## External Sector Report 2025 — Executive Summary and Select Chapters ## Source details **Canonical URL:** [External Sector Report 2025 — Executive Summary and Select Chapters](https://www.imf.org/-/media/files/publications/esr/2025/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2025/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2025/english/text.pdf.json) --- ### Revisions and corrections - Executive Summary, IMF Executive Board Discussion Summary, Chapter 1, Chapter 2, and Chapter 3 PDFs replaced with typeset versions. - Correction: Türkiye — CPI-based real effective exchange rate annual average depreciation revised to 6.1 percent over 2020–23 (changed from 5.7 percent over 2020–23). ### Report scope and purpose - Annual External Sector Report analyzes global external developments and provides multilaterally consistent assessments of external positions of the world’s largest economies representing more than 90 percent of global GDP. - Assessed elements include current accounts, real exchange rates, external balance sheets, capital flows, and international reserves. - Complements the World Economic Outlook and Article IV consultations in assessing spillovers from members’ policies on global stability and monitoring external positions. --- ### Chapter 1 — External Positions and Policies: Principal findings and outlook - Global headline outcomes and key statistics - United States current account deficit widened by $228 billion to $1.13 trillion (1.0 percent of world GDP) in 2024. - China current account surplus increased by $161 billion to $424 billion in 2024. - Euro area surplus increased by $198 billion to $461 billion in 2024. - Of 30 ESR countries, 22 reported widening current account deficits or surpluses in 2024. - Global current account balances widened by 0.6 percentage point of world GDP in 2024. - Commodity price changes in 2024: oil –4.5 percent; gas –16.2 percent; metals –4.7 percent; food –5.9 percent. - Drivers of 2024 external developments - Domestic macro imbalances (structural, cyclical, policy) were primary drivers. - Investment-rate changes contributed most to diverging current accounts: - US: increased investment rate widened deficit. - China, euro area, Japan: decreased investment rates expanded surpluses. - Private saving changes partly accommodated divergences but offset only 10 percent to 50 percent of the investment change. - Global real interest rates broadly stable in 2024. - Excess imbalances and historical context - Excess current account balances (sum of absolute IMF staff–assessed current account gaps) explain about two-thirds of the widening in global headline current account balances. - Excess CA balances increased to 1.3 percent of ESR economy GDP in 2024 (about 0.4 percentage point higher than 2023). - 2024 saw the largest increase in excess global current account balances in a decade (after adjustment for COVID-19 and commodity shocks, the largest since the pre‑Global Financial Crisis boom). - Risks, scenarios, and model-based outcomes - Main risks: delayed domestic macro adjustments; escalation of trade tensions; prolonged high policy uncertainty; geo‑economic fragmentation. - Scenario A (Growing Domestic Imbalances): continued divergence (weaker domestic demand in China, US fiscal expansion, lower EU productivity) increases global current account balances. - Convergence Scenario (rebalancing and productivity gains): reduces medium‑term global current account balances by about ½ percentage point of world GDP by 2030; China’s large decline in saving accounts for 68 percent of the overall decline by 2030. - Medium-term impact: widening domestic imbalances increase global current account balance by 0.11 percentage point of world GDP by 2030; muted rise in global interest rates by 0.04 percentage point. - Tariff escalation calibrated to April 2025 US–China episode: medium-term global balances narrowed by 0.12 percent of world GDP but produced significant negative macroeconomic effects; on impact global balances increase by 0.15 percentage point of world GDP. - Policy uncertainty shock (April 2025 calibration): global investment falls by 3.3 percent at trough in 2026; global output declines by 0.9 percent; heterogeneous current account responses (US +0.05 percentage point of GDP; China –0.11 percentage point of GDP; euro area –0.08 percentage point of GDP two years after shock). - Policy priorities and recommendations - Surplus economies: durable market‑oriented structural reforms to boost domestic demand; policies to reduce excess saving and promote investment (expanded social safety nets, higher fiscal deficits where feasible). - Deficit economies: fiscal consolidation to rebuild fiscal buffers and increase saving, especially where public debt is high. - Across economies: structural reforms to improve productivity and increase investment; fiscal consolidation often needed to maintain external balance. - International cooperation: resolve trade tensions, deepen economic integration via nondiscriminatory reductions in trade barriers or comprehensive trade agreements, ensure IMF-centered global financial safety net (16th General Review of Quotas approval noted; members’ quota consents required). - Executive Board observations (summary of July 11, 2025) - Directors agreed broadly with findings/recommendations: widening global current account balances in 2024, domestic macro imbalances as main driver, largest investment‑rate contribution, US dollar centrality in the IMS, projection of narrowing global balances over medium term subject to high uncertainty, and call for transparency and methodological improvements to the EBA. --- ### Chapter 1 — Measurement, models, and technical findings - External Balance Assessment (EBA) methodology - Produces medium‑term current account and REER benchmarks (norms) consistent with fundamentals and desirable