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Dear Colleague,
In today's edition, we highlight:
- Euro area's economic outlook
- Fiscal risks in the Middle East
- Claudia Goldin on family economics
- South Africa's slow growth
- Regional trade agreements
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EURO AREA
(Credit: Travel_Motio/iStock by Getty Images)
After slipping into recession earlier this year, economic activity in the euro area is likely to recover only modestly throughout 2023 and 2024, IMF staff said in a statement on Friday.
A slow recovery in real incomes, further easing of supply constraints and firmer external demand will support activity across the 20-member bloc that shares the euro even as financial conditions continue to tighten, staff said at the end of a regular review of the economy, known as an Article IV consultation.
While headline inflation has fallen sharply, core inflation has proven more persistent. This partly reflects the delayed transmission of lower commodity prices into consumer prices and firms’ ability to protect or increase profits, staff said.
“Monetary policy must continue to tighten to bring inflation to target in a timely manner. Fiscal consolidation should also proceed to ease inflation pressures and rebuild fiscal space.”
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MANAGING DIRECTOR PRESS CONFERENCE
Euro area monetary tightening should continue
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Kristalina Georgieva welcomed the European Central Bank’s decision this week to raise interest rates to a 22-year high but told a press conference on Friday that inflation was still too high. “Monetary policy should continue to tighten and then remain in restrictive territory for some time,” she said. |
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MIDDLE EAST AND NORTH AFRICA
(Credit: Vasili Binzari/iStock by Getty Images)
Public finances often end up far away from government plans, but stronger risk management can reduce budgetary surprises, IMF Deputy Managing Director Antoinette M. Sayeh writes in a blog.
Volatile economic growth, universal subsidies and loss-making state-owned enterprises expose many low- and middle-income economies to fiscal risks. These factors combine with adverse external developments such as recent interest-rate rises and commodity-price surges to put public finances under pressure in many countries.
The “MENAPEG” region—a group that includes economies in the Middle East, North Africa and Pakistan but excludes high-income Gulf countries—is especially vulnerable to fiscal risks. According to a new IMF paper, small fiscal risks occur in these countries every year. Larger shocks that cause debt to increase by an average of 12 percent of gross domestic product occur once every eight years, on average.
“Despite the frequency of these events, policymakers are often caught off guard,” Sayeh writes with co-authors Mahmoud Harb and Jacques Charaoui.
“Such shocks force them to make ad hoc cuts to development and other priority spending. This also limits many countries’ ability to use fiscal policy to smooth economic slowdowns, precisely when it is needed most.”
Sayeh discussed fiscal risks with Egypt’s finance minister Mohamed Maait, Jordan’s finance minister Mohamad Al Ississ and other senior officials at a conference on Sunday. Watch here.
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The history of economics has largely been written by men about men. Even when the economics of family became a burgeoning field of study in the 1970s, the woman’s role was hardly talked about. Harvard University’s Claudia Goldin is a pioneer in the field of gender economics. In this podcast, Goldin discusses her work and how she came to write the definitive book on gender economics, Understanding the Gender Gap. The interview is part of the IMF series on extraordinary Women in Economics. |
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FINANCE & DEVELOPMENT
(Credit: Robert Briggs/Adobe Stock)
Regional trade agreements have helped rewrite trade rules and reshape both trade and nontrade outcomes, writes the IMF’s Michele Ruta writes in an article in Finance & Development Magazine.
Yet many observers see regionalism and multilateralism as opposing forces. Some believe that global tensions that are weakening the multilateral trading system—including protectionism and rising nationalism—will inevitably push governments toward more and stronger regional pacts, he writes.
“At the end of the day, there is no choice between regionalism and multilateralism; there is only a choice between integration and disintegration. A revival of multilateralism is necessary to complement RTAs in an age of conflict.”
This article features in the June edition of F&D. Focusing on Trade, Disrupted, eminent voices 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.Â
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SOUTH AFRICA
(Robf73/iStock by Getty Images)
South Africa’s economy grew by 0.4 percent between January and March this year and by year-end, we project real GDP growth to fall sharply from last year, reports an IMF Country Focus article. Though growth should pick up again in 2024, the pace is too slow to reduce unemployment, which at 32.9 percent remains close to an all-time high.
Reforms are needed to address the country’s energy and logistical constraints, reduce barriers to private sector investment, address structural rigidities in the labor market, and tackle crime and corruption.
Stabilizing the country’s public debt—one of the highest among emerging markets—and creating room in the budget for targeted social spending and public investment will require reducing the government wage bill and transfers to state-owned enterprises.
Monetary policy normalization should continue to keep inflation expectations anchored and bring down headline inflation to the midpoint of the South African Reserve Bank’s 3–6 percent target range.
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LIBYA
(Cinoby/iStock by Getty Images)
As Libya paves the way for its economic recovery, it has made recent improvements in data collection, sharing, and transparency that have enabled the IMF to resume its surveillance after a decade-long hiatus, reports an IMFÂ Country Focus article.
As part of its first economic health check in a decade, the IMF identified key strengths and opportunities that will support Libya’s recovery, and underscored the need for an economic strategy that clearly articulates a way forward for the nation.
The success of reforms will depend on achieving a stable political and security environment and developing institutional capacity. Structural reform efforts should focus on strengthening institutions and the rule of law.
To guard against risks from lower oil revenues and a potential loss of reserves, the authorities should avoid spending more when the economy is doing well and save for times when the economy might slow down.
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From rapid inflation and food insecurity to costly borrowing and crippling debt, low-income countries face multiple economic challenges. To put these countries back on a path to income convergence with advanced economies, we estimate they will need an additional $440 billion of financing through 2026. IMF concessional financing will play a key part. As the Chart of the Week shows, the benefits of such financing were visible during the pandemic: IMF-funded economies, on average, saw faster recoveries than unfunded counterparts, based on readings across three indexes tracking economic activity.
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Weekly Roundup
EUROPE'S CAPITAL MARKETS
Europe needs a capital-market union to create more choices for savers and investors, to mobilize funding for innovation, and to catch up with the United States on productivity and growth, Kristalina Georgieva said on Thursday. But the IMF’s managing director said the European Union should maximize cooperation with financial centers beyond its borders. “The regulatory equivalence process should be exploited to the maximum. And, as regards the UK, we can hope that having the Windsor framework in place creates a basis to build a new and mutually beneficial capital markets relationship.”
GHANA
Against a complex global economic backdrop, the Ghanaian economy is showing signs of stabilization, with softening inflation, an increase in international reserves and a less volatile exchange rate, the IMF’s Stéphane Roudet said in a statement at the end of a visit to the West Africa nation. In May the IMF’s Executive Board approved a $3-billion program Ghana to restore macroeconomic stability and debt sustainability.
STAFF PAPER
A new IMF staff paper examines the impact of structural reforms in the energy sector on green growth in 25 advanced economies, from 1970 to 2020. While structural reforms have so far failed to reduce greenhouse gas emissions per capita, there is evidence of greater effectiveness in lowering emissions per unit of gross domestic product. Energy reforms are not associated with higher share of renewable energy, but they seem to stimulate a sustained increase in environmental inventions and patents over the medium term.
STAFF PAPER
Tapping data on banks from 45 countries with different monetary and exchange-rate regimes, results from a new IMF staff paper point to complementarities between monetary and macroprudential policies. The tightening of most macroprudential tools reduces bank systemic risk further under inflation targeting. These findings lend credence to the view that inflation targeting strengthens the role of macroprudential policy in mitigating financial stability risks.
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JUNE 19, 4 AM ET | 9 AM WEST
Join IMF Managing Director Kristalina Georgieva and senior officials in Rabat, Morocco, to discuss policy recommendations for central bank digital currencies.
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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. |
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