IMF urges policymakers to fine-tune monetary tightening and focus on fiscal sustainability

Cumulative global output losses from the pandemic are estimated to be about $13.8 trillion through to 2024

The IMF's offices in Washington. The global economic recovery pace has moderated amid uncertainty and greater risk, the fund said. AFP

The International Monetary Fund called on policymakers to focus on three priorities to chart a global economic recovery in 2022.

These include broader efforts to fight the economic consequences of Covid-19, the calibration of monetary tightening to suit the specific circumstances of each country and a shift in focus to fiscal sustainability, said the Washington-based lender.

Global economic recovery continues but its pace has moderated amid high uncertainty and rising risks since the fund released its last World Economic Outlook projections in January, IMF chief Kristalina Georgieva said in a blog post accompanying a report on Wednesday.

“Economic indicators have continued to point to weaker growth momentum due to the Omicron variant and persistent supply chain disruptions. Inflation readings have been higher than expected in many economies, financial markets remain volatile and geopolitical tensions have sharply increased. That is why we need strong international co-operation and extraordinary agility,” Ms Georgieva said.

Economic indicators have continued to point to weaker growth momentum due to the Omicron variant and persistent supply chain disruptions

Kristalina Georgieva,
IMF chief

In January, the fund revised its global economic growth forecast for 2022 to 4.4 per cent, half a percentage point lower than its estimate in October and below last year's estimated 5.9 per cent expansion.

The global economy entered 2022 in a weaker-than-anticipated position. The rapid spread of the Omicron coronavirus variant led to financial market volatility at the end of last year.

Supply disruptions have continued to weigh on activity and inflation has been higher than anticipated.

The 0.5 percentage point revision for 2022’s economic output largely reflects the forecast markdowns in the US and China, the world’s two largest economies, the IMF said.

Cumulative global output losses from the pandemic are estimated at about $13.8 trillion through to 2024, Ms Georgieva said.

“Our best defence is to move from a singular focus on vaccines to ensuring each country has equitable access to a comprehensive Covid-19 toolkit with vaccines, tests and treatments” she said.

“Keeping these tools updated as the virus evolves will require ongoing investments in medical research, disease surveillance and health systems that reach the last mile into every community.”

The IMF called for upfront financing worth $23.4 billion to close the funding gap in the World Health Organisation’s Access to Covid Tools (ACT) Accelerator, the partnership set up to help the global community gain the tools to tackle the virus.

Enhanced co-ordination between G20 finance and health ministries is essential to increasing resilience — both to potential new coronavirus strains and future pandemics that could pose systemic risks, the lender said.

Citing the “profound disruptions” to businesses, labour markets and the $17tn learning loss suffered by pupils and students worldwide, the IMF said ending the pandemic would help to address the scars from “economic long-Covid".

“Strong policy action is needed. Scaling up social spending, reskilling programmes, remedial training for teachers and tutoring for students will help economies get back on track and build resilience to future health and economic challenges,” the IMF chief said.

Although inflation pressures have been building in many countries, resulting in calls for a withdrawal of monetary accommodation, it is important to calibrate policies to country circumstances, the IMF said.

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Clear communication of any policy shift is essential to protect financial stability at home and abroad, the lender said.

“If negative real interest rates in most G20 countries tighten suddenly, emerging and developing countries must be ready for potential capital flow reversals,” Ms Georgieva said.

“To prepare for this, borrowers should extend debt maturities where feasible now, while containing a further build-up of foreign currency debts.”

The IMF also urged countries to carefully adjust their fiscal policies as they emerge from the pandemic.

Extraordinary fiscal measures pushed global debt levels up. The year 2020 marked the largest one-year debt surge since the Second World War, with global debt — both public and private — rising to $226tn.

“We estimate that about 60 per cent of low-income countries are in or at high risk of debt distress, double 2015 levels. These and many other economies will need more domestic revenue mobilisation, more grants and concessional financing, and more help to deal with debt immediately,” Ms Georgieva said.

She called for a reinvigorated G-20 common framework for debt treatment. That includes offering a moratorium on debt service payments during negotiations under the framework and making the initiative available to a wider range of highly indebted countries.

“We encourage channelling of new special drawing rights of $650bn through our poverty reduction and growth trust, which provides concessional financing to low-income countries, and the new Resilience and Sustainability Trust,” Ms Georgieva said.

“With its cheaper rates and longer maturities, the RST could fund climate, pandemic preparedness and digitalisation policies that would improve macroeconomic stability for decades to come.”

SDRs are an international reserve asset created by the IMF to supplement the official reserves of its member countries. They are not a currency, but rather a potential claim on the freely usable currencies of IMF members that can boost a country’s available liquidity.

A basket of currencies that includes the US dollar, euro, Chinese yuan, Japanese yen and the British pound defines SDRs, which are distributed to countries in proportion to their quota of shares in the IMF.