## 1. Global Current Account Balance

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### Definition and overall movements
- Global current account balance is defined as the sum of absolute values of current account balances.
- Global current account balances widened in 2022, with cyclical factors playing a more important role in the widening compared with previous years.
- Contribution breakdown:
  - Contribution of COVID-19 factors: transportation and travel adjustors (medical and consumption adjustors discontinued for 2022; transportation and travel adjustors continued to be applied in the 2023 External Sector Report).
  - Contribution of cyclical factors: elevated commodity prices (temporary) and differential output gaps across economies.

### Pandemic, war, and commodity-related developments
- COVID-19 pandemic and Russia’s war in Ukraine materially affected external balances in 2022:
  - Travel shock lowered travel services and current account balances for tourism-exporting countries (example: Thailand).
  - Shipping costs remained high on a yearly average versus historical average, increasing current account balances of economies with large shipping company presences (example: France).
- Commodity and trade indicators:
  - Industrial production and commodity price indices showed elevated levels through Apr. 23 relative to pre-pandemic baselines.
  - China’s reopening in early 2023 temporarily improved exports in Q1 2023; imports increased less than exports, reflecting growth led by private consumption that is less import intensive.
  - China’s trade surplus improvement more than offset narrowing surpluses in commodity-exporting economies in early 2023; China’s trade surplus is expected to shrink with a significant anticipated pickup in tourism travel in the remainder of 2023.

### Fiscal and saving dynamics
- Fiscal policy effects in 2022 likely moderated the increase in global current account balances:
  - On average, economies with current account deficits consolidated fiscal policies in 2022 relative to 2021; economies with current account surpluses loosened their stances.
  - Among deficit countries, Canada, Türkiye, the United Kingdom, and the United States reduced their (cyclically adjusted) fiscal deficits.
  - Among surplus economies, China, Japan, Korea, and The Netherlands increased theirs.
  - The strengthening of the US dollar widened the US current account deficit.
- Saving and investment decomposition:
  - Government (public sector) saving improved in 2022 relative to 2021 in many economies, reflecting unwinding of temporary pandemic support measures despite about 1.3 percent of GDP in budgetary support in the European Union for the energy crisis.
  - Household saving declined, notably in the United States where the saving rate fell below pre-pandemic levels.
  - Corporate saving has remained high since mid-2020 in the United States and several other advanced economies compared with pre-pandemic levels.

### Currencies, exchange rates, and market pressure
- Major currency movements:
  - The US dollar was about 7 percent stronger in April 2023 compared with its 2021 average.
  - By October 2022, in real effective terms, the US dollar had appreciated by about 14 percent relative to its 2021 average; it has since depreciated by about 6 percent on a real trade-weighted basis.
  - As of April 2023, the Japanese yen depreciated by 15.3 percent and the renminbi depreciated by 7.6 percent in real effective terms compared with their 2021 averages; the euro and the pound sterling remained broadly unchanged.
- EMDE currency heterogeneity:
  - Some EMDE currencies (example: Brazil and Mexico) appreciated in nominal effective terms in 2022 and early 2023; others (including Argentina, South Africa, and Türkiye) depreciated significantly.
  - Country-specific factors—earlier monetary tightening, preexisting vulnerabilities, and commodity exposure—shaped heterogeneous currency movements.
  - The Russian ruble appreciated significantly in Q2 2022 under restrictions on imports and capital outflows, but has since depreciated against the US dollar, largely owing to weaker terms of trade and a sharp increase in parallel imports.
- Exchange Market Pressure Index and policy responses:
  - The Exchange Market Pressure Index incorporates realized exchange rate movement, foreign exchange intervention (FXIs), and policy rate changes.
  - In 2022, many economies either allowed currencies to adjust fully (examples: Australia, Sweden) or used FXIs (examples: Czech Republic, Singapore) or raised policy rates (examples: Colombia, Romania) to dampen depreciation pressures.
  - Countries with larger increases in inflation tended to experience more external pressure in 2022.

### Financial sector events and cross-currency funding
- March 2023 banking-sector turmoil had limited impact on currency volatility owing to forceful policy responses:
  - After a brief period of tightening, international dollar funding conditions eased; the cross-currency basis of advanced economy currencies with respect to the US dollar narrowed back to pre-March levels.

### Global financial flows and balance sheet developments
- Capital flow patterns:
  - In 2022, uphill capital flows from EMDEs to advanced economies reemerged.
  - Net capital outflows from EMDEs, particularly from China, occurred not via accumulation of official foreign exchange reserves but via other types of flows; private holdings of US assets increased.
  - The net flow of capital from EMDEs, as a whole, is expected to diminish in 2023.
- Financial account subcomponents:
  - Net portfolio flows: a large share of net outflows from EMDEs occurred through net portfolio flows, which declined substantially in 2022.
  - Other investment inflows and global cross-border bank flows to EMDEs declined since 2021, with the bulk of the decline in inflows into China.
  - Net foreign direct investment (FDI) inflows, relatively stable in 2020 and 2021, fell in 2022.
- Reserves:
  - Reserves accumulation slowed from the large accumulation in 2021 and had turned into a net sale of reserves in the second quarter of 2022.

### Capital flow dynamics and incidence of extreme flows
- China accounted for a large share of the net capital outflows from EMDEs, but the phenomenon was broad based.
- Drivers likely included increased risk aversion triggered by the war in Ukraine and tightening of monetary policy in advanced economies.
- Short-run net capital flows in 2022–2023:
  - After net outflows in 2022, short-run net capital inflows to EMDEs resumed in the first few months of 2023.
  - Factors bringing net inflows back in early 2023: easing financial conditions, reopening of China, and a shallower expected monetary policy rate path in the United States.
  - There was a strong rebound in nonresident—and mostly debt—flows to EMDEs in early 2023.
  - The March 2023 banking sector turmoil had, so far, a limited impact on short-term capital flows but raises the risk of a potential risk-off episode with decreasing inflows to EMDEs.
- Definitions and sample for extreme episodes:
  - Episodes based on year-over-year changes in four-quarter flows more than two standard deviations away from the historical average (based on 20 quarters) during at least one quarter of the event; sample: External Balance Assessment countries; last observation: fourth quarter of 2022.

### International balance sheets and valuation effects
- Creditor and debtor stock positions remained elevated in 2022, reflecting offsetting effects of widening current account balances, the dollar’s strength, and declining asset prices.
- Largest debtor economy: the United States; its net international investment position improved from –18.1 percent of world GDP in 2021 to –16.4 percent in 2022.
- Other large debtor economies include the euro area (excluding Germany and The Netherlands).
- Largest creditor economies, in descending order: Japan, Germany, and China.
- Financial centers represent 36 percent of global holdings but only 7 percent of global GDP.
- Valuation changes in 2022 were more muted compared with 2021; creditor economies tended to have more valuation losses, and debtors tended to experience more valuation gains.
- In the United States, declining asset prices led to positive valuation gains that more than offset the deterioration due to its current account deficit.

### Global Financial Safety Net (GFSN)
- The GFSN softened dollar funding strains during the COVID-19 crisis; the Federal Reserve’s bilateral swap lines played a key role.
- The GFSN comprises four main layers: gross international reserves; central banks’ bilateral swap lines (BSLs, limited and unlimited); Regional Financing Arrangements (RFAs); the IMF (borrowed and quota resources).
- As of the end of 2021, the GFSN represented a combined firepower of about 19 percent of global GDP.
- In March 2023, the Federal Reserve announced enhancement of dollar funding swap lines between itself and five other major advanced economy central banks.

