targets; 3) improve governance and the business climate; and 4) boost labor force participation.

The world is changing so quickly it’s hard to think of one aspect of our economic lives that hasn’t shifted from what it was only a few years ago. Trade is no exception. New technologies, the re-emergence of industrial policy, and rising geopolitical tensions are all putting added pressure on the international trading system. Michele Ruta is a trade expert at the IMF. In this podcast, he says global cooperation is key to preventing economic fragmentation, from which no one benefits.

F&D MAGAZINE Back to Basics:  Globalization Today (Credit: PIDJOE) For at least 150 years, global economic forces have by turns pulled countries closer together and pushed them farther apart—and today we may be at another turning point in globalization’s history, the IMF’s Adam Jakubik and Elizabeth Van Heuvelen write in F&D magazine’s Back to Basics series. In this explainer, the authors summarize the main characteristics of globalization and how it has developed over the years. They also examine globalization’s pros and cons, and what can be done to spread its benefits more widely. Also check out our video on globalization. F&D’s Back to Basics series explains basic economic concepts for the non-specialist. More than 70 articles and videos focus on relevant topics making the headlines and provide a better understanding of how economic issues can affect our daily lives. View our archives here. The world has changed markedly since the IMF was founded 80 years ago. In F&D’s June issue, we explore how the IMF can adapt to remain effective. Authors include Kristalina Georgieva, Ceyla Pazarbasioglu, Raghuram Rajan, Mia Amor Mottley, William Ruto, Pablo García-Silva, Harold James, Martin Wolf, Adam S. Posen, Edwin M. Truman, Masood Ahmed, Axel A. Weber, Anna Postelnyak, Réka Juhász, Nathan Lane, Mark Aguiar, James M. Boughton, Atish Rex Ghosh, Andrew Stanley, Adam Jakubik, Elizabeth Van Heuvelen, Henny Sender, Melinda Weir, Vivek Arora, Douglas A. Irwin, and Lisa Kolovich. Subscribe for a Free Print Copy Weekly Roundup STAFF PAPER Can Mobile Technologies Enhance Productivity? Evidence from Benin Food security remains an important development goal in Africa, a region where one in five people were chronically undernourished and 24 percent of the people were acutely food insecure in 2023 (FAO et al., 2023). Beyond the production and availability of food, a range of market frictions (such as bottlenecks to market access and transport infrastructure gaps) can impede the continuous supply of safe, sufficient, affordable, and nutritious food, with disproportionate negative effects on households at the lower end of the income distribution. However, the rapid uptake of mobile phones and broadband internet in Africa, which contributed to a wider adoption of digital technologies, has the potential of facilitating the market access of food products, and thereby improve food security This new staff paper analyzes how digital technology adoption shapes the productivity of small-scale businesses in the grains and legumes markets. STAFF PAPER Capital Controls on Outflows: New Evidence and a Theoretical Framework In recent years, academics and policymakers have proposed to reconsider controls on cross-border capital flows as a potentially useful stabilization device. By and large, developments in this direction reflect shifting views about capital inflows and research findings indicating that, under some circumstances, it may be socially beneficial to impose controls to curb excessive foreign borrowing. The authors of a new IMF staff paper study capital controls on outflows (CCOs) in situations of macroeconomic and financial distress, and present novel empirical evidence indicating that CCO implementation is associated with crises and declines in GDP growth. The authors then develop a theoretical framework that is consistent with such empirical findings and also yields policy and welfare lessons.

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.   The IMF Weekend Read will return on September 6.

Miriam Van Dyck Editor IMF Weekend Read mvandyck@IMF.org

(Credit: Eakarat Buanoi/iStock by Getty Images) The world is changing so quickly it’s hard to think of one aspect of our economic lives that hasn’t shifted from what it was only a few years ago. Trade is no exception. New technologies, the re-emergence of industrial policy, and rising geopolitical tensions are all putting added pressure on the international trading system. Michele Ruta is a trade expert at the IMF. He says global cooperation is key to preventing economic fragmentation, from which no one benefits. Check out the IMF’s global trade webpage   Listen to the podcast on: IMF.org | Apple Podcasts | Spotify | Soundcloud | YouTube   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