When finance ministers and central bank governors from the Group of 20 meet in Jakarta, in person and virtually, this week, they can take inspiration from the Indonesian phrase, gotong royong, “to work together” to achieve a goal. common. This spirit is more important than ever as countries face a tough obstacle course this year.
The good news is that the global economic recovery is continuing, but its pace has slowed amid elevated uncertainty and growing risks. Three weeks ago, we lowered our global forecast to a still healthy 4.4% for 2022, in part due to a reassessment of growth prospects in the United States and China.
Since then, economic indicators have continued to point to weaker growth momentum, driven by the Omicron variant and ongoing supply chain disruptions. Inflation readings were higher than expected in many economies; financial markets remain volatile; and geopolitical tensions have risen sharply.
This is why we need strong international cooperation and extraordinary agility. For most countries, this means continuing to support growth and employment while controlling inflation and maintaining financial stability, all in the context of high debt levels.
Our new report to the G20 shows how complex this obstacle course is and what policymakers can do to overcome it. Let me highlight three priorities:
First, we need broader efforts to tackle the ‘long economic Covid’
We project cumulative global production losses from the pandemic of nearly $13.8 trillion through 2024. Omicron is the latest reminder that a sustainable and inclusive recovery is impossible while the pandemic continues.
But considerable uncertainty remains about the trajectory of the virus post-Omicron, including the durability of the protection offered by vaccines or previous infections, and the risk of new variants.
In this environment, our best defense is to move from a single focus on vaccines to ensuring that every country has equitable access to a full Covid-19 toolkit with vaccines, tests and treatments. Updating these tools as the virus evolves will require continued investments in medical research, disease surveillance, and health systems that reach the “last mile” in every community.
Initial funding of $23.4 billion to fill the funding gap for ACT-Accelerator will be a significant down payment for distributing this dynamic toolkit everywhere.
Going forward, better coordination between the G20 finance and health ministries is essential to increase resilience, both to potential new variants of SARS-CoV-2 and to future pandemics that could pose systemic risks.
Ending the pandemic will also help deal with the scars of the long economic Covid. Think of the profound disruptions in many businesses and labor markets. And think of the cost to students worldwide, estimated at $17 trillion over their lifetime due to lost learning, reduced productivity and job disruptions.
School closures have been particularly severe for students in emerging economies where educational attainment was much lower to begin with, threatening to deepen the dangerous divergence between countries.
What can be done? Strong political action. Increased social spending, retraining programs, remedial training for teachers and mentoring for students will help economies get back on track and build resilience to future health and economic challenges.
Second, countries need to navigate the cycle of monetary tightening
Although there is significant differentiation between economies and great uncertainty going forward, inflationary pressures have been building up in many countries, calling for a withdrawal of much-needed monetary easing.
Going forward, it is important to adapt policies to national circumstances. This means the withdrawal of monetary easing in countries like the United States and the United Kingdom, where labor markets are tight and inflation expectations are on the rise.
Others, including the eurozone, can afford to act more slowly, especially if rising inflation is largely tied to energy prices. But they, too, should be ready to act if the economic data warrants a more rapid policy change.
Of course, clear communication of any changes remains essential to preserve financial stability at home and abroad. Some emerging and developing economies have already been forced to fight inflation by raising interest rates.
And the political pivot in advanced economies may require further tightening in more countries. This would reinforce the already difficult trade-offs countries face in controlling inflation while supporting growth and jobs.
So far, global financial conditions have remained relatively supportive, partly due to negative real interest rates in most G20 countries. But if these financial conditions suddenly tighten, emerging and developing countries should prepare for possible reversals in capital flows.
To prepare for this, borrowers should extend debt maturities where possible now, while containing further accumulation of foreign currency debt. When shocks occur, flexible exchange rates are important to absorb them, in most cases, but they are not the only tool available.
In the event of high volatility, foreign exchange interventions may be appropriate, as Indonesia did successfully in 2020. Capital flow management measures may also be wise in times of economic or financial crisis: consider the Iceland in 2008 and in Cyprus in 2013.
And countries can take macroprudential measures to guard against risks in the nonbank financial sector or where real estate markets are booming. Of course, all of these measures may still need to be combined with macroeconomic adjustments.
In other words, we must ensure that all countries can safely navigate the cycle of monetary tightening. Third, countries need to focus on fiscal sustainability
As countries emerge from the grip of the pandemic, they need to carefully calibrate their fiscal policies. It’s easy to see why: extraordinary fiscal measures helped prevent another Great Depression, but they also drove up debt levels. In 2020, we saw the largest one-year increase in debt since World War II, with global debt, both public and private, reaching $226 trillion.
For many countries, this means ensuring continued support for health systems and the most vulnerable, while reducing deficits and debt levels to meet their specific needs.
For example, a faster reduction in budget support is justified in countries where the recovery is more advanced. This will in turn facilitate their reorientation of monetary policy by reducing demand and thus helping to contain inflationary pressures.
Others, particularly in the developing world, face much more difficult trade-offs. Their fiscal firepower has been scarce throughout the crisis, leaving them with weaker recoveries and deeper scars from the long economic Covid. And they have little wiggle room to prepare for a greener, more digital post-pandemic economy.
For example, the IMF described last year how green procurement policies, including a 10-year public investment program, could increase annual global production by about 2% above baseline on average. over the period 2021-30.
All of these policy actions can help us find a new modus vivendi for a more shock-prone world. But they can be hampered by debt. We estimate that around 60% of low-income countries are in debt distress or at high risk of debt distress, double 2015 levels.
These economies and many others will need more domestic revenue mobilization, more grants and concessional financing, and more help to deal with debt immediately.
This includes revitalizing the G-20 common framework for debt treatment. This should start by proposing a status quo on debt service payments during the negotiation in the framework.
Faster and more efficient processes are needed, with clarity on the steps to be taken, so that everyone knows the road ahead, from the formation of creditors’ committees to a debt resolution agreement. And make the framework available to a wider range of highly indebted countries.
The role of the IMF
The IMF plays an important role in this area by providing macroeconomic frameworks and debt sustainability analyses.
And we encourage greater debt transparency: by requiring greater disclosure of what a member owes and to whom when seeking IMF financing, and by working with our members through the multi-pronged IMF and World Bank on debt vulnerabilities.
We must also build on the historic allocation of special drawing rights of $650 billion. In addition to holding the new SDRs in reserve, some members have already begun to put them to good use.
For example: Nepal for vaccine imports; North Macedonia for health spending and pandemic lifelines; and Senegal to increase vaccine production capacity.
To amplify the impact of the allocation, we are encouraging the flow of new SDRs through our Poverty Reduction and Growth Trust Fund, which provides concessional financing to low-income countries, and the new fiduciary for resilience and sustainability.
With its cheaper rates and longer maturities, the RST could fund climate, pandemic preparedness and digitalization policies that would improve macroeconomic stability for decades to come. The G20 has given strong support to the RST, and we aim to have it fully operational this year.
As countries face multiple challenges, the IMF will support them with calibrated policy advice, capacity building, and financial assistance where needed. The key is to introduce agility into all aspects of policymaking, but even that is not enough.
We must also follow the spirit of the Indonesian motto, Bhinneka Tunggal Ika, “Unity in Diversity”. Together, we can overcome the obstacle course towards a sustainable recovery that benefits everyone.