The world is reeling from multiple shocks and the global economic outlook looks increasingly difficult. Therefore, the IMF is in quest for a more resilient world, as is reflected in the IMF’s policy paper, called the Managing Director’s Global Policy Agenda 2022. It has come with an assertion that the time to confront together our shared challenges is now. Act now and act together it has urged.
Since last October, the IMF has been downgrading global growth and revising up inflation projections. They did it four times. IMF has now said that two years of pandemic, followed by the war in Ukraine, have taken a heavy toll on activity and global trade, exhausting both policy buffers and people’s patience.
Now, a ‘cost-of-living crisis’ threatens livelihoods everywhere, with the most vulnerable hit the hardest, and acute food insecurity is an unbearable hardship in too many parts of the world. Multi-decade inflation highs, tightening financing conditions, rising food and energy insecurity, capital flow disruptions, and record high debt levels point to a particularly difficult and uncertain period ahead—especially in the context of slowing growth in the US, Europe, and China.
Moreover, the increasing frequency and intensity of climate-related disasters—devastating floods, droughts, and wildfires—adds to these challenges. While the ongoing digital revolution brings new opportunities, the recent turmoil in crypto asset markets is a reminder of the risks of unfettered digitalization.
While urging the world to act now and act together to alleviate these hardships and build the resilience the world needs, the paper has also admitted that it would not be easy in an increasingly fragmented world, that is making multilateral cooperation even more difficult. Increasingly, countries face difficulties through no fault of their own, but policymakers need to act swiftly to address high inflation and the cost-of-living crisis, which call for difficult policy choices.
As necessary policy actions in advanced economies will likely lead to negative spillovers, the policy paper says, support for vulnerable countries will be needed. Global action is also required to address the escalating climate crisis, capture the benefits and manage the risks of digitalization, and reduce inequality. With our social fabric already strained by the prolonged pandemic, we cannot afford to let circumstances worsen because of an inability to cooperate.
IMF, as a guardian of global financial stability, has been taking action on several fronts, including adapting several policies and lending toolkit including by operationalizing the new Resilience and Sustainability Trust and putting in place a new food-shock window to meet the most urgent needs of the member countries to ensure that the fund remains resilient in both today’s and tomorrow’s world. The Agenda has also admitted that gaining public traction for reforms is becoming more difficult following successive years of crises.
Act now, it says, to prioritize macro policies to address the macro shocks we face today. Fighting inflation and protecting the most vulnerable to mitigate the impact of the cost-of-living crisis much be given top priority by policymakers while addressing debt and other vulnerabilities.
Monetary policy should stay the course to restore price stability. Central banks must act resolutely to bring inflation back to target and avoid a de-anchoring of inflation expectations, and prevent an erosion of incomes and worsening of inequality. Clear communication is needed to avoid unwarranted market volatility and mitigate spillovers.
As for fiscal policies, the paper says, that it should prioritize the protection of vulnerable groups through targeted near-term support to alleviate the burden of the cost-of-living crisis, while being guided by debt sustainability considerations and supported by credible medium-term policy frameworks. The overall stance of fiscal policy should not work at cross purposes with monetary policy, particularly where there is overheating.
Financial and external policies must safeguard macro-financial stability, recommends the policy agenda. As financial conditions tighten, macro prudential policymakers will need to become ever more vigilant to guard against rising systemic risks, including in housing markets. Flexible exchange rates remain a buffer against shocks, while foreign exchange intervention may be needed to address disorderly market conditions and other frictions, and capital flow management measures on outflows may be used if disruptive outflows lead to (imminent) crisis circumstances.
The paper believes that structural reforms can help address the supply-side driversof inflation and ease growth-inflation trade-offs. Active labour market policies and other measures, such as earned income tax credits and investments in childcare, along with complementary product-market and energy reforms, can help support labor force participation and mitigate supply-chain bottlenecks.
The agenda emphasizes on global solidarity while urging the country to act together. Global action is urgently needed to help countries and people hit hardest by shocks, it says. Ending Russia’s war in Ukraine remains paramount. Many countries, especially LICs are facing acute food crisis, while emerging markets and some advanced economies are facing volatile capital flows and rising debt and interest rates that are putting the very financial stability at risk. With limited or no policy space left, and the risk of rising social disparities and unrest, a growing number of countries will need financial support from the global community, along with timely and effective debt restructuring.
To ensure food security, unwinding and refraining from restrictive practices are required by lifting export restrictions on food and fertilizers, consistent with countries’ commitments to the WTO. Last year’s Special Drawing Rights (SDRs) allocation helped countries boost foreign reserves and deal with pressing needs, but new or prolonged shocks and spillovers have steadily eroded buffers.
Debt distress, or the risk of it, is a growing concern for over 60 per cent of low-income countries and 25 per cent of emerging markets. It is therefore essential to have timely, effective, and well-considered debt resolution mechanisms. This calls for improving implementation of the G20 Common Framework for Debt Treatments (CF) and expanding creditor coordination to middle-income countries.
With climate change escalating, the agenda calls for effective action now to overcome it. It also mentions the accelerating digital transformation, rising inequality, and growing fragility. Joint action is thus imperative to strengthen future resilience, the paper emphasized. (IPA Service)