In our recap for Wednesday, October 12, we spotlight the increased risk of fiscal crises amid turbulent bond markets, policies that can protect people from the cost-of-living crisis, the importance of strong state institutions for resilience, conversations with the central bank governors of Colombia and the Netherlands, and more.
Consistency between fiscal and monetary policy is paramount for economic and financial stability as high debts and deficits push more countries into budget crises, the director of the IMF’s Fiscal Affairs Department told a press conference. Government deficits fell from 9.7% of gross domestic product in 2020 to 4.7% in 2022, but debt and deficits are expected to remain above pre-pandemic levels, Vitor Gaspar said at the launch of the IMF’s latest Fiscal Monitor. Gaspar said policymakers face painful trade-offs as the global economy goes through turbulent times, but most countries should stay the course by tightening fiscal policy further.
Climate action needs to be embedded into the purpose of multilateral development banks and international financial institutions that were created decades ago, said Alok Sharma, COP26 president, at a high-level seminar. Moderated by Spain’s First Deputy Prime Minister, Nadia Calviño, the panel also featured heads of the IMF, World Bank, OECD, and UNFCCC. Meeting the climate goals set under the Paris agreement requires an investment of $3-6 trillion per year. But the current investment stands at $630 billion—five to ten times less than what is necessary. “If we do not shift our trajectory this decade, we are cooked,” said the IMF's Kristalina Georgieva. Undoubtedly, cooperation between global, regional, and national actors is essential to fight climate crises but nothing is possible without climate financing.
Strong state institutions and well-trained staff that can provide sound policy advice are always critical for navigating economic challenges, but this is especially true in today’s trying times, said IMF First Deputy Managing Director Gita Gopinath at a high-level capacity development talk on building resilience, moderated by the Director of the IMF’s Institute for Capacity Development, Dominique Desruelle. Governor Timothy Antoine of the Eastern Caribbean Central Bank described resilience as “the capacity to withstand and absorb shocks, recover, and bounce forward,” and in the context of the climate crisis emphasized the need to develop policymaking capacity in relevant areas in the Caribbean and other most-affected regions around the world.
Many countries need debt relief, there is no question about it. But for debt relief to be impactful, countries also need to address difficult issues, such as better governance, more transparency, and structural fiscal issues.
ANTOINETTE M. SAYEH, DEPUTY MANAGING DIRECTOR, IMF
Governments face difficult policy choices as they cope with multiple crises under tight budgets, but only a people-first approach will ultimately succeed, panelists told an IMF seminar. Poor households in low-income countries are the most affected by soaring food prices, the IMF’s Antoinette Sayeh said, spending about 44% of their budget on food compared with 16% in advanced economies. Governments should not just rationalize spending but also reprioritize it to privilege spending that lessens the crisis impact on the poor. But policymakers need the support of the people to take reforms forward, or they risk social unrest.
Data transparency has become more critical in the face of heightened fiscal challenges, Lusine Lusinyan of the IMF’s Statistics Department told one of two capacity development sessions. “Enhanced transparency helps reduce uncertainty about the economic developments in countries and lowers risk premiums when countries access financial markets.” The event showcased the IMF’s latest Data Standards Initiatives, designed to provide a tailored framework for helping members strengthen data transparency practices.
During a session on financial resilience, panelists focused on the partnership between IMF capacity development and countries to strengthen governments’ abilities to respond to urgent financial sector needs during disruption and change. Koba Gvenetadze, Georgia’s central bank governor, said of working with IMF experts: “We receive high-quality analysis from the best experts in different areas at the same time. We know that it's not going to be just one size fits all.”
Global government debt is projected to be 91% of GDP in 2022, 7.5 percentage points above pre-pandemic levels, despite a recent reduction in the ratio for many countries.
The European Central Bank (ECB) needs at least two significant interest rate hikes before it hits the neutral level, Dutch central bank president and ECB policymaker Klaas Knot told a Governor Talk, moderated by the IMF’s Alfred Kammer.“I have no indication that with steps up to 75 basis points we would not be able to achieve our price stability mandate of 2% inflation over the medium-term,” added Knot. Although there are no “convincing” signs of a wage-price spiral yet in the euro area, Knot said that calls from workers to be compensated for loss in purchasing power are growing stronger. “We do believe there is room for such one-off adjustment in wages if you also realize that corporate profit margins are at a record high or at least historically very-very high.”
Colombia will see one of the world's highest GDP growth rates this year, but it also faces a 27% increase in food prices—7% above its peers. This makes monetary policy even more challenging, explains Colombia’s central bank governor Leonardo Villar, as countries in Latin America begin to cope with more difficult and tighter financial conditions. To fight inflation, the central bank has already raised its interest rates to 10% from 1.75% a year ago—and is prepared to raise them further. “We know the cost of inflation—we want to avoid the situation where we were 25 years ago.”
IMF Managing Director Kristalina Georgieva attends the second ministerial roundtable, co-chaired by the Government of Ukraine, the IMF, AND the World Bank Group.
Michael Froman, Vice Chairman and President of Strategic Growth for Mastercard, greets Christine Lagarde, President of the European Central Bank in the atrium of the IMF headquarters.
Panelists finish their last preparations in the green room before the High-Level Capacity Development Talk: Building Resilience for Today and Tomorrow.
Ravi Menon, Managing Director of the Monetary Authority of Singapore talks to Krishna Srinivasan, Director Asia and Pacific Department, IMF
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