### Assessment methodology (EBA) and 2022 adjustments
- IMF staff use the External Balance Assessment (EBA) methodology to produce medium-term current account and real exchange rate benchmarks consistent with country fundamentals and desirable policies.
- Benchmarks are compared with realized cyclically adjusted levels to derive gaps, with positive and negative gaps offsetting for multilateral consistency.
- For 2022, EBA estimates were adjusted to strip out lingering temporary effects of the COVID-19 pandemic (including remaining travel restrictions and transportation cost shocks) and other country-specific factors.

### Assessment results for 2022 (30 ESR economies; represent 87.5 percent of global GDP)
- Categorization relative to medium-term fundamentals:
  - Moderately stronger, stronger, or substantially stronger (9 economies): Germany, Malaysia, Russia, Singapore, Sweden, Thailand, India, Mexico, Saudi Arabia (India, Mexico, and Saudi Arabia entered this category in 2022).
  - Moderately weaker, weaker, or substantially weaker (8 economies): Argentina, Belgium, Canada, South Africa, United States, France, Italy, Türkiye (France, Italy, and Türkiye entered this category in 2022).
  - Broadly in line (13 economies): Brazil, China, Hong Kong Special Administrative Region, Indonesia, Japan, Korea, Spain, Switzerland, United Kingdom, Australia, The Netherlands, Poland, euro area (The Netherlands, Poland, and the euro area entered this category in 2022).
- Compared with 2021:
  - Assessments changed for nearly half of the 30 ESR economies.
  - Assessments moved farther away from “broadly in line” for nearly a third of the ESR economies.
  - Majority of assessment changes driven by lower current account balances in 2022.
- Aggregate metric:
  - The sum of the absolute values of IMF staff–assessed current account gaps remained unchanged with respect to 2021 at 0.9 percent of ESR economy GDP in 2022.

### Recent patterns and outlook (ESR sample)
- For the ESR sample, the sum of the absolute values of current account balances increased by 0.2 percentage point to about 3 percent of ESR GDP.
- IMF staff–assessed current account norms widened to 1.6 percent of GDP in 2022, from 1.4 percent of GDP in 2021.
- Most excess balances in 2022 pertained to advanced economies:
  - Largest contributors to negative current account gaps (as a share of ESR economy GDP): United States, France, Italy (in descending order).
  - Largest contributors to positive current account gaps (as a share of ESR economy GDP): Germany, Russia, Saudi Arabia (in descending order).
- IMF staff–assessed REER gaps and CA gaps for 2022 were generally consistent.

### Outlook for 2023 and medium term
- Global current account balances are projected to narrow in 2023.
- China, the United States, and commodity-exporting countries (notably Norway and Saudi Arabia) are expected to contribute to narrowing global balances by about 0.5 percentage point of world GDP in 2023.
  - Drivers cited: an increase in public saving in the United States; robust recovery in domestic demand and overseas travel in China; falling commodity prices.
- Germany and Japan (along with Korea) are expected to contribute to a widening of global balances by about 0.1 percentage point.
  - Germany’s surplus projected to increase driven by lower liquefied natural gas prices and stronger demand from Asia.
  - Japan’s surplus projected to increase mainly driven by lower commodity prices and inbound tourism.
- The narrowing is expected to continue over the medium term as the impact of COVID-19 wanes, output gaps close, and commodity prices fall.
- Some surplus economies (example: Japan and Korea) are expected to see current accounts widen over the medium term due to fundamentals such as demographics and high rate of return on net foreign assets.

### Risks and quantified scenarios
- Key uncertainties: falling commodity prices, no further escalation of geopolitical tensions, and contained financial sector turmoil.
- Severe tightening of global financial conditions:
  - IMF staff estimate capital flows at risk at the 5 percent level to be 2.7 percent of GDP.
  - Probability of outflows estimated to be about 31 percent in May.
  - In the severe downside scenario from the April 2023 World Economic Outlook, simulation implies a narrowing of global balances and a 10 percent depreciation of EMDE currencies on impact.
- Adjustments to Japan’s yield curve control policy could cause portfolio rebalancing by Japanese investors, downward pressure on foreign asset prices, and material capital outflows and exchange rate adjustments in some emerging markets (examples: Indonesia and Malaysia).
- Rising commodity prices could widen global current account balances in 2023 beyond the baseline and increase vulnerabilities in commodity-importing EMDEs.
- Faltering growth in China would reduce China’s imports and likely expand global balances by lowering global demand for commodities.
- Fiscal policy paths can alter global balances; additional fiscal spending financed by borrowing in deficit economies or stronger-than-expected consolidation in surplus economies could slow narrowing of global balances.
- Climate change and geoeconomic fragmentation could affect global balances; further trade costs across blocs would likely contribute to reducing global balances, while lower intra-bloc trade costs could increase them.

### Quantitative snapshot (selected headline figures)
- Global Current Account Balance (Billions of US Dollars): 2,594 (2020), 3,435 (2021), 3,941 (2022), 3,188 (2023 Projection).
- Global Current Account Balance (Percent of World GDP): 3.1 (2020), 3.6 (2021), 3.9 (2022), 3.0 (2023 Projection).
- IMF staff projection drivers: contribution to narrowing global balances by about 0.5 percentage point of world GDP in 2023 from China, the United States, and commodity exporters; Germany and Japan expected to widen balances by about 0.1 percentage point.
- Capital flows at risk at the 5 percent level: 2.7 percent of GDP; probability of outflows: about 31 percent in May.
- Severe downside scenario effect on EMDE currencies: 10 percent depreciation on impact.

### Policy priorities and prescriptions
- Rationale:
  - Excess current account balances reflect inefficient allocation of resources and frictions, leading to welfare losses; reducing excess balances requires collective action by both excess surplus and deficit economies.
- Policy objectives (consistent with the April 2023 World Economic Outlook):
  - restoring financial sector stability,
  - normalizing fiscal policy,
  - avoiding recession while durably reducing inflation and achieving sustainable and inclusive growth,
  - steadily increasing policy rates where appropriate.
- Exchange rate and capital flow guidance:
  - In event of global financial distress, EMDEs should generally let their currencies adjust to absorb external shocks, except in cases with shallow foreign exchange markets, sizable balance sheet mismatches, or poorly anchored inflation, where more tailored responses may be required.
  - Temporary foreign exchange interventions may be appropriate to address liquidity and expectations.
  - Capital flow management measures on outflows may be used if disruptive outflows lead to (imminent) crisis circumstances, but should not substitute for needed macroeconomic policy adjustment.
- Structural and multilateral priorities:
  - Coordinate policies to preserve benefits of global integration and multilateralism and adapt the rule-based trading system.
  - Support availability of climate financing to mitigate external sector impacts of climate change mitigation and adaptation efforts.
  - Use industrial policy only to address well-established market failures and ensure it is consistent with international agreements and WTO rules, minimizes adverse spillovers, and avoids creating barriers to technology transfer.
  - Advance labor, product market, and other structural reforms to promote green, digital, and inclusive growth while boosting productivity.
- GFSN and IMF role:
  - Maintain liquidity in the global financial system via the GFSN.
  - IMF is the only GFSN layer that provides universal coverage through lending programs; to perform this function effectively the IMF should remain representative and adequately resourced, depending on the successful completion of the 16th General Review of Quotas.

### Policy prescriptions by external position group (selected)
- Economies with weaker-than-warranted external positions should:
  - boost saving and competitiveness; implement medium-term fiscal consolidation where appropriate; adopt growth-friendly consolidation while preserving room for critical infrastructure and well-targeted social spending; address structural bottlenecks.
- Economies with stronger-than-warranted external positions should:
  - promote investment and diminish excess saving to support external rebalancing while pursuing domestic objectives (examples: Germany, Sweden, Malaysia, Thailand).
- Economies broadly in line should:
  - continue to address domestic imbalances, accelerate market-based structural reforms, shift fiscal support toward strengthening social protection to reduce high household saving and stimulate private consumption where relevant (example: China), and pursue productivity-boosting reforms.

### Financial side of global imbalances — key findings
- Interdependence between large surplus and deficit economies remains largely intact; offshore financial centers play important roles in intermediating flows.
- Since the global financial crisis, recycling of large current account surpluses has shifted away from foreign exchange reserve accumulation toward net portfolio investment and net other investment.
- Country and financial-center patterns:
  - China: smaller role for reserve accumulation post-GFC; net errors and omissions account for part of recycling.
  - Saudi Arabia: net portfolio investment (equity) and net other investment more important.
  - Russia: net other investment main channel for financial outflows; share of gold in reserves reached 21 percent at the end of 2022.
  - United Kingdom: accounted for about US$600 billion of holdings that financed recent US external portfolio debt financing.
  - Cayman Islands: accounted for about US$500 billion of holdings that financed recent US external portfolio debt financing.
- Official versus private holdings and currency composition:
  - Share of official holdings of US Treasury securities declined from 76 percent in mid-2009 to about 50 percent at the end of 2022.
  - The share of private holdings exceeded 40 percent at the end of 2022.
  - The US dollar accounts for about 60 percent of the total of (allocated) global reserves.

### Currency composition and vulnerability of external balance sheets
- Aggregate foreign currency exposures improved significantly since 1990, particularly in EMDEs.
- Representative valuation effects for a 10 percent depreciation in domestic currency (all else equal):
  - EMDEs in 1990: median valuation loss of 1.6 percent of GDP.
  - EMDEs in 2020: median valuation effect became positive, equivalent to 2.4 percent of GDP.
  - Advanced economies in 1990: median valuation gain of 0.5 percent of GDP.
  - Advanced economies in 2020: median valuation gain of 9.2 percent of GDP.
- Proportion of EMDEs with net long positions in foreign currency: 17 percent in 1990 and 75 percent in 2020.
- However, 92 percent of EMDEs were short on foreign currency in portfolio debt in 2020, producing a median valuation loss of 1 percent of GDP in portfolio debt for a 10 percent depreciation in domestic currency.
- Aggregate positions can mask significant currency mismatches at more granular levels; currency-driven valuation effects in debt and equity tend to offset each other for many economies but short debt positions leave vulnerabilities.

*Source: ch1 — 1. Global Current Account Balance (External Sector Report, excerpts provided).*

### 1. Global Current Account Balance

### 1. Global Current Account Balance

### Definition and overall movements
- Global current account balance is defined as the sum of absolute values of current account balances.
- Global current account balances widened in 2022, with cyclical factors playing a more important role in the widening compared with previous years (Figure 1.5).
- Contribution breakdown:
  - Contribution of COVID-19 factors: transportation and travel adjustors (medical and consumption adjustors discontinued for 2022; transportation and travel adjustors continued to be applied in the 2023 External Sector Report).
  - Contribution of cyclical factors: elevated commodity prices (temporary) and differential output gaps across economies.

### Pandemic, war, and commodity-related developments
- The COVID-19 pandemic and Russia’s war in Ukraine materially affected external balances in 2022, including:
  - Travel shock lowered travel services and current account balances for tourism-exporting countries such as Thailand.
  - Shipping costs remained high on a yearly average versus historical average, increasing current account balances of economies with large shipping company presences (for example, France).
- Commodity and trade indicators (Figure 1.2 and Figure 1.4):
  - Industrial production and commodity price indices showed elevated levels through Apr. 23 relative to pre-pandemic baselines (panels in Figure 1.2 and Figure 1.4).
  - China’s reopening in early 2023 temporarily improved exports in Q1 2023; imports increased less than exports, reflecting growth led by private consumption that is less import intensive.
  - China’s trade surplus improvement more than offset narrowing surpluses in commodity-exporting economies in early 2023; China’s trade surplus is expected to shrink with a significant anticipated pickup in tourism travel in the remainder of 2023.

### Fiscal and saving dynamics
- Fiscal policy effects in 2022 likely moderated the increase in global current account balances:
  - On average, economies with current account deficits consolidated their fiscal policies in 2022 relative to 2021; economies with current account surpluses loosened their stances (Figure 1.6).
  - Among deficit countries, Canada, Türkiye, the United Kingdom, and the United States reduced their (cyclically adjusted) fiscal deficits.
  - Among surplus economies, China, Japan, Korea, and The Netherlands increased theirs.
  - The strengthening of the US dollar widened the US current account deficit.
- Saving and investment decomposition (Figure 1.7):
  - Government (public sector) saving improved in 2022 relative to 2021 in many economies, reflecting unwinding of temporary pandemic support measures despite about 1.3 percent of GDP in budgetary support in the European Union for the energy crisis.
  - Household saving declined, notably in the United States where the saving rate fell below pre-pandemic levels.
  - Corporate saving has remained high since mid-2020 in the United States and several other advanced economies compared with pre-pandemic levels.

### Currencies, exchange rates, and market pressure
- US dollar and major currencies:
  - The US dollar was about 7 percent stronger in April 2023 compared with its 2021 average.
  - By October 2022, in real effective terms, the US dollar had appreciated by about 14 percent relative to its 2021 average; it has since depreciated by about 6 percent on a real trade-weighted basis.
  - As of April 2023, other major currencies: the Japanese yen depreciated by 15.3 percent and the renminbi depreciated by 7.6 percent in real effective terms compared with their 2021 averages; the euro and the pound sterling remained broadly unchanged.
- EMDE currency heterogeneity:
  - Some EMDE currencies (for example, Brazil and Mexico) appreciated in nominal effective terms in 2022 and early 2023; others (including Argentina, South Africa, and Türkiye) depreciated significantly.
  - Country-specific factors—earlier monetary tightening, preexisting vulnerabilities (such as lower perceived institutional quality), and commodity exposure—shaped heterogeneous currency movements.
  - The Russian ruble appreciated significantly in Q2 2022 under restrictions on imports and capital outflows, but has since depreciated against the US dollar, largely owing to weaker terms of trade and a sharp increase in parallel imports.
- Exchange Market Pressure Index and policy responses (Figure 1.9 and Figure 1.10):
  - The Exchange Market Pressure Index incorporates realized exchange rate movement, foreign exchange intervention (FXIs), and policy rate changes.
  - In 2022, many economies either allowed currencies to adjust fully (for example, Australia, Sweden) or used FXIs (for example, Czech Republic, Singapore) or raised policy rates (for example, Colombia, Romania) to dampen depreciation pressures.
  - Countries with larger increases in inflation tended to experience more external pressure in 2022; the correlation between exchange market pressure and inflation is noted (Figure 1.10).

### Financial sector events and cross-currency funding
- The March 2023 banking-sector turmoil had only limited impact on currency volatility owing to forceful policy responses:
  - After a brief period of tightening, international dollar funding conditions eased; the cross-currency basis of advanced economy currencies with respect to the US dollar narrowed back to pre-March levels (Figure 1.11).

### Global financial flows and balance sheet developments
- Capital flow patterns:
  - In 2022, uphill capital flows from EMDEs to advanced economies reemerged (see Figure 1.1 and External Sector Report Online Annex 1.2).
  - Net capital outflows from EMDEs, particularly from China, occurred not via accumulation of official foreign exchange reserves but via other types of flows; private holdings of US assets increased (Box 1.1).
  - The net flow of capital from EMDEs, as a whole, is expected to diminish in 2023.
- Financial account subcomponents (Figure 1.12):
  - Net portfolio flows: a large share of net outflows from EMDEs occurred through net portfolio flows, which declined substantially in 2022, likely reflecting monetary tightening in advanced economies.
  - Other investment inflows and global cross-border bank flows to EMDEs declined since 2021, with the bulk of the decline in inflows into China amid higher funding costs and dollar strength.
  - Net foreign direct investment (FDI) inflows, relatively stable in 2020 and 2021, fell in 2022.
- Reserves:
  - Reserves accumulation slowed from the large accumulation in 2021 and had turned into a net sale of reserves in the second quarter of 2022.

*Source: ch1 - 1. Global Current Account Balance*

### Annex Table 1.1.1).

### Annex Table 1.1.1)

### Capital flow dynamics and drivers
- China accounted for a large share of the net capital outflows from EMDEs, but the phenomenon was broad based across other EMDEs.
- Outflows potentially reflect global factors such as increased risk aversion triggered by the war in Ukraine and tightening of monetary policy in advanced economies.
- The level of US-dollar-denominated credit in cross-border banking flows declined, especially in the second half of 2022 (BIS 2023).
- After an increase in volatility of capital flows since the beginning of the pandemic, gross flows rebounded in 2021 with notable surges (foreign investors) and flights (domestic investors), likely fueled by mounting optimism in financial markets.
- The COVID-19 crisis did not lead to many sudden stops, as policymakers reacted forcefully to maintain investor confidence.

### Incidence of extreme capital flows
- Episodes are defined based on Forbes and Warnock (2012, 2021): year-over-year changes in four-quarter flows more than two standard deviations away from the historical average (based on 20 quarters) during at least one quarter of the event; the event lasts while changes exceed one standard deviation.
- Definitions:
  - Surge: sharp increase in gross capital inflows by foreigners.
  - Stop: sharp decrease in gross capital inflows by foreigners.
  - Flight: sharp increase in gross capital outflows by domestic investors.
  - Retrenchment: sharp decrease in gross capital outflows by domestic investors.
- Sample: External Balance Assessment countries. Last observation: fourth quarter of 2022.

### Short-run net capital flows in 2022–2023
- After a year of net outflows in 2022, short-run net capital inflows to EMDEs resumed in the first few months of 2023.
- Key drivers of the 2022 net outflows: global financial tightening.
- Factors bringing net inflows back in early 2023:
  - Easing financial conditions (see April 2023 Global Financial Stability Report).
  - Reopening of China.
  - A shallower expected monetary policy rate path in the United States.
- There was a strong rebound in nonresident—and mostly debt—flows to EMDEs in early 2023.
- The March 2023 banking sector turmoil had, so far, a limited impact on short-term capital flows but raises the risk of a potential risk-off episode with decreasing inflows to EMDEs.

### International balance sheets and valuation effects
- Creditor and debtor stock positions remained elevated in 2022, reflecting offsetting effects of widening current account balances, the dollar’s strength (causing valuation gains in countries with long positions in the dollar), and declining asset prices.
- Largest debtor economy: the United States; its net international investment position improved from –18.1 percent of world GDP in 2021 to –16.4 percent in 2022.
- Other large debtor economies include the euro area (excluding Germany and The Netherlands).
- Largest creditor economies, in descending order: Japan, Germany, and China.
- Financial centers represent 36 percent of global holdings but only 7 percent of global GDP.
- Valuation changes in 2022 were more muted compared with 2021 for all ESR economies; creditor economies tended to have more valuation losses, and debtors tended to experience more valuation gains, dampening global stock imbalances.
- In the United States, declining asset prices led to positive valuation gains in its external balance sheet that more than offset the deterioration due to its current account deficit.

### Global Financial Safety Net (GFSN)
- The GFSN softened dollar funding strains during the COVID-19 crisis; the Federal Reserve’s bilateral swap lines played a key role.
- The GFSN comprises four main layers:
  - gross international reserves,
  - central banks’ bilateral swap lines (BSLs, limited and unlimited),
  - Regional Financing Arrangements (RFAs),
  - the IMF (borrowed and quota resources).
- As of the end of 2021, the GFSN represented a combined firepower of about 19 percent of global GDP.
- In March 2023, the Federal Reserve announced enhancement of dollar funding swap lines between itself and five other major advanced economy central banks.

### Assessment methodology (EBA) and adjustments for 2022
- The IMF staff’s assessments use the External Balance Assessment (EBA) methodology to produce medium-term current account and real exchange rate benchmarks consistent with country fundamentals and desirable policies.
- Benchmarks (norms) are compared with realized cyclically adjusted levels to derive gaps; positive and negative gaps offset one another to ensure multilateral consistency.
- Model outputs are combined with external indicators (net international investment positions, capital flows, foreign exchange reserves, competitiveness indicators), analytically grounded adjustments, and country-specific insights.
- For 2022, EBA model estimates were adjusted to strip out lingering but temporary effects of the COVID-19 pandemic on current accounts (including remaining travel restrictions and transportation cost shocks).
- Adjustments for country-specific factors (measurement issues, demographics, net international investment position considerations) were also included.
- Annex Table 1.1.3 reports the overall set of IMF staff adjustments to reflect both COVID-19-related factors and other country-specific factors.

### Assessment results for 2022 (30 ESR economies; represent 87.5 percent of global GDP)
- Categorization of external positions relative to levels consistent with medium-term fundamentals and desirable policies:
  - Moderately stronger, stronger, or substantially stronger (9 economies):
    - Germany, Malaysia, Russia, Singapore, Sweden, Thailand, India, Mexico, Saudi Arabia (India, Mexico, and Saudi Arabia entered this category in 2022).
  - Moderately weaker, weaker, or substantially weaker (8 economies):
    - Argentina, Belgium, Canada, South Africa, United States, France, Italy, Türkiye (France, Italy, and Türkiye entered this category in 2022 driven by decreases in current account balances).
  - Broadly in line (13 economies):
    - Brazil, China, Hong Kong Special Administrative Region, Indonesia, Japan, Korea, Spain, Switzerland, United Kingdom, Australia, The Netherlands, Poland, euro area (The Netherlands, Poland, and the euro area entered this category in 2022 after being on the stronger side in 2021).
- Compared with 2021:
  - Assessments changed for nearly half of the 30 ESR economies.
  - Assessments moved farther away from “broadly in line” for nearly a third of the ESR economies.
  - Majority of assessment changes driven by lower current account balances in 2022 (e.g., Australia and the euro area).
  - Saudi Arabia’s large increase in its current account balance moved its assessment to substantially stronger.
  - Some economies saw current account gaps widen (China, Korea, United Kingdom) or narrow (Germany, Japan, Switzerland) without moving categories.
- Aggregate metrics:
  - The sum of the absolute values of IMF staff–assessed current account gaps remained unchanged with respect to 2021 at 0.9 percent of ESR economy GDP in 2022.
- Note on EBA norms:
  - EBA current account norms reflect fundamental features affecting saving and investment decisions; advanced economies with higher incomes, older populations, and lower growth prospects tend to have positive norms, while most EMDEs have negative norms.
  - Norms also depend on desirable medium-term policies recommended by IMF staff.

*Source: ch1 - Annex Table 1.1.1). PDF chapter/section.*

### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES

### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES

### Recent Patterns in External Positions
- For the ESR sample, the sum of the absolute values of current account balances increased by 0.2 percentage point to about 3 percent of ESR GDP.
- IMF staff–assessed current account norms widened to 1.6 percent of GDP in 2022, from 1.4 percent of GDP in 2021.
- Most of the excess balances in 2022 (measured by the sum of absolute values of IMF staff–assessed current account gaps) pertained to advanced economies:
  - Largest contributors to lower-than-warranted current account balances (negative current account gaps), as a share of ESR economy GDP: United States, France, Italy (in descending order).
  - Largest contributors to larger-than-warranted current account balances (positive current account gaps), as a share of ESR economy GDP: Germany, Russia, Saudi Arabia (in descending order).
- IMF staff–assessed real effective exchange rate (REER) gaps and current account (CA) gaps for 2022 were generally consistent: economies with excess current account surpluses (deficits) were assessed to have had an undervalued (overvalued) REER.

### Outlook for Current Account Balances
- Global current account balances are projected to narrow in 2023.
- China, the United States, and commodity-exporting countries, notably Norway and Saudi Arabia, are expected to contribute to narrowing global balances by about 0.5 percentage point of world GDP (more than half of the projected narrowing in global balances), reflecting:
  - an increase in public saving in the United States,
  - robust recovery in domestic demand and overseas travel in China,
  - falling commodity prices.
- Germany and Japan (along with Korea) are expected to contribute to a widening of global balances by about 0.1 percentage point.
  - In Germany, the surplus is projected to increase, with the change driven by lower liquefied natural gas prices and stronger demand from Asia.
  - Japan’s current account surplus is also projected to increase mainly driven by lower commodity prices and inbound tourism.
- The narrowing of global current account balances is expected to continue over the medium term as:
  - the impact of COVID-19 wanes,
  - output gaps close,
  - commodity prices fall as demand and supply adjust and the global economy slows.
- Some surplus economies (for example, Japan and Korea) are expected to see current accounts widen over the medium term due to fundamentals such as demographics and high rate of return on net foreign assets.

### External Stocks and Recent Levels
- Creditor and debtor stock positions reached historically high levels in 2022 (Table 1.2) but are expected to moderate slightly over the medium term as current account balances gradually narrow.
- In a few debtor countries (for example, Spain), the net foreign asset position is expected to improve, driven by sustained projected trade surpluses and positive returns on net foreign assets.
- Nonetheless, in some economies gross external liabilities remain large from a historical perspective, posing risks of external stress materializing.

### Risks Surrounding the Outlook (Scenarios and Quantified Risks)
- Key uncertainties include falling commodity prices, no further escalation of geopolitical tensions, and contained financial sector turmoil.
- Severe tightening of global financial conditions:
  - IMF staff estimate capital flows at risk at the 5 percent level to be 2.7 percent of GDP.
  - Probability of outflows estimated to be about 31 percent in May.
  - In the severe downside scenario from the April 2023 World Economic Outlook, simulation implies a narrowing of global balances and a 10 percent depreciation of EMDE currencies on impact.
- Adjustments to Japan’s yield curve control policy could cause:
  - portfolio rebalancing by Japanese investors, downward pressure on foreign asset prices, larger effects in countries with larger presence of Japanese investors (examples: Australia, Ireland, The Netherlands),
  - material capital outflows and exchange rate adjustments in some emerging markets such as Indonesia and Malaysia.
- Rising commodity prices (from supply disruptions, escalation of war in Ukraine, extreme climate events, or stronger-than-expected global growth) could:
  - widen global current account balances in 2023 beyond the baseline and delay adjustment thereafter,
  - increase vulnerabilities in commodity-importing EMDEs, possibly causing capital outflows, exchange rate volatility, higher borrowing costs, and increased fiscal pressures.
- Faltering growth in China would:
  - directly affect trading partners (largest in Asia and the Pacific),
  - reduce global demand for commodities for which China accounts for a large share, likely expanding global balances by reducing China’s imports.
- Fiscal policy paths can alter global balances:
  - Additional fiscal spending financed by borrowing in deficit economies or stronger-than-expected consolidation in surplus economies could slow narrowing of global balances,
  - Failures to implement credible consolidation where debt is high could pressure financing for current account deficits, resulting in narrowing of global balances.
- Climate change and geoeconomic fragmentation:
  - Worsening climate change and unbalanced mitigation policies could affect global balances.
  - Geoeconomic fragmentation (exacerbated by US–China tensions and the war in Ukraine) could reduce capital flows, complicate global safety nets, reorganize the international monetary system, and in extreme forms reduce welfare and international policy coordination.
  - Effects on global current account balances from fragmentation depend on scenario specifics; further trade costs across blocs would likely contribute to reducing global balances, while lower intra-bloc trade costs could increase them.

### Quantitative Snapshot from Tables (Selected headline figures as reported)
- Global Current Account Balance (Billions of US Dollars): 2,594 (2020), 3,435 (2021), 3,941 (2022), 3,188 (2023 Projection).
- Global Current Account Balance (Percent of World GDP): 3.1 (2020), 3.6 (2021), 3.9 (2022), 3.0 (2023 Projection).
- IMF staff projection drivers: contribution to narrowing global balances by about 0.5 percentage point of world GDP in 2023 from China, the United States, and commodity exporters; Germany and Japan expected to widen balances by about 0.1 percentage point.
- Capital flows at risk at the 5 percent level: 2.7 percent of GDP; probability of outflows: about 31 percent in May.
- Severe downside scenario effect on EMDE currencies: 10 percent depreciation on impact.

### Policy Priorities for Promoting External Rebalancing
- Excess current account balances should be reduced because they reflect inefficient allocation of resources and frictions, leading to welfare losses.
- Promoting external rebalancing requires collective action by both excess surplus and deficit economies.
- Policy objectives to facilitate rebalancing, consistent with the April 2023 World Economic Outlook, include:
  - restoring financial sector stability,
  - normalizing fiscal policy,
  - avoiding recession while durably reducing inflation and achieving sustainable and inclusive growth,
  - steadily increasing policy rates where appropriate.
- In event of global financial distress, EMDEs should generally let their currencies adjust to absorb external shocks, except in cases with:
  - shallow foreign exchange markets,
  - sizable balance sheet mismatches,
  - poorly anchored inflation, where more tailored responses may be required.

*Source: CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES — External Sector Report (excerpts provided).*

### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES

### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES

### Macroeconomic policy guidance and external sector adjustments
- Temporary foreign exchange interventions may be appropriate to address liquidity and expectations.
- Capital flow management measures on outflows may be used if disruptive outflows lead to (imminent) crisis circumstances, but these measures should not substitute for needed macroeconomic policy adjustment.
- Coordinated policy efforts are important to preserve benefits of global integration and multilateralism and to adapt the rule-based trading system to a changing world.
- The package agreed at the 12th Ministerial Conference of the World Trade Organization (WTO) in June 2022 is cited as a step toward advancing multilateral trade rules.
- Fully restoring the WTO dispute settlement system and implementing new WTO-based agreements would further strengthen the rule-based system.
- Policies to preserve global economic integration would mitigate risks related to fragmentation of FDI and other capital flows along geoeconomic fault lines.

### Industrial policy, climate finance, and structural reform
- Supporting availability of climate financing is important because green infrastructure investment in developing economies could mitigate external sector impacts of climate change mitigation and adaptation efforts.
- Industrial policy can be used to address well-established market failures and where other policies are not available, but industrial policy should:
  - not introduce distortions;
  - be consistent with international agreements and WTO rules;
  - minimize adverse spillovers;
  - avoid creating barriers to technology transfer;
  - be well-structured, cost-effective, transparent, and accountable;
  - not undermine competition.
- Countries with competitiveness challenges need labor, product market, and other structural reforms to promote green, digital, and inclusive growth while boosting productivity.

### Global Financial Safety Net (GFSN) and IMF role
- Maintaining liquidity in the global financial system via the GFSN is essential to help economies manage risks from tightening global financial conditions and financial system fragmentation due to geopolitical tensions.
- The GFSN has played a vital role in safeguarding global stability, but coverage of its layers is uneven and global liquidity provision is limited.
- The IMF is identified as the only GFSN layer that provides universal coverage through lending programs that act as a safety net for countries hit by balance-of-payments shocks.
- To perform this function effectively, the IMF should remain representative of its global membership and adequately resourced; this crucially depends on the successful completion of the 16th General Review of Quotas.

### Policy prescriptions by external position group
- Economies with weaker-than-warranted external positions should:
  - focus on policies that boost saving and competitiveness;
  - implement medium-term fiscal consolidation where current account deficits in 2022 partly reflected fiscal deficits above desirable levels (examples given: Italy and the United States);
  - implement fiscal consolidation in a growth-friendly way while providing space for critical infrastructure investment and well-targeted social spending to help reduce poverty and inequality (examples given: Argentina and South Africa);
  - address structural bottlenecks through reforms to support green, digital, and inclusive growth and boost productivity.
- Economies with stronger-than-warranted external positions should:
  - prioritize policies to promote investment and diminish excess saving to support external rebalancing while pursuing domestic objectives;
  - examples: Germany may require higher fiscal deficits over the medium term to achieve climate, digital, and energy security goals; Sweden’s higher investment in the green transition and the health sector would lower the external balance;
  - in some emerging markets (examples: Malaysia and Thailand), reforming and expanding social safety nets and addressing informality could reduce precautionary saving and support consumption.
- Economies with external positions broadly in line with fundamentals should:
  - continue to address domestic imbalances to prevent excessive external imbalances;
  - accelerate market-based structural reforms (including state-owned enterprise reform) to promote growth;
  - shift fiscal policy support toward strengthening social protection to reduce high household saving and stimulate private consumption (example: China);
  - where negative net international investment positions exist (examples: Brazil and Spain), keep current account balances in line with norms via a combination of fiscal consolidation and higher private saving to provide room for investment in education and reforms that encourage innovation and competitiveness;
  - pursue productivity-boosting reforms to create space for investment needed for the green transition and to reduce dependence on foreign energy.

### Financial Side of Global Imbalances — key findings
- Interdependence between large surplus and deficit economies remains largely intact, while offshore financial centers play increasingly important roles in intermediating flows.
- Since the global financial crisis (GFC), recycling of large current account surpluses (China, Saudi Arabia) has shifted away from foreign exchange reserve accumulation toward:
  - net portfolio investment (debt in China, equity in Saudi Arabia);
  - net other investment (bank loans in China; currency and deposits in China and Saudi Arabia).
- In Russia, net other investment is the main channel for financial outflows, with a notable portion of those outflows headed toward the euro area (Belgium a prime destination) and a substantial share to Switzerland since 2008.
- The US current account deficit is mainly financed via portfolio debt flows, but has increasingly been financed by net flows of other investment (mainly currency and deposits, and bank loans).
- Since early 2021, net external purchases of US portfolio debt securities have shifted to US Treasury securities and away from corporate bonds, partly reflecting large financing needs related to pandemic stimulus measures.
- Financing of the US current account deficit has become increasingly mediated by financial centers, contrasting with the pre-GFC period when reserve accumulation by surplus countries played a larger role.
- Specific country and financial-center patterns:
  - China: accumulation of foreign exchange reserves has played a much smaller role post-GFC; net errors and omissions account for part of the recycling of the surplus in China.
  - Saudi Arabia: net portfolio investment (equity) and net other investment have become more important channels of recycling surpluses.
  - Russia: has been divesting from US Treasury bonds especially since 2014; divestment peaked about 2018 with no significant transactions since mid-2019; the share of gold in its reserves reached 21 percent at the end of 2022.
  - United Kingdom: accounted for about US$600 billion of holdings that financed recent US external portfolio debt financing, composition now more tilted toward US Treasuries and away from corporate bonds.
  - Cayman Islands: accounted for about US$500 billion of holdings that financed recent US external portfolio debt financing, also tilted toward US Treasuries.
  - Given the United Kingdom’s current account deficit and the Cayman Islands’ small size, both are likely intermediaries providing financial and banking sector services.
- Official versus private holdings and currency composition:
  - The share of official holdings (among total holdings) of US Treasury securities declined from a peak of 76 percent in mid-2009 to about 50 percent at the end of 2022.
  - The share of private holdings exceeded 40 percent at the end of 2022.
  - The currency composition of official foreign exchange reserves remained largely stable in recent years, with the US dollar accounting for about 60 percent of the total of (allocated) global reserves.

*Source: CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES (2023 External Sector Report).*

### Box 1.1 (continued)

### Box 1.1 (continued)

### Currency composition and vulnerability of external balance sheets
- Analysis covers the currency breakdown of international investment positions for 50 major economies.
- The vulnerability of economies to external shocks depends crucially on the currency composition of international investment positions.

### Long foreign currency positions and historical shifts
- Aggregate foreign currency exposures are defined as total net foreign assets denominated in foreign currency as a share of total assets and liabilities.
- Aggregate foreign currency exposures have improved significantly since 1990, particularly in emerging market and developing economies (EMDEs).
- Most EMDEs moved from a negative aggregate net position in foreign currency (negative x-axis values in Figure 1.2.1, panel 1) to a positive one; the corresponding distribution curve shifted rightward.
- This transition occurred mainly before the global financial crisis and is largely attributable to:
  - the currency composition of other investments (mainly bank related), and
  - a greater reliance on portfolio equity financing.

### Currency-induced valuation effects
- Positive net positions in foreign currency reduce risks associated with depreciations in domestic currency and increase the insurance role of national balance sheets.
- Representative valuation effects for a 10 percent depreciation in domestic currency (all else equal):
  - EMDEs in 1990: median valuation loss of 1.6 percent of GDP.
  - EMDEs in 2020: median valuation effect became positive, equivalent to 2.4 percent of GDP.
  - Advanced economies in 1990: a 10 percent depreciation led to a median valuation gain of 0.5 percent of GDP.
  - Advanced economies in 2020: a 10 percent depreciation led to a median valuation gain of 9.2 percent of GDP.
- Changes in distribution of positions:
  - Proportion of EMDEs with net long positions in foreign currency: 17 percent in 1990 and 75 percent in 2020.
  - However, 92 percent of EMDEs were short on foreign currency in portfolio debt in 2020, producing a median valuation loss of 1 percent of GDP in portfolio debt for a 10 percent depreciation in domestic currency.

### Risks and granularity
- Aggregate positions can mask significant currency mismatches at more granular levels (sectors, institutions, asset classes).
- When debt and equity are examined separately, currency-driven valuation effects in debt and equity tend to offset each other for many economies.
- Prevalence of short positions in foreign currency for debt among EMDEs keeps these economies vulnerable to depreciation pressures.

*Source: https://www.imf.org/-/media/files/publications/esr/2023/english/ch1.pdf*

### Annex Table 1.1.4. External Sector Report Economies: Summary of IMF Staff–Assessed Real Effective

### Annex Table 1.1.4–1.1.6: External Sector Report Economies — IMF Staff Assessments, Gaps, and 2022 Policy Recommendations

### IMF staff–assessed REER gaps and EBA model gaps (2022) — key figures and summary observations
- GDP-weighted average sum of IMF staff–assessed REER gaps (Discrepancy): 0.9.
- Selected economy REER and related gaps (columns: IMF Staff-Assessed REER Gap | REER Gap Implied by IMF Staff-Assessed CA Gap | EBA REER-Level Gap):
  - Argentina: 17.5 | 15.2 | 10.8
  - Australia: 2.6 | 2.6 | 23.4
  - Belgium: 6.3 | 6.3 | 31.3
  - Brazil: 6.0 | 6.0 | –14.4
  - Canada: 6.8 | 6.8 | –10.5
  - China: –5.7 | –5.7 | 12.7
  - Euro Area: 0.2 | 0.2 | 8.0
  - France: 7.1 | 7.1 | 5.3
  - Germany: –7.8 | –7.8 | –9.5
  - India: –7.8 | –7.8 | 10.6
  - Indonesia: –2.0 | –2.0 | –16.3
  - Italy: 9.3 | 9.3 | 15.4
  - Japan: 0.0 | 0.0 | –31.4
  - Korea: 2.9 | 2.9 | 3.4
  - Malaysia: –8.0 | –8.0 | –29.3
  - Mexico: –4.9 | –4.9 | 14.9
  - The Netherlands: 0.1 | 0.1 | 15.0
  - Poland: –2.0 | –2.0 | –19.0
  - Russia: –13.6 | –13.6 | –4.7
  - South Africa: 5.0 | 5.0 | 12.8
  - Spain: –2.2 | –2.2 | 29.2
  - Sweden: –9.7 | –10.3 | –17.0
  - Switzerland: 0.1 | 0.1 | 17.6
  - Thailand: –6.2 | –6.2 | –2.6
  - Türkiye: 6.5 | 6.5 | –56.7
  - United Kingdom: 2.9 | 2.9 | 2.3
  - United States: 9.0 | 9.0 | 22.8
  - Hong Kong SAR: –1.4 | –1.4 | . . .
  - Singapore: –10.2 | –10.2 | . . .
  - Saudi Arabia: –21.6 | –21.6 | . . .
- Note: “. . .” indicates data are not available or not applicable; REER = real effective exchange rate; EBA = External Balance Assessment; CA = current account.

### External Balance Assessment current account regression policy gap contributions (2022) — overview
- Methodology notes provided in table:
  - Total contribution after adjusting for multilateral consistency.
  - Implied REER gap formula: Implied REER gap = –(IMF staff–assessed CA gap/CA-to-REER elasticity).
  - CA-to-REER semielasticity used by IMF country teams reported per economy in source table.
  - Foreign contributions (in percent of GDP) noted in footnote: fiscal = 1.1; public health = 0.0; private credit = –0.4; foreign exchange intervention = 0.0.
  - Total foreign exchange intervention and capital controls contribution = Coeff * [(FXI x KC) - (desirable FXI x desirable KC)].
- Selected country-level highlights from regression policy-gap decomposition (EBA gap and principal domestic policy contributions, percent of GDP):
  - Argentina: EBA Gap –1.2; Fiscal total identified –1.0; Public Health total 0.3; Private Credit total –3.9; FXI/KC total –0.5.
  - Australia: EBA Gap –1.1; Fiscal total –1.0; Public Health total 0.3; Private Credit total –3.4; FXI/KC total 0.0.
  - Brazil: EBA Gap –1.1; Fiscal total –0.8; Public Health total 0.7; Private Credit total –5.0; FXI/KC total 0.0.
  - Canada: EBA Gap –3.4; Fiscal total –4.4; Public Health total 0.9; Private Credit total –1.0; FXI/KC total 0.0.
  - China: EBA Gap 1.5; Fiscal total 0.5; Public Health total –0.4; Private Credit total –6.8; FXI/KC total 0.0.
  - Germany: EBA Gap 2.5; Fiscal total 3.1; Public Health total 0.7; Private Credit total –2.8; FXI/KC total 0.0.
  - India: EBA Gap 1.5; Fiscal total 1.3; Public Health total 0.0; Private Credit total –9.6; FXI/KC total 0.0.
  - Japan: EBA Gap –0.3; Fiscal total 1.7; Public Health total –1.0; Private Credit total –7.8; FXI/KC total 0.0.
  - Mexico: EBA Gap 1.2; Fiscal total 0.8; Public Health total 0.6; Private Credit total –4.3; FXI/KC total 0.0.
  - Russia: EBA Gap 2.7; Fiscal total 3.5; Public Health total –0.8; Private Credit total –2.0; FXI/KC total 0.0.
  - United Kingdom: EBA Gap –1.2; Fiscal total –2.4; Public Health total –0.3; Private Credit total –7.2; FXI/KC total 0.0.
  - United States: EBA Gap –1.2; Fiscal total –0.6; Public Health total –0.1; Private Credit total –5.8; FXI/KC total 0.0.
- Coeff = coefficient; Dom = domestic; FXI = foreign exchange intervention; KC = capital controls; P = actual level; P* = desired level.

### 2022 Individual Economy Assessments — overall assessments and policy recommendations (selected economies)
- Argentina — Overall 2022 Assessment: Weaker
  - Policy recommendations:
    - Implement growth-friendly fiscal consolidation, combined with tight monetary policy and a streamlined FX regime to strengthen the trade balance, rebuild international reserves, regain market access, and ensure debt sustainability.
    - Introduce reforms to boost export capacity and encourage FDI.
- Australia — Broadly in line
  - Policy recommendations:
    - Withdraw fiscal and monetary stimulus at an appropriate pace.
    - Boost investment by executing planned infrastructure spending, streamlining product market regulation, and promoting R&D and innovation.
- Belgium — Substantially weaker
  - Policy recommendations:
    - Strengthen competitiveness by addressing structural challenges, including labor and product market reforms, to foster green, digital, and inclusive growth.
    - Rebuild fiscal buffers through expenditure-led consolidation.
- Brazil — Broadly in line
  - Policy recommendations:
    - Raise national saving including by implementing medium-term fiscal consolidation.
    - Reduce the cost of doing business by fostering a skilled labor force and implementing structural reforms to increase competitiveness.
- Canada — Moderately weaker
  - Policy recommendations:
    - Develop a medium-term fiscal consolidation plan.
    - Boost nonfuel exports through improved labor productivity, removal of nontariff trade barriers, promotion of FDI, and investment in R&D, physical capital, and green transformation.
- China — Broadly in line
  - Policy recommendations:
    - Accelerate structural reforms (further open domestic markets, ensure competitive neutrality between SOEs and private firms).
    - Reduce wasteful and distorting industrial policy subsidies; reduce high household savings by strengthening the social safety net; promote green investment.
    - Further increase ER flexibility to help the economy adjust to absorb shocks.
- Euro Area — Broadly in line
  - Policy recommendations:
    - Step up efforts to facilitate the green transition; ensure policies to protect the vulnerable from elevated energy prices are well targeted; avoid a trade-distorting subsidy race; preserve the integrity of the European single market.
    - See additional member country–specific recommendations on reducing internal and external imbalances.
- France — Moderately weaker
  - Policy recommendations:
    - Enhance productivity through structural reforms and sustain higher private investment to facilitate the green transition and digitalization.
    - Rebuild fiscal space once shock dissipates.
- Germany — Stronger
  - Policy recommendations:
    - Promote investment and diminish excess saving through an investment push to achieve climate, digital, and energy security goals.
    - Implement structural reforms to foster innovation, develop the venture capital market, and reduce administrative steps to start a business.
- Hong Kong SAR — Broadly in line
  - Policy recommendations:
    - Ensure medium-term fiscal sustainability given the rapidly aging population; maintain policies supporting wage and price flexibility to preserve competitiveness.
- India — Moderately stronger
  - Policy recommendations:
    - Raise infrastructure spending to reduce CA gap.
    - Over the medium term, implement gradual fiscal consolidation, develop export infrastructure, negotiate free trade agreements, and liberalize investment regime.
    - Structural reforms to deepen integration in global value chains and attract FDI; ER flexibility should be main shock absorber, with intervention limited to disorderly market conditions.
- Indonesia — Broadly in line
  - Policy recommendations:
    - Increase infrastructure and social spending, strengthen the social safety net, reduce restrictions on inward FDI and trade, and improve labor market flexibility.
    - Maintain ER flexibility to support external stability.
- Italy — Weaker
  - Policy recommendations:
    - Raise productivity and improve the business climate via structural reforms: upskilling the workforce, improving infrastructure and the effectiveness of the judiciary and public administration.
    - Improve budget efficiency, contain pension spending, undertake comprehensive and progressive tax reform, and fully implement the National Recovery and Resilience Plan.
- Japan — Broadly in line
  - Policy recommendations:
    - Implement a more flexible monetary policy, bold structural reforms, and a credible and specific medium-term fiscal consolidation plan.
    - Focus on reforms supporting private demand, raising potential growth, and promoting digital and green investment.
- Korea — Broadly in line
  - Policy recommendations:
    - Continue fiscal consolidation and monetary tightening to contain domestic demand and import growth in the near term.
    - Over the medium term, reduce household debt and implement policies to mitigate geopolitical risks; maintain market-determined ER with intervention limited to preventing disorderly market conditions.
- Malaysia — Stronger
  - Policy recommendations:
    - Strengthen the social safety net via reorientation of fiscal spending targeted at gradual growth-friendly consolidation.
    - Implement structural policies to encourage private investment and boost productivity growth.
- Mexico — Moderately stronger
  - Policy recommendations:
    - Implement structural reforms to address investment obstacles, tackle informality and governance gaps.
    - Continue using floating ER as main shock absorber; use FXI only to prevent disorderly market conditions.
- The Netherlands — Broadly in line
  - Policy recommendations:
    - Support investment in physical and human capital to foster potential growth; safeguard energy security, address housing shortages, facilitate SME finance, reinforce education, advance climate transition and digitalization.
- Poland — Broadly in line
  - Policy recommendations:
    - Reduce fiscal deficit while boosting public investment by deploying Next Generation EU grants for infrastructure, digitalization, and climate change.
    - Use structural policies to encourage corporate investment and productivity; incentivize credit allocation to private sector.
- Russia — Stronger
  - Policy recommendations: . . .
- Saudi Arabia — Substantially stronger
  - Policy recommendations:
    - Implement structural reforms with an accompanying investment program to diversify the economy, lift productivity, and align the external position in the medium term.
    - Avoid procyclical fiscal policy amid high hydrocarbon windfalls; minimize risks associated with industrial policies.
- Singapore — Substantially stronger
  - Policy recommendations:
    - Increase public investment in health care, green and other physical infrastructures, and human capital to reduce external imbalances over the medium term by lowering net public saving.
- South Africa — Moderately weaker
  - Policy recommendations:
    - Implement structural reforms and stronger fiscal consolidation under a credible medium-term framework while preserving space for critical infrastructure and social spending.
    - Improve governance, product market efficiency, and labor market functioning; build up reserves.
- Spain — Broadly in line
  - Policy recommendations:
    - Implement fiscal consolidation; improve productivity via education, innovation, and energy efficiency.
    - Spain’s recovery plan foresees investments and reforms in these areas.
- Sweden — Stronger
  - Policy recommendations:
    - Once inflation recedes, increase private and public investment in the green transition and the health sector.
- Switzerland — Broadly in line
  - Policy recommendations:
    - Fiscal policy should remain in line with debt-brake framework in the near term; as inflation eases, small deficits should support necessary expenditures.
    - Consider targeted FXI to mitigate disruptive volatility.
- Thailand — Stronger
  - Policy recommendations:
    - Focus public spending on targeted social transfers and infrastructure to support a green recovery and sector reorientation.
    - Reform and expand social safety nets; address widespread informality.
- Türkiye — Moderately weaker
  - Policy recommendations:
    - Strengthen the policy framework to underpin external sustainability; implement tighter monetary and fiscal policy and rebuild policy credibility.
- United Kingdom — Broadly in line
  - Policy recommendations:
    - Implement gradual fiscal consolidation while preserving quality of public services and protecting the vulnerable.
    - Implement structural reforms to boost competitiveness, upgrade labor skills, bolster national savings to finance investment, including for climate transition.
- United States — Moderately weaker
  - Policy recommendations:
    - Implement fiscal consolidation over the medium term.
    - Implement structural policies to increase competitiveness: upgrade infrastructure; enhance schooling, training, and mobility; support the working poor; increase labor force growth (including skill-based immigration reform).
    - Roll back tariff barriers and resolve trade and investment disagreements to support an open, stable, and transparent global trading system.

*Source: IMF staff estimates and 2022 Individual External Balance Assessments.*

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_Source: https://www.imf.org/-/media/files/publications/esr/2023/english/ch1.pdf_