Press Release No. 17/303

IMF Executive Board Discusses the 2017 External Sector Report

July 28, 2017

On July 24, 2017, the Executive Board of the International Monetary Fund (IMF) discussed the 2017 External Sector Report (ESR).

The 2017 ESR found that excess current account imbalances (i.e., deficits or surpluses that deviate from levels deemed consistent with medium-term fundamentals and desired policies) represented about one-third of total global imbalances in 2016, remaining broadly unchanged since 2013, although increasingly concentrated in advanced economies. While this rotation of imbalances towards advanced economies could entail lower external financing risks in the near term, a greater concentration of excess deficits in advanced debtor economies may engender protectionist sentiment and raise the risk of disruptive corrections down the road, including due to widening external stock imbalances.

Addressing excess external imbalances in a manner that is supportive of global growth requires a recalibration of the macroeconomic policy mix and properly-targeted structural policies in deficit and surplus economies alike. In general, excess surplus countries with fiscal space should allow for greater fiscal stimulus, while advancing structural reforms that support domestic demand and foster competition. Meanwhile, excess deficit countries should move forward with fiscal consolidation, while gradually normalizing monetary policy in tandem with inflation developments and focusing on structural policies that strengthen competitiveness and overall saving. Protectionist policies should be avoided as they are unlikely to reduce external imbalances and are detrimental to domestic and global growth.

The ESR, produced annually since 2012, analyzes global external sector developments and provides assessments of economies’ external positions, including current account balances, real exchange rates, external balance sheets, capital flows, and international reserves. These assessments are derived at by integrating multilateral and country-specific perspectives, while ensuring individual economy assessments add up to a multilaterally consistent view. The report, which covers 28 of the world’s largest economies plus the euro area (representing over 85 percent of global GDP), comprises two papers: (i) an overview paper that covers multilateral issues, showing how individual economies fit into the global picture and discussing policies needed to reduce global imbalances; and (ii) a set of individual country pages with details on external assessments for each economy.

Executive Board Assessment [1]

1. Executive Directors broadly agreed with the assessment of global excess imbalances and related policy recommendations. They noted that, while global imbalances had narrowed markedly in the aftermath of the global financial crisis, with the adjustment process relying heavily on demand compression in deficit countries, progress had stalled more recently. Excess imbalances are increasingly concentrated in advanced economies, with persistent large excess surpluses in some economies. Directors noted that, absent policy actions and more effective automatic adjustment mechanisms, global excess imbalances are likely to widen over the medium term, potentially further straining the international monetary system. They agreed that addressing global excess imbalances is in the interests of all countries and requires collective efforts. Directors emphasized that both deficit and surplus countries have critical roles to play in that regard.

2. Directors broadly shared the view that excess imbalances have rotated toward advanced economies, and that deficits and surpluses have been concentrated in a few economies. While this points to lower deficit‑financing risks in the near term, the widening of deficits in key economies, if unaddressed, could potentially increase protectionist sentiment, further straining global trade, investment, and growth. Directors also highlighted that diverging stock positions, coupled with continued overreliance on demand from debtor countries, could pose risks to global growth and raise the likelihood of a disruptive adjustment over the medium term.

3. Directors stressed the need for both deficit and surplus countries to recalibrate macroeconomic policies, with a view to achieving their domestic objectives as well as strengthening the global prospects for strong, sustainable, and balanced growth. In general, excess deficit countries should move forward with fiscal consolidation without delay, gradually normalizing monetary policy in tandem with inflation developments; while excess surplus economies with fiscal space should rely more on fiscal policy, especially to encourage investment. Where monetary policy is constrained, fiscal and structural policies could be necessary to facilitate relative price adjustments for internal and external rebalancing. Directors also stressed that countries should allow exchange rates to move in line with fundamentals. Directors underscored the importance of well‑targeted structural policies to address the persistence of excess external imbalances. They concurred that structural policies in excess surplus countries should generally focus on boosting overall domestic investment, reducing saving, and promoting competition; while in excess deficit economies, policies should be directed to improving external competitiveness and overall saving. Directors urged countries to maintain open trade and investment regimes and to avoid using protectionist policies to address excess imbalances, noting that they are detrimental to domestic and global growth.

4. Directors welcomed the analysis of persistent current account surpluses and the composition of sectoral saving in advanced economies. A few Directors, noting the concentration of large excess deficits in a handful of countries, suggested that a similar focus on external deficits would be useful, while others pointed to the extensive studies on the issue. Directors observed the large difference in gross corporate saving behavior across advanced economies and the role it plays in driving imbalances. They called for more research on the drivers of corporate and household savings.

5. Directors appreciated ongoing efforts by staff to better describe the external assessment methodology and improve transparency in deriving staff assessments. They saw value in a clear presentation of the different elements of the overall assessments, including the results of the models and the justification and application of country‑specific judgment. They recognized that staff judgment is necessary to reflect country‑specific factors not captured by the models, although further justification is warranted where large adjustments are made to current account norms. Directors called on staff to ensure that adjustments are transparent, evenhanded, and multilaterally consistent.

6. Directors pointed to limitations of the models, including in terms of data comparability and measurement issues, as well as methodological uncertainties inherent in the use of economic models to assess external positions. Directors thus emphasized the need for caution and nuance in interpreting the results, although some saw room for more persuasive policy recommendations. Careful and clear public communication about the nature of the exercise and role of judgment would also be essential. In this regard, Directors saw merit in sharpening key messages further for communication to a broader audience, conveying the criticality of conducting external assessments through a multilateral approach, and continuing to integrate them into the Fund’s flagship reports. A number of Directors considered it a priority to clarify that external imbalances (deficits and surpluses), as opposed to excess imbalances, can be appropriate and desirable. Directors agreed that any domestic policy gaps identified by the models should be discussed thoroughly in Article IV consultations.

7. Directors acknowledged that although some improvements had been made to the External Balance Approach methodology, there remains scope for further refinements. They welcomed staff’s intention to review the key models ahead of next year’s report, with inputs from experts and country authorities across the membership and Board members, and offered many useful suggestions in this regard. Directors saw as priority areas for improvement: demographics‑related variables, use of third‑party indicators, and treatment of financial centers; as well as the identification of additional policy variables and other factors to reduce the unexplained components. They also offered a range of views on issues that deserve greater attention in future reports, including assessing the role of external stock positions, income balances, capital flows, reserve currencies, foreign exchange intervention, and global value chains.

8. Directors supported the Fund’s work on external sector assessments and the External Sector Report. They underscored the role of the Fund in providing multilaterally consistent assessments of member countries’ external sector positions and policies. Directors welcomed staff’s continued analysis of global excess imbalances and their causes, and broader efforts to strengthen integrated surveillance. They looked forward to discussing the planned refinements to the methodology, taking into consideration Directors’ suggestions made today and in the earlier informal setting.