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Dear Colleague,
In today's edition we hear about January updates to the World Economic Outlook, Global Financial Stability Report, and Fiscal Monitor; how the IMF is supporting a new climate economy; the Fund's role in a new Bretton Woods; the importance of capacity development; the future of the state in Gulf economies; and much more.
📣 But first, don't forget to tune in today to our live event on "The Great Green Reboot." The event builds off the latest issue of IMF’s Finance & Development Magazine on the future of jobs and opportunity, produced in partnership with the World Economic Forum. A live panel discussion will delve into the intersection of climate change and employment, and how investing in a greener, fairer and more inclusive recovery can also be a strategy for tackling the unemployment crisis as a result of the pandemic. Panelists include Martin Sandbu (European Economics Commentator, Financial Times), Petya Koeva Brooks (Deputy Director of Research, IMF) and Dominic Waughray (Managing Director, WEF). The discussion starts at 11:30 a.m. EST. Watch it live here.
RECOVERY HOPES RISE AMID EXCEPTIONAL UNCERTAINTY
Tremendous uncertainty over the path of a mutating COVID-19 virus and the global availability of vaccines continues to weigh on a recovery from the crisis. Despite an opaque future, our latest World Economic Outlook Update forecast released this week projects global growth for 2021 at 5.5 percent, 0.3 percentage point higher than our October forecast, moderating to 4.2 percent in 2022.
"The upgrade for 2021 reflects the positive effects of the onset of vaccinations in some countries, additional policy support at the end of 2020 in economies such as the United States and Japan and an expected increase in contact-intensive activities as the health crisis wanes. However, the positive effects are partially offset by a somewhat worse outlook for the very near term as measures to contain the spread of the virus dampen activity," IMF Chief Economist Gita Gopinath writes in a blog.
A widening gap: The uneven rollout of vaccines and differing levels of fiscal support across countries risks a "great divergence"--an ever-growing gulf between countries when it comes to the pace of recovery relative to the pre-COVID forecast. China returned to its pre-pandemic projected level in the fourth quarter of 2020. The US is projected to surpass its pre-COVID levels this year, well ahead of the euro area.
However, more than 50 percent of emerging markets and developing economies that were converging towards advanced economies per capita income over the last decade are expected to diverge over the 2020–2022 period. Within countries, the crisis has increased inequality. Workers with less education, youth, women and those informally employed have suffered disproportionate income losses. Close to 90 million individuals are expected to enter extreme poverty over 2020–21, reversing the trends of the past two decades.
Policies to strengthen the recovery: The international community must act swiftly to ensure rapid and broad global access to vaccines, targeted economic lifelines to households and firms must be maintained where the virus continues to surge, financial stability should be ensured with continued accommodative monetary policy, and the international community needs to do more to help poorer countries combat the crisis, Gopinath writes.
Read the full World Economic Outlook Update and watch the press conference here.
Watch Gita Gopinath discuss more about the outlook during the 9th C.D. Deshmukh Memorial Lecture hosted by the National Council of Applied Economic Research.
TRANSITIONING TO THE NEW CLIMATE ECONOMY
Speaking at the international Climate Adaptation Summit Managing Director Kristalina Georgieva described climate resilience as a critical priority. Here are four key areas where she said the IMF is meeting the challenge in the coming year:
- Integrating climate in IMF annual country economic assessments, known as Article IV consultations. In highly vulnerable countries the focus will be on adaptation; and we are building up mitigation analysis, including carbon pricing, in our assessments of large emitters.
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Including climate related financial stability risks in financial sector surveillance – through standardized disclosure of these risks, enhanced stress tests and assessments of supervisory frameworks.
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Scaling up climate in capacity development to help equip finance ministries and central banks with the skills needed to take climate considerations into account.
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Mainstreaming climate indicators in macroeconomic data. The IMF will launch a Climate Change Dashboard this year—with indicators to track the economic impact of climate risks and the measures taken to mitigate them.
"Increased resources matter; policies matter even more. The focus must be not only on green spending, but on overall economic and social policies," she said in remarks at the inaugural Global Center for Adaptation Ministerial Dialogue on Adaptation Action.
Watch MD Georgieva discuss a "A Climate Resilient Financial System in a Post-COVID World" with Aiyaz Sayed-Khaiyum, Fiji's Attorney-General and Minister for Economy, Civil Service, and Communications.