policies; norms multilaterally consistent and cyclically adjusted. - Gaps: realized minus norm after cyclical adjustments; greater weight to current account model; IMF staff judgment critical; number of country‑specific adjustors decreased versus 2023. - Measurement issues highlighted - Customs vs. BoP trade flow differences increased three‑fold after 2020 (percent of global GDP), with China the most globally sizable change since 2020; change‑of‑ownership measurement and company surveys recommended. - Primary income flows: implied yields on foreign assets rose after 2021 in top 10 economies except China; China’s implied yield declined and data gaps hinder analysis—authorities urged to improve data transparency. - Global balance sheet and NIIP developments - Net external creditor and debtor stock positions reached a new high in 2024; expansion of the external debtor side entirely accounted for by the United States. - US NIIP decreased by 3.6 percentage points of world GDP in 2024 relative to 2023. - Financial centers represent 31 percent of global foreign assets and liabilities but only 5 percent of world GDP. --- ### Chapter 2 — International Monetary System (IMS): Currencies in a changing world - Core findings on the IMS - The US dollar remains at the center of the IMS across trade invoicing, reserves, FX turnover, international loans and debt, and global payments; dollar use exceeds US economic weight. - A composite index of international currency usage shows dollar dominance sustained; moderate decrease since 2015 in some reserve shares but overall stability. - Four ongoing developments shaping the IMS: - Geopolitical fragmentation (trade reorientation within geopolitical groups). - Rising RMB use in trade invoicing and international credit (share more than doubled since 2012 but still small relative to China’s economic weight; RMB invoicing reached approximately 25 percent by mid‑2024 in firm‑level forum data). - Signs of relative softening in US role as global banker/insurer (declining NIIP, falling excess returns/differentials, declining convenience yield on Treasuries). - Technological innovation in cross‑border payments (CBDCs experimental; private stablecoins rising). - RMB use in trade invoicing (Box findings) - Drivers identified from forum NLP and customs data: early policy pilots (2009–12), exchange‑rate risk concerns (2015–16), geopolitical concerns and rerouting (2018–22), and Russia‑related sanctions effects (2022 onward). - Forum trend: RMB invoicing by platform firms rose from about 6 percent pre‑2018 to 17 percent during 2018–19 among rerouting firms; reached ~25 percent by mid‑2024 in illustrated series. - Limitations: forum data infer use but not share/value of exports invoiced in RMB. - US dollar “exorbitant privilege” and recent signals - Manifestations: consistent positive valuation gains on US net external assets, excess return on US foreign assets, and convenience yield on Treasuries. - Recent changes: US NIIP deterioration, narrowing return differentials, and declining Treasury convenience yield; episodes in early April 2025 showed Treasury spreads widening and dollar depreciation, suggesting potential weakening of demand for Treasuries in stressed episodes. - Global Financial Safety Net (GFSN) - Four layers: international reserves, bilateral swap arrangements, regional financial arrangements, IMF. - International reserves reached $14.5 trillion at end‑2023; other GFSN layers about $4.5 trillion. - IMF lending capacity near $1 trillion; 16th General Review of Quotas increases quotas by 50 percent once implemented. - Cross‑border payments and digital innovation - Correspondent banking remains dominant; Swift analysis (2021–24) shows core‑periphery structure, heavy US and UK centrality, increasing connectivity, and RMB payment connectivity rising from low base. - Stablecoins: market capitalization rose sharply since 2021; US‑dollar‑backed stablecoins increasingly used for cross‑border transactions. Box 2.4 estimates: - 2024 gross stablecoin flows (selected blockchains) total $2 trillion in 138 million transactions; average transaction size $14,630. - North America and Asia and Pacific account for largest fraction of gross flows; flows relatively large versus regional GDP in Africa and Latin America. - Risks: stablecoins can substitute for dollar use in some payments, may operate outside banking intermediation and central bank liquidity, and pose financial integrity and currency substitution risks if large without regulation. --- ### Chapter 3 — 2024 Individual Economy Assessments: methodology and selected economy highlights - Methodology and process - Integrated use of EBA models, balance‑sheet indicators, capital and financial account flows, FX intervention/reserves adequacy, and staff judgment; assessments presented in ranges and categorized (broadly in line; moderately weaker/stronger; weaker/stronger; substantially weaker/stronger). - ESR covers 30 economies representing 88–90 percent of global GDP; assessments for 13 of 30 changed in 2024. - Aggregate assessment results and drivers - Excess current account balances for ESR sample increased to 1.3 percent of ESR economy GDP in 2024 (about 0.4 percentage point higher than 2023). - Sum of absolute headline current account balances for ESR sample increased to 3.0 percent of ESR group GDP in 2024 (up 0.6 percentage point from 2023). - Main country contributions to excess CA balances: China +0.24 percentage point of ESR group GDP; United States –0.20 percentage point; euro area +0.07 percentage point. - Selected country highlights and policy advice (preserving numeric findings and recommendations) - United States - 2024 CA: –3.9 percent of GDP; EBA Norm: –2.2 percent; Staff Gap midpoint: –1.4 percent of GDP. - NIIP: –89.9 percent of GDP at end‑2024. - Policy advice: fiscal consolidation aimed at achieving a general