In order to restore macroeconomic stability and sustained growth, the International Monetary Fund (IMF) yesterday recommended highly indebted nations to pursue debt restructuring where required.
In a report titled: “Toward a Better Balanced and More Resilient World Economy” Published before the IMF/World Bank Spring Meetings in Washington D.C., IMF Managing Director, Kristalina Georgieva, said nations with unsustainable public debt need to work proactively to restore sustainability.
She asserts that nations must, when required, choose the challenging path of debt restructuring.
She outlined incremental adjustment options that respect budgetary frameworks and urged nations to take decisive fiscal measures to restore policy flexibility.
Georgieva also described the serious effects that trade disputes and tariff increases have on the world economy, including the tightening of financial circumstances for many nations.
She cautioned that protracted high uncertainty raises the risk of financial market stress.
The head of the IMF clarified that most developing markets and smaller advanced countries are more vulnerable to tighter financial conditions since they depend more on trade for growth.
“As donor countries shift their focus to domestic issues, low-income countries face the added challenge of collapsing aid flows,” she said. As a result, Georgieva urged developing market nations to maintain exchange rate flexibility as a buffer against shocks.
She asserts that monetary policy must continue to be flexible and credible, underpinned by a strong commitment to central bank independence, in order to preserve price stability.
She said central bankers must keep an eagle eye on the data, including higher inflation expectations in some cases, noting that in finance, strong regulation and supervision remain essential to keep banks safe while rising risks from non-banks must be monitored and contained.
She said: “Policymakers can look to the IMF’s Integrated Policy Framework for insights on how and when temporary measures may be warranted. Tighter budget constraints will entail difficult choices everywhere—but nowhere more so than in low-income countries. Here, weak revenues necessitate stronger efforts for domestic resource mobilization, but also call for support from international partners—both to improve capacity for reforms and to secure crucial financial assistance”.
Explaining the impacts of these tensions, she said that uncertainty is costly.
Georgieva said: “The complexity of modern supply chains means imported inputs feed into a broad range of domestic products. The cost of one item can be affected by tariffs in dozens of countries. In a world of bilateral tariff rates, each of which may be moving up or down, planning becomes difficult. “The result? Ships at sea not knowing which port to sail to; investment decisions postponed; financial markets volatile; precautionary savings up. The longer uncertainty persists, the larger the cost.”
She claims that growing trade barriers have an immediate negative impact on growth. She stated that tariffs, like other taxes, raise income at the price of lowering and moving activity and data from historical episodes shows higher tariff rates are not paid by trade partners alone. Consumers pay a portion through increased pricing, while importers pay a portion through decreased earnings.
She added: “By raising the cost of imported inputs, tariffs act upfront. Of course, if domestic markets are large, they also create incentives for foreign firms to respond with inward investment, bringing in new activity and new jobs. This, however, takes time.”
According to Georgieva, protectionism eventually lowers productivity, particularly in smaller economies. She claims that industries that are protected from competition have fewer incentives to allocate resources efficiently.
Georgieva said: “Past productivity and competitiveness gains from trade erode. Entrepreneurship gives way to special pleadings for exemptions, protection, and state support. This hurts innovation. But again, if domestic markets are large and domestic competition is vibrant, negative effects can be mitigated.”
She noted that that ultimately, trade is like water given that when countries put up obstacles in the form of tariff and nontariff barriers, the flow diverts.
The IMF chief said that some sectors in some countries may be flooded by cheap imports; others may see shortages adding that trade will always go on, but disruptions incur costs.
As trade tensions flared, global stock prices dropped, meaning that the world is currently in a phase of sudden and sweeping shifts.
“Trade tensions are like a pot that was bubbling for a long time and is now boiling over. To a large extent, what we see is the result of an erosion of trust—trust in the international system, and trust between countries,” Georgieva said.
She said that global economic integration has lifted vast numbers of people out of poverty and made the world as a whole better off, but not everyone benefitted.
Georgieva said: “Communities were hollowed out by jobs going overseas. Wages were repressed by the growing availability of low-cost labor. Prices went up when global supply chains were interrupted. Many blame the international economic system for the perceived unfairness in their lives.”
“Trade distortions—tariff and nontariff barriers—have fed negative perceptions of a multilateral system seen to have failed to deliver a level playing field.”
She claimed that the perception of injustice in certain locations contributes to the idea that some nations follow the law while others circumvent it with impunity.