A NEW BRETTON WOODS
The Managing Director virtually participated in a wide-ranging conversation hosted by Wellesley College where she made an appeal for a new Bretton Woods moment and outlined the role of the IMF and other international institutions.
"The world today has three priorities: Bring the health crisis to an end everywhere; transform, recover and transform the economy for the future, not replicate the economy of yesterday; and prevent divergence between rich and poor, rich and poor people, rich and poor countries," she said during the event. "Every institution has to find its place vis-à-vis these priorities and deliver its utmost best to address them, and for me that is our new Bretton Woods moment to step up to what is expected from us in this crisis."
Read the full transcript here.
The MD covered a wide range of topics in other media appearances this week:
"What we are seeing in [20]21 is indeed parts of the world economy doing extremely well. They are lifting their growth projections on the basis of vaccines, on the basis of stimulus, but also because now we know how to function with the pandemic still around us. But for 150 countries this year, the picture remains relatively bleak," she said on CNBC.
"Vaccine policy is an economic policy and that only vaccinating everybody, everywhere would get us out of the risk of this mutation that we have already seen threatening the hopes for accelerated recovery. And that is possible. Not only it is possible, it is in the interest of everyone," she said on Bloomberg.
"We are now seeing a much more engaged world on the very big challenges we face. More engaged on climate. Remarkably, in 2020, many of us worried that we would lose sight of this looming climate crisis. The opposite happened. There is much more determination to take a green turn," she said on PBS.
FINANCIAL PERILS IN CHECK BUT DON'T GET COMPLACENT
The IMF's Global Financial Stability Report update found that the promise of vaccines have inoculated the market but economic recovery still rests on continued monetary and fiscal policy support. Still, don't discount the possibility of a market correction.
"Prices for stocks, corporate bonds, and other risk assets have risen higher on the news of vaccine rollouts. Financial markets have shrugged off rising COVID-19 cases, betting that continued policy support will offset any bad economic news in the short term and provide a bridge to the future.
"As the apparent disconnect between exuberant financial markets and the still-lagging economic recovery persists, it raises the specter of a possible market correction should investors reassess the economic outlook or the extent and duration of policy backstop," IMF Financial Counsellor Tobias Adrian and Fabio Natalucci, Deputy Director of the IMF's Monetary and Capital Markets Department, write in a blog accompanying the release of the update.
Beware complacency: A sense of complacency appears to permeating markets as investors bet on a persistent policy backstop. When coupled with apparent uniform investor views, this raises the risk of a market correction or “repricing,” they warn.
Financial stability risks have been in check so far, but action is needed to address vulnerabilities exposed by the pandemic. These include rising corporate debt, fragilities in the nonbank financial institutions sector, increasing sovereign debt, market access concerns for some developing economies, and declining profitability in some banking systems.
In this IMF Podcast, listen to Natalucci, a lead author of the GFSR Update, describe how difficult times still lie ahead despite vaccine rollout boosting hopes of recovery this year.
KEEPING UP THE FISCAL SUPPORT
Government support for vaccine rollouts, protecting vulnerable households and otherwise viable firms, and fostering a durable and inclusive recovery will continue to be vital amid the ongoing crisis, according to the January 2021 Fiscal Monitor Update. Most countries will need to do more with less, considering the increasingly tight budget constraints.
"Support has varied across countries depending on the impact of the pandemic-related shocks and governments’ ability to borrow. In advanced economies, fiscal actions cover several years (exceeding 4 percent of GDP in 2021 and beyond). In contrast, support in emerging markets and developing countries was frontloaded, with a large share of measures expiring," Vitor Gaspar, Director of the IMF's Fiscal Affairs Department, writes in a blog with the IMF's Raphael Lam, Paolo Mauro, and Mehdi Raissi.
Before the pandemic, the IMF projected global public debt to be 84 percent of GDP at the end of 2020; it has now reached 98 percent of GDP. The global fiscal support reached nearly $14 trillion as of end-December 2020, up by about $2.2 trillion since October 2020. It comprises $7.8 trillion in additional spending or (to a lesser extent) measures to forgo revenues and $6 trillion in guarantees, loans, and equity injections.
