Speech

Opening Remarks by the Deputy Managing Director, Kenji Okamura

November 17, 2022

As prepared for delivery

Good morning, everyone. And a warm welcome to those who are joining us virtually from across the world.

I am pleased to be here in Tokyo at this conference on Managing Financial Risks in a Shock Prone World.

I would like to thank our co-host, the University of Tokyo’s Center for Advanced Research in Finance, for working with us to host this very important conference.

I am also grateful to my colleagues in the Regional Office for Asia and the Pacific for their organizational leadership of this event. And congratulations on your 25th anniversary.

Outlook

This conference is very timely – we are in a riskier and more shock-prone world.

The outlook is becoming more challenging for policymakers in 2023. Three powerful forces are holding back the global economy:

i) the Russian invasion of Ukraine;

ii) the need to tighten monetary policy, amid a cost-of-living crisis and persistent and broadening inflation pressures; and,

iii) the slowdown in China.

During the IMF Annual Meetings one month ago, we projected global growth to slow from 6.0 percent last year to 3.2 percent this year.  And, for 2023, we lowered our forecast to 2.7 percent. 

Financial stability risks have increased with rising interest rates. Vulnerabilities are elevated in the sovereign and nonbank financial institutions sectors. Meanwhile, banks in advanced economies appear to be in a stronger position, thanks to the regulatory reform efforts following the Global Financial Crisis.

Emerging markets and developing countries are under pressure from capital outflows, dollar strength, and volatile commodity prices. Many are dealing with elevated debt levels that were pushed up by the pandemic. Rising global interest rates make these debt burdens more difficult to sustain. More than 60 percent of low-income countries and over 25 percent of emerging markets are in or at risk of debt distress.

Natural disasters have also caused human suffering and economic losses. Climate change is making these events more severe and frequent. Unfortunately, despite a lot of progress, we are still far from putting all the needed policies in place to mitigate the devastating impact of climate change.

On top of this, geoeconomic fragmentation risks damaging global production and trade networks with adverse consequences for growth and inflation.

Policy priorities

Against this economic backdrop, what are the policy priorities?

First, we need to bring inflation back to central bank targets. This means staying the course on monetary policy. There is a cost in terms of lower growth and higher unemployment in the near-term, but not getting inflation under control now would lead to much greater and longer-lasting pain later. Getting monetary policy settings just right is challenging in an environment of heightened uncertainty.

Second, broad fiscal support was appropriate during the pandemic, but is unsustainable over the longer run and would add fuel to inflation. 

Instead, fiscal support should be targeted to protect the most vulnerable from rising prices. Broad energy subsidies should be avoided – they are generally regressive and ineffective.

Fiscal buffers should be rebuilt, and debt reduced. We also need to have timely, effective, and well-coordinated debt resolution mechanisms in place, building on progress under the G20 Common Framework.

Third, for countries facing capital outflows, our recommendations are country specific. In general, exchange rate flexibility helps, especially when foreign currency debt is low.

For some emerging market economies, a mix of tools including interest rate policy, macroprudential actions, foreign exchange intervention, and capital flow management measures could be helpful to mitigate monetary policy tradeoffs and reduce financial stability risks.

My fourth and final point on policy priorities, we need to build resilience to new shocks. For example, climate risks to the global economy and financial systems are rising, and cyber-related vulnerabilities could be the source of the next big shock. 

Conclusion

To conclude, the world economy and financial systems are grappling with the legacy of the pandemic and Russia’s invasion of Ukraine.

Shocks are likely to be more frequent in the future. We need to prepare by building buffers and strengthening resilience.

Conferences like this provide an ideal platform to exchange experiences, learn from one another, and develop novel ideas.

I look forward to insightful and open discussions.

Thank you.