‘Powerful policy mix’ needed to support demand, growth, and structural reform – IMF
The International Monetary Fund (IMF) said emerging and developing economies need a powerful policy mix to counter the risks arising from volatile global financial environment this year.
This statement came from a speech delivered by IMF Managing Director Christine Lagarde in Washington, D.C. on Thursday (Friday in Manila), which was also posted in the multilateral agency’s website.
Lagarde admitted that global growth is still too low, too brittle, and too lopsided, and one of the significant risks to recovery is the asynchronous normalization of monetary policies in advanced economies.
“There has been a lot of talk about this, but this year we should expect it to actually begin. The US could see its first rise in short-term interest rates since 2006—an important moment. Even if this process is well-managed and well-communicated—and I believe that it has been and will be—there could be negative effects for emerging markets and global financial stability,” she stated.
The IMF chief said emerging and developing economies could face a ‘triple hit’ of a strengthening US dollar, higher global interest rates, and more volatile capital flows.
She warned that a stronger dollar will have a significant impact on financial systems in emerging markets, because many banks and companies have increased their borrowing in dollars over the past five years.
Lagarde also said that there is a risk that the Euro Area and Japan could remain stuck in a world of low growth and low inflation for a prolonged period.
“This ‘low-low environment’ would make it even harder for many Euro Area countries to reduce unemployment and excessive public and private debt, and so would raise the risk of recession and deflation,” she said.
Finally, the IMF managing director pointed out that there are increased geopolitical risks particularly in Ukraine, France, Nigeria and Pakistan.
“[In] Ukraine for example, increased international support to complement IMF support is crucial. At the same time, there is a palpable sense that the forces of intolerance and fragmentation are gaining strength,” she said.
“The recent atrocities in France—my home country—in Nigeria, or in Pakistan are only the latest actions of forces that are fundamentally opposed to what we here in this room believe in,” she added.
In this regard, Lagarde said accommodative monetary policies among economies remain essential.
The IMF chief noted that fiscal adjustment must be as growth- and job-friendly as possible. And above all, policymakers need to finally step up structural reforms.
“This economic mantra—support demand, growth, and structural reforms—is not new, but now takes on increased urgency. And it places increased emphasis on political leadership,” she stated.
Impact of oil prices
Lagarde also mentioned that impact of lower oil prices will be an immediate test for many policy makers.
Lower oil prices provide an opportunity for oil-importing countries, she said, explaining that the windfall would allow them to strengthen their macroeconomic frameworks and may help in alleviating inflation pressures.
“But oil exporters need to cushion the shock on their economies. Some are using their rainy day funds and fiscal deficits to adjust public spending more gradually. Others resort to allowing substantial exchange rate depreciation, which poses the risk of inflation and may require tighter monetary policies,” she said.