Five spending priorities: To ensure fiscal policy enables a green, digital, and inclusive transformation priorities should include:
- Investing in health systems (including vaccinations), education, and infrastructure. A coordinated green public investment push by economies with fiscal space can foster global growth. Projects—ideally with the participation of the private sector—should aim at mitigating climate change and facilitating digitalization;
- Helping people go back to work and move between jobs, if needed, through hiring subsidies, enhanced training and job search programs;
- Strengthening social protection systems to help counter inequality and poverty;
- Rethinking tax systems to promote greater fairness and provide incentives to protect the environment; and
- Cutting wasteful spending, strengthening the transparency of spending initiatives, and improving governance practices to reap the full benefits of fiscal support.
STRENGTHENING ECONOMIC INSTITUTIONS
Strong economic institutions are a critical foundation for countries seeking effective policies and progress toward the Sustainable Development Goals, IMF Deputy Managing Director Antoinette Sayeh said in a speech this week at the annual conference of the Norwegian Agency for Development Cooperation.
The IMF provides technical assistance and training to help governments strengthen public finances, safeguard financial stability, modernize exchange rate policies, and improve economic governance and transparency. In fact, nearly a third of the IMF's budget goes toward capacity development activities, she said.
Capacity development priorities: The DMD listed three priority areas where the IMF will focus its technical assistance and training in the period ahead. First, helping policymakers confront rising public debt. Second, assisting governments with revenue mobilization to tackle debt vulnerabilities and create space for development spending. Third, working with countries on carbon pricing in the effort to address climate change and mobilize revenues.
TRANSFORMING THE ROLE OF THE STATE IN GULF ECONOMIES
The COVID-19 pandemic has reaffirmed economic challenges facing the Gulf region, but it has not altered them, Tim Callen, Assistant Director of the IMF's Middle East and Central Asia Department, write this week in a commentary with Chatham House's Adel Hamaizia.
"Ultimately, if diversification is to succeed, the relationship between state and private companies will need to change," they write, adding that striking the right balance is essential. "The state should primarily focus its efforts on providing quality infrastructure, a sound legal and regulatory framework, and appropriate time-limited financial incentives to private sector investors where needed."
Read the full piece here.
IMF RESEARCH PERSPECTIVES
The greatest contribution that economic research can make right now is to analyze the impact of the pandemic and cast light on its shadows, so that the paths, both behind and ahead of us, begin to emerge. There is no darkness but ignorance.
The latest issue of IMF Research Perspectives looks at the history of social unrest in the aftermath of pandemics, the inequalities of telework, COVID’s infection of banks, and how economic activity has been shaped by people’s reaction to the virus.
IMF AROUND THE WORLD
The IMF Executive Board approved two disbursements this week. The Pacific island nation of Tonga received a $9.95 million disbursement under the IMF’s Rapid Credit Facility, as COVID-19 and the effects of Cyclone Harold weigh on the economy. The Board approved $20.47 million in emergency assistance to Guinea-Bissau, also under the IMF’s Rapid Credit Facility. The disbursement will help the West African nation support critical spending in health, social protection and investment to underpin the recovery and catalyze additional donor resources.
The Board last Friday also concluded its Article IV consultation with The Bahamas, which has suffered recently from the impact of the pandemic and remains vulnerable to natural disasters. On Wednesday, the Board completed Article IV consultations assessing the economies of Nigeria and Bulgaria.
Chad this week reached a staff-level agreement with the IMF for a new medium-term program that could be supported by IMF resources of about $560 million under the Extended Credit Facility and the Extended Fund Facility. The agreement is subject to Board approval. IMF staff also concluded a virtual staff visit to South Africa and completed an Article IV mission to the Republic of Korea.
IMF LENDING
Check out our global policy tracker to help our member countries be more aware of the experiences of others in combating COVID-19. We are also regularly updating our lending tracker, which visualizes the latest emergency financial assistance and debt relief to member countries approved by the IMF’s Executive Board.
To date, 80 countries have been approved for emergency financing, totaling over US$32 billion. Looking for our Q&A about the IMF's response to COVID-19? Click here. We are also continually producing a special series of notes—more than 50 to date—by IMF experts to help members address the economic effects of COVID-19 on a range of topics including fiscal, legal, statistical, tax and more.
FINAL THOUGHT
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