government primary surplus of about 1 percent of GDP; constructive trade policy to resolve tensions. - REER: staff CA gap implies REER overvaluation 11.9 percent in 2024; range 6.1 to 17.8 percent noted in technical endnotes. - China - 2024 CA: 2.3 percent of GDP; Staff Gap midpoint: 1.2 percent of GDP (moderately stronger). - NIIP: 17.6 percent of GDP; reserves about $3.5 trillion end‑2024. - Policy advice: boost domestic demand via expansionary fiscal policy, scale up social spending, structural reforms to reduce household savings, and cautiously phase out CFMs with exchange rate flexibility. - Euro area (aggregate) - 2024 CA: 2.8 percent of GDP; EBA Norm: 1.4 percent; Staff Gap: 1.0 percent of GDP (moderately stronger). - NIIP: 10.9 percent of GDP. - Policy advice: deepen single market, boost investment, complete banking and capital markets unions. - Türkiye - 2024 CA: –0.8 percent of GDP; Staff Gap midpoint: –1.3 percent of GDP (moderately weaker). - CPI‑based REER annual average depreciation revised to 6.1 percent over 2020–23 (correction preserved). - NIIP: –22.3 percent of GDP in 2024; gross international reserves $155 billion in 2024; reserves at 72 percent of IMF ARA metric (de facto crawl‑like arrangement). - Policy advice: tighten monetary and fiscal stance, remove discretionary credit allocation favoring exports, strengthen credibility to build reserves. - Japan - 2024 CA: 4.8 percent of GDP; EBA Norm: 4.3 percent; Staff Gap midpoint: 0.6 percent of GDP (broadly in line). - NIIP: 89.8 percent of GDP; reserves about $1.3 trillion end‑2024. - Policy advice: structural reforms, credible medium‑term fiscal consolidation to support private‑sector‑led growth. - India - FY2024/25 CA: –0.8 percent of GDP; EBA Norm: –2.0 percent; Staff Gap: 1.4 percent of GDP (moderately stronger). - NIIP: –9.6 percent of GDP; reserves increased to $665.4 billion end‑FY2024/25. - Policy advice: reduce import restrictions (especially intermediate goods), liberalize FDI, improve trade infrastructure, maintain exchange rate flexibility. - Singapore - 2024 CA: 17.5 percent of GDP; Staff Gap midpoint: 5.1 percent of GDP (substantially stronger). - NIIP: 146.9 percent of GDP; reserves and other official assets large; official reserves $384 billion in 2024. - Policy advice: execute planned high‑quality infrastructure and strengthen social safety nets to reduce net saving. - Selected other countries (summary bullets of policy focus) - Australia: CA widened to –1.9 percent of GDP in 2024; recommend gradual fiscal consolidation and structural policies to boost competitiveness; staff REER gap midpoint 10.7 percent (elasticity 0.18). - Germany: CA 5.7 percent of GDP in 2024; staff CA gap midpoint 2.1 percent of GDP; recommend higher public investment and policies to reduce excess saving. - Netherlands: CA 9.9 percent of GDP in 2024; staff CA gap midpoint 4.0 percent of GDP; recommend boosting public and private investment. - Spain: CA 3.0 percent of GDP in 2024; staff CA gap midpoint 2.0 percent of GDP; recommend fiscal consolidation and productivity reforms. - Sweden: CA 7.4 percent of GDP in 2024; staff CA gap 5.5 percent of GDP; recommend private and public investment to raise domestic absorption. - Russia: 2024 CA 2.9 percent of GDP; NIIP 43.6 percent of GDP; assessments subject to high uncertainty due to sanctions and data challenges. - Annex table highlights (selected quantitative aggregates preserved) - Annex Table 1.1.1 — Aggregate gross official reserves (Billions of US Dollars): 2021: 12,834; 2022: 11,898; 2023: 12,404; 2024: 12,439 — Percent of GDP: 13.1 (2021), 11.7 (2022), 11.7 (2023), 11.3 (2024). - Annex Table 1.1.2 — Selected economy CA and assessment excerpts (examples preserved exactly where provided): China CA actual 2.3; United States CA actual –3.9; Singapore CA actual 17.5; Germany CA actual 5.7; Japan CA actual 4.8. - Annex Table 1.1.6 — Selected 2024 policy recommendations summarized above for individual economies. --- *Source: International Monetary Fund — 2025 External Sector Report (Executive Summary, IMF Executive Board Discussion Summary, Chapter 1: “External Positions and Policies”, Chapter 2: “International Monetary System: Currencies in a Changing World”, Chapter 3: “2024 Individual Economy Assessments”; typeset replacements and correction notice as provided).* ### Executive Summary, IMF Executive Board Discussion Summary, Chapter 1, Chapter 2, ### External Sector Report 2025 — Executive Summary, IMF Executive Board Discussion Summary, Chapter 1, Chapter 2, Chapter 3 (typeset replacements and correction notice) ### Revisions and corrections - Executive Summary, IMF Executive Board Discussion Summary, Chapter 1, Chapter 2, and Chapter 3 PDFs were replaced with the typeset versions. - In the Background paragraph of the Real Exchange Rate section of Table 3.28. Türkiye: Economy Assessment, the annual average by which the CPI-based real effective exchange rate depreciated was changed from 5.7 percent over 2020–23 to 6.1 percent over 2020–23. ### Report scope and purpose - Annual External Sector Report analyzes global external developments and provides multilaterally consistent assessments of external positions of the world’s largest economies representing more than 90 percent of global GDP. - Assessed elements include current accounts, real exchange rates, external balance sheets, capital flows, and international reserves. - The report complements the World Economic Outlook and Article IV consultations in assessing spillovers from members’ policies on global stability and monitoring external positions. ### Chapter 1 — External Positions and Policies: major themes (as listed) - External Sector Developments in 2024 - Currencies, Financial Flows and Balance Sheets - Assessment of External Positions in 2024 - Outlook and Risk Scenarios - Policy Priorities for Promoting External Rebalancing - Boxes in Chapter 1: - Measuring Current Account Balance - Spillovers from Large Current Account Surpluses and Deficits - Import Tariffs, Current Accounts, and Global Balances - Policy Uncertainty and External Balances ### Chapter 2 — International Monetary System: Currencies in a Changing World: major themes (as listed) - Introduction - The Rise of US Dollar Dominance - Current State: The US Dollar at the Center - Global Transformations in the 21st Century: Trade and Financial Liberalization and Globalization - Ongoing Developments in the IMS - Conclusion - Boxes in Chapter 2: - Rising RMB Use in Trade Invoicing and Its Drivers - Global Financial Safety Net - Unveiling Patterns in Cross-Border Payments via Swift - Measuring International Stablecoin Flows ### Chapter 3 — 2024 Individual Economy Assessments: major themes (as listed) - Methodology and Process - Selection of Economies - Box: Assessing Imbalances: The Role of Policies—An Example - Abbreviations and Acronyms - Technical Endnotes by Economy ### Inventory of illustrative figures and tables (selected headings retained exactly as in source) - Key figure headings include: - Figure 1.1. Diverging Current Account Balances in 2024 - Figure 1.2. Global Current Account Balances - Figure 1.3. Decomposition of Changes in Current Account into Contributions from Saving and Investment, 2023–24 - Figure 1.4. Real Interest Rates - Figure 2.2. The Rise of US Dollar Dominance - Figure 2.3. Share in Global Economy and Currency Composition in 2023 - Figure 2.14. The United States’ Exorbitant Privilege - Figure 2.19. US Dollar Liabilities of Non-US Banks Outside the US - Figure 2.4. An Index of International Currency Usage - Selected tables include: - Table 1.1. Selected Economies: Current Account Balance, 2022–25 - Table 1.2. Selected Economies: Net International Investment Position, 2021–24 - Annex Table 1.1.1. Selected Economies: Foreign Reserves, 2021–24 - Annex Table 1.1.2. External Sector Report Economies: Summary of External Assessment Indicators, 2024 - Annex Table 1.1.3. External Sector Report Economies: Summary of IMF Staff–Assessed Current Account Gaps and IMF Staff Adjustments, 2024 - Annex Table 1.1.4. External Sector Report Economies: Summary of IMF Staff–Assessed Real Effective Exchange Rate and External Balance Assessment Model Gaps, 2024 - Annex Table 1.1.5. Selected External Sector Report Economies: External Balance Assessment Current Account Regression Policy Gap Contributions, 2024 - Annex Table 1.1.6. 2024 Individual Economy Assessments: Summary of Policy Recommendations - Table 3.28. Türkiye: Economy Assessment (note: includes corrected CPI-based real effective exchange rate depreciation figure) ### Notable numeric value preserved from correction - Türkiye: CPI-based real effective exchange rate annual average depreciation revised to 6.1 percent over 2020–23 (changed from 5.7 percent over 2020–23). *International Monetary Fund | 2025 — External Sector Report (selected sections and correction notice)* ### Chapter 1, “External Positions and Policies,” discusses the evolution of global external positions in 2024, ### Chapter 1 — “External Positions and Policies” ### Overview - Discusses the evolution of global external positions in 2024, key risks to external sector stability, and policy priorities for reducing excess imbalances over the medium term. - Forward-looking analysis assesses key risks affecting global current account balances and summarizes IMF staff external sector assessments for the medium term based on 2024 information. ### External sector developments in 2024 — Current accounts and headline outcomes - Current accounts in major economies diverged significantly in 2024. - The deficit in the United States widened by $228 billion to $1.13 trillion (1.0 percent of world GDP). - Surpluses increased in: - China by $161 billion to $424 billion. - The euro area by $198 billion to $461 billion. - Among other major economies, surpluses increased in Japan and Korea; deficits widened in Brazil and Australia. - Of the 30 countries covered in the ESR, 22 reported widening current account deficits or surpluses. - Global current account balances widened by 0.6 percentage point of world GDP. - Major economies drove the widening; contributions from China and advanced economies accounted for most of the increased global current account surpluses, matched by an increased US contribution to global current account deficits. - Global balances widened despite a decline in oil exporters’ current account surplus, reflecting lower commodity prices in 2024. - Average global prices in 2024 declined for oil (by 4.5 percent), gas (16.2 percent), metals (4.7 percent), and food (5.9 percent). - Net capital inflows into emerging markets, excluding China, remained stable, while China saw increasing net outflows. - Net external creditor and debtor stock positions reached a new high, owing to both valuation changes and widening current account balances. - The United States sustained a large valuation loss in the external stock position amid its strong stock market and the exchange rate that had hit a historical high in 2024 before depreciating in 2025 amid rising uncertainty. ### Drivers: domestic macro imbalances and saving–investment decomposition - Domestic macro imbalances—due to structural factors, cyclical conditions, and policies—drove the widening global balances in 2024. - From the saving–investment perspective: - Changes in investment rates contributed the most to diverging current accounts. - Increased investment rate in the United States widened the current account deficit. - Decreased investment rates in China, the euro area, and Japan expanded their surpluses. - These investment changes partly reflect divergent domestic demand conditions in 2024 relative to 2023: - Continuing real estate correction and weaker demand in China. - Deteriorating conditions in the euro area. - Strong growth in the United States. - Changes in medium-term growth prospects and productivity trends also contributed to investment trends (reference: 2025 April World Economic Outlook). - Private saving changes partly accommodated divergences but compensated for only 10 percent to 50 percent of the investment change in the economies discussed. - Global real interest rates remained stable in 2024, with excess saving in key surplus countries matching saving shortfall in deficit countries. ### Excess current account imbalances and historical context - Excess current account balances, measured as the sum of the absolute value of IMF staff-assessed current account gaps, account for about two-thirds of the widening in global headline current account balances. - Changes in desirable current account balances (i.e., CA norms and the applied staff adjustments) explain the remaining increase. - The assessed increase in excess current account balances is the largest in a decade, with major economies—China, the United States, and the euro area—driving the increase. - Once COVID-19 and commodity-price shocks are adjusted for, 2024 saw the largest increase in global balances since the pre-Global Financial Crisis boom, halting the downward trend that prevailed after the Global Financial Crisis. ### Risks, scenarios, and spillovers - In 2025 and over the medium term, a delay in macroeconomic adjustments to correct post‑pandemic domestic imbalances could result in continued current account divergence in major economies. - A model-based risk scenario reveals that domestic macroeconomic forces are the largest contributors to external sector developments in China, the United States, and the euro area; addressing domestic imbalances could bring about convergence of major current account balances. - A further escalation of trade tensions, including with tariffs, would have significant negative macroeconomic effects, with limited efficacy in correcting global imbalances. - Excess global current account balances could exacerbate the risks of sudden stops and disruptive currency and capital flow movements, contribute to deepening geo‑economic fragmentation, and raise trade barriers. ### Policy priorities and recommendations - Policy efforts are required in both excess surplus and deficit economies to promote durable external rebalancing. - Surplus economies: - Durable market‑oriented structural reforms to boost insufficient domestic demand. - Policies to diminish excess saving and promote investment, including through expanded social safety nets or higher fiscal deficits—where feasible—to lift medium‑term growth prospects. - Deficit economies: - Appropriate fiscal consolidation to help rebuild fiscal buffers and increase saving, particularly where excess current account deficits partly reflect the need to reduce high public debt levels. - Across economies: - Structural reforms to improve productivity and increase investment. - In many cases, fiscal consolidation is needed to maintain external balance. - Pragmatic international cooperation is vital to sustain global growth and mitigate cross‑country spillovers. - Trade tensions should be resolved to promote clarity and transparency and deepen economic integration through nondiscriminatory reductions in trade barriers or by pursuing comprehensive free trade agreements at the regional, plurilateral, or multilateral level. - Industrial policies should be consistent with international obligations, limited to specific objectives where externalities or market failures prevent effective market solutions, and undergo comprehensive cost–benefit analyses given limited fiscal space. - Ensuring an adequate global financial safety net, with the Fund at its core, is essential given heightened uncertainty and increased risks; approval of the 16th General Review of Quotas further fortifies liquidity in the global financial system, which needs to be followed up by members consenting to their respective quota increase to ensure that the IMF is adequately resourced. ### Executive Board observations (summary of July 11, 2025 discussion) - Executive Directors generally agreed with the findings and policy recommendations of the 2025 External Sector Report. - Directors noted: - The widening of global current account balances in 2024 and the largest increase in excess global current account balances in a decade. - Domestic macro imbalances drove the widening, with investment‑rate changes contributing most. - State interventions and other non‑market policies affect trade flows; their impact on external imbalances is harder to quantify due to data limitations. - The US dollar’s central role in the International Monetary System remains intact despite emerging trends (geopolitical fragmentation concerns, greater use of RMB, a softening role of the US as world banker and insurer, emergence of alternative payment systems and private digital assets). - Global current account balances are projected to narrow over the medium term, underpinned by a reduction in current account balances in key surplus economies, but this outlook is subject to unusually high uncertainty. - Directors reiterated the need for transparency, consistency, and evenhandedness of external assessments and encouraged further methodological improvements to the EBA. *Source: International Monetary Fund — 2025 External Sector Report, Chapter 1, “External Positions and Policies.”* ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### Global current account and saving–investment dynamics - Global real interest rates remained broadly stable in 2023–24. - Both global investment and saving decreased as a share of GDP in 2024. - Excess saving in key surplus countries was matched by dissaving in deficit countries, with weak domestic demand in China and dissaving in the United States as central offsetting drivers. - These offsetting drivers produced an increase in global current account balances in 2024 with more muted global effects than in the years leading up to the global financial crisis. - Persistently elevated real interest rates since 2023 could mark a break from previous declining trends observed over the past 20 years. - Decomposition of country contributions, 2023–24: - United States: expansion of the trade deficit in goods accounted for 63 percent of the decrease in the current account; a reduction in the primary income balance accounted for the remaining increase in the deficit. - China: 87 percent of the current account increase came from a stronger goods balance, driven by weak imports and a surge in exports. - Euro area: increase in the services balance contributed sizably (partly from unusually high exports of intellectual property from Ireland); an increase in the goods balance was significant mainly due to an improved trade balance for oil reflecting lower energy import prices. - “Rest of the world” group: main counterparty to the US primary income deficit and the euro area service trade surplus. - Measurement caveat: balance-of-payments components (trade in goods, primary income balance) can contain significant measurement errors that could affect headline current accounts and global balances. ### Trade policy, subsidies, and high-frequency trade signals - New trade-restrictive policy measures continued to accumulate during 2024 at a high pace; the effective size accelerated in 2025 (reference to Figure 1.27 in source). - Between 2009 and 2022: - New restrictions increased rapidly in the United States and euro area (from low levels). - China accounted for about two-thirds of all subsidy measures adopted by G20 advanced economies combined. - Empirical evidence: - Subsidies in China can expand exports and suppress imports, potentially contributing to external imbalances, though the impact on aggregate trade balances remains unclear. - A lack of up-to-date and comprehensive data on subsidy policies in many countries hinders further analysis. - Early 2025 monthly merchandise trade data (January–March): - Large increase in the US deficit and an expanded surplus in China, likely reflecting frontloading of trade in anticipation of tariff increases and gold imports for the United States. - These activities are likely temporary and signal potential volatility going forward. ### Currencies, FX intervention, and exchange market pressure - US dollar moves: - First three quarters of 2024: US dollar broadly stable at 13 percent above the post-2000 average; limited appreciation in effective terms of 1.3 percentage points (entirely due to appreciation against the Mexican peso). - Fourth quarter of 2024: sharp appreciation, reaching 18.5 percent above the post-2000 average in real effective terms (highest since September 1985), reflecting optimism on US growth, favorable terms-of-trade, and tight monetary policy. - After peaking in January 2025, the US dollar depreciated sharply in the first quarter of 2025; as of April 2025, it remained at 15 percent above its post-2000 average. - Other reserve currencies: - Chinese renminbi: depreciated in 2024 by 2.3 percent and in the first quarter of 2025 by 1.6 percent; cumulative depreciation since 2022 reached 13 percent. - Japanese yen: depreciated in 2024 by 5.3 percent; strengthened by 2.4 percent in the first quarter of 2025. - Euro: appreciated by 0.6 percent in 2024 relative to 2023; depreciated by 1.4 percent in the first quarter of 2025. - Pound sterling: appreciated by 5.3 percent during 2024 and the first quarter of 2025. - Exchange market pressure management in 2024: - During 2024:Q1–Q3, exchange rate changes were the main outlet for addressing exchange market pressure, especially in countries with depreciation pressure (e.g., Brazil, Mexico). - Adjusted changes in FX reserves also absorbed appreciation pressure (Poland, Hungary) and depreciation pressure (Japan, Korea). - Monetary policy rates were lowered in 17 of the 24 sample economies but had a smaller impact on exchange market pressure due to limited easing and low elasticity of exchange market pressure to interest rates. - During 2024:Q4, broad-based depreciation pressure was addressed mostly by exchange rate changes, with adjusted changes in FX reserves notable in Brazil, Hungary, and India; contribution from policy rates was subdued. ### Global financial flows and emerging market patterns - China: - Net capital outflows accelerated in 2024 to reach a new decade-high. - Increase driven by higher gross capital outflows while gross inflows remained close to zero. - Surge in gross portfolio and other outflows; gross FDI outflows declined slightly relative to 2023. - Gross inflow components remained subdued, continuing 2023 patterns. - Other emerging markets: - Net inflows remained positive and stable in 2024 but significantly below levels a decade ago. - Both gross inflows and gross outflows grew in 2024 relative to 2023, with inflows supported by portfolio flows and outflows by “other” flows. - Changes in net inflows over the past decade mainly reflect increasing gross outflows, especially gross portfolio outflows. - FDI declined on both inflow and outflow sides with limited impact on net capital inflows. - Regional heterogeneity: net inflows grew in Middle East and North Africa; were flat in Latin America and the Caribbean, emerging and developing Europe, and emerging and developing Asia; declined in the Caucasus and Central Asia and sub-Saharan Africa country groups. - Drivers and interpretations: - Easing global financial conditions likely contributed to recovery of gross portfolio inflows to emerging markets. - Sustained geopolitical fragmentation pressures continued to restrain gross FDI flows. - Diverging growth prospects likely contributed to heterogeneity in capital flows between China and other emerging markets. - High-frequency signals, January–March 2025: - Potential recovery in gross portfolio inflows to China (renewed inflows driven primarily by debt flows in February and March). - Continued inflows to other emerging markets, increasing for Latin America and the Caribbean and decreasing in emerging and developing Asia. - These patterns driven mainly by debt flows; gross portfolio equity inflows remained small. ### Global balance sheets and NIIP developments - External assets and liabilities as percent of world GDP were slightly larger in 2024 than at end-2023. - After rapid expansion during 2000–07, gross cross-border asset holdings as a share of global GDP have remained broadly unchanged over the past decade. - Financial centers remained outsized in global cross-border balance sheets: - Representing 31 percent of global foreign assets and liabilities but only 5 percent of world GDP. - Net positions: - Within outwardly stable gross positions, net external creditor and debtor positions reached a new high in 2024. - Expansion of the external debtor side is entirely accounted for by the United States. - United States NIIP in 2024 relative to 2023 decreased by 3.6 percentage points of world GDP. - All other major economies and country groups—creditors and debtors—reported an increase in their NIIP positions. *Italic: Chapter 1, ExtErnal POSItIOnS anD POlICIES, 2025 External Sector Report (source PDF: text - CHAPTER 1 ExtErnal POSItIOnS anD POlICIES).* ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### Net International Investment Position (NIIP) developments, 2024 - Global net creditor and debtor positions expanded in 2024, with the discrepancy between the debtor and credit sides widening to a new high, amounting to one-quarter of the global net external creditor position (Table 1.2). - NIIP trends over the past decade: NIIP gradually decreased in the United States, while that of other debtors and creditors increased. - The oil exporters country group was an exception; its NIIP was unchanged in 2024. ### Valuation changes and current account contributions to NIIP, 2024 - Valuation losses and widening current account balances both contributed to the expansion of global net creditor and debtor positions. - The United States experienced particularly large valuation losses due to the outperformance of its stock markets and the stronger US dollar magnifying the negative contribution of the current account deficit to its NIIP position. - For the US NIIP in 2024, asset price changes accounted for 66 percent of the valuation loss, while the exchange rate accounted for 20 percent, with other statistical changes contributing the rest (data are from US Bureau of Economic Analysis, “Table 1.3. Change in the US Net International Investment Position”). - China reported a small valuation loss in 2024. - In other larger creditor countries, including Germany, Canada, and Japan, valuation gains increased their net creditor positions. - Current accounts accounted for 43 percent of the expansion of net external creditor and debtor positions in 2024, relative to 2023. - The role of valuation changes likely reversed in 2025:Q1, with US equity markets significantly underperforming a global benchmark. ### External Balance Assessment (EBA) methodology and adjustments - The EBA models produce medium-term current account and real exchange rate (REER) benchmarks (norms) that are consistent with country fundamentals and desirable policies. - Norms depend on fundamentals (income, demographics, growth prospects) and desirable medium-term policies (for example, relative fiscal stance). - Norms are multilaterally consistent and cyclically adjusted. - Gaps are derived by comparing realized current account and REER levels to norms after adjusting for cyclical and other short-term factors; greater weight is given to the current account model. - IMF staff judgment is critical due to model limitations and statistical uncertainty. - Adjustors for country-specific factors (measurement issues, demographics, net international investment position considerations) are included; the number of adjustors decreased compared to 2023. - Annex Table 1.1.3 reports the overall set of IMF staff adjustments. ### Assessment results for 2024 (30 ESR economies) - The report provides multilaterally consistent assessments for 30 of the world’s largest economies, representing 88 percent of global GDP. - Assessments changed for 13 of the 30 ESR economies in 2024. - The three largest economies moved farther away from the “broadly in line” category: - United States: changed from broadly in line to moderately weaker. - China: changed from broadly in line to moderately stronger. - Euro area: changed from broadly in line to moderately stronger. - Two other countries moved farther away from broadly in line: Australia, Spain. - Eight countries switched to broadly in line: Korea, Saudi Arabia, Switzerland, Thailand, or moved closer to it: Malaysia, Poland, Türkiye, the United Kingdom. - Changes in headline current accounts drove up excess current account balances by the largest amount in a decade: - Excess current account balances (sum of absolute values of IMF staff–assessed current account gaps) increased in 2024 to 1.3 percent of ESR economy GDP, by about 0.4 percentage point relative to 2023 (Figure 1.20). - The sum of the absolute value of headline current account balances for the ESR sample increased to 3.0 percent of ESR group GDP in 2024, up 0.6 percentage point from 2023. - Estimated excess CA balances account for about two-thirds of the increase in global headline current account balances. - Changes in CA norms contributed 0.1 percent of ESR group GDP to the increase. - A reduction in applied adjustments accounted for another 0.1 percentage point increase in global current account balances. - The contribution of cyclical factors remained broadly unchanged relative to 2023. ### Main country-level contributions to global excess current account balances, 2024 - China, the United States, and the euro area drove the significant increase in excess current account balances. - China: excess current account increased by +0.24 percentage point of ESR group GDP (from an excess current account deficit of 0.02 percent in 2023 to an excess surplus of 0.22 percent in 2024). - United States: assessed excess current account deficit increased by −0.20 percentage point (approximately doubled in size). - Euro area: excess surplus increased by +0.07 percentage point. - Other smaller ESR countries’ contributions remained broadly unchanged in aggregate, though excess current account balances narrowed when expressed relative to own GDP. - The sum of excess surpluses for ESR countries in 2024 broadly matched the sum of excess deficits; they do not add to zero because the exercise is implemented for a broader EBA sample and current accounts for EBA countries can have a discrepancy. ### Risks and macroeconomic implications of widened global current account balances - The sizable increase in CA balances in major economies can generate significant negative cross-border spillovers. - Globally sizable deficits can fuel financial crises with costly global consequences. - Excess surpluses can contribute to the buildup of systemic macrofinancial risks, depress real interest rates, encourage risk-taking and leverage, and create inefficiencies and policy trade-off problems in partner countries. - Rapid increases in excess surpluses can magnify negative impacts on employment and incomes in exposed regions or sectors. - Persistent current account imbalances further increase imbalances in NIIPs, with attendant macro-financial risks. ### Outlook and risk scenarios (anchor: observed 2024 outcomes) - Global current account balances are projected to narrow in 2025 in the reference forecast of the April 2025 World Economic Outlook, driven by reduced current account balances in key surplus countries including China, Japan and Germany; however, this projection is subject to unusually high uncertainty. - The report does not base external sector assessments on the 2025 projection; the assessments are based on actual 2024 balances. - Four types of risks examined through model-based scenarios: 1. Lack of needed domestic macroeconomic adjustment in key surplus and deficit economies could lead to further divergence of current account balances, widening global current account balances. 2. A coordinated effort to address domestic imbalances could set the global economy on a path of narrowing global current account balances. 3. Increase in trade barriers and intensifying fragmentation could have significant negative macroeconomic effects but only modestly narrow global current account balances. 4. Prolonged high policy uncertainty would be detrimental to global economic prospects, with sizable cross-country variation in uncertainty heightening external sector risks in most affected economies. - Scenario A (Growing Domestic Imbalances): model-based scenario with continued widening of domestic imbalances in key economies (weaker domestic demand in China, fiscal expansion in the United States, and lower productivity in Europe). - China: compression of demand and policy response lead to REER depreciation and increase in the saving rate; relative price adjustment supports export growth and reduces import demand, increasing China’s current account surplus. - United States: fiscal expansion decreases saving, stimulates investment and imports, appreciates the REER, reduces exports, and widens the current account deficit. - Euro area: decline in productivity lowers investment and saving, resulting in a slight decrease in the current account and subdued REER appreciation. - These adjustments are a continuation of recent macroeconomic trends; assessed external sector effects are limited in economic terms, but postponing adjustments could magnify the effects. - The scenario increases global current account balances (quantitative details are presented in Box 1.1 of the April 2025 World Economic Outlook). *Source: IMF, 2025 External Sector Report — CHAPTER 1 ExtErnal POSItIOnS anD POlICIES (text - CHAPTER 1 ExtErnal POSItIOnS anD POlICIES).* ### 0.11 percentage point of world GDP by 2030, with ### text - 0.11 percentage point of world GDP by 2030, with ### Medium-Term Impact of Widening Domestic Imbalances - Widening domestic imbalances increase the global current account balance by 0.11 percentage point of world GDP by 2030, with comparable contributions from China and the United States and a limited contribution from the euro area. - Domestic macro forces drive external imbalances in each country, with a muted effect on the global interest rate. - Two-thirds of the expansion in the medium-term current account surplus in China is the result of weaker domestic demand. - For the United States and the euro area, domestic macro forces explain an even larger share of the change in the current account. - Net effect on global interest rates: - China’s increased saving reduces interest rates; the United States’ public dissaving increases them. - Overall effect: a muted rise in global interest rates by 0.04 percentage point. - Heterogeneous impact on trade openness: - China: REER depreciation and the surge in exports increase its trade exposure to the rest of the global economy. - United States: exports decline and the economy becomes less open. ### Risks from Prolonged Domestic Imbalances - Prolonged domestic imbalances could increase external sector vulnerabilities and risks: - Delay of fiscal consolidation and fiscal policy uncertainty could deteriorate global risk sentiment and elevate global financial stress. - Creditor countries could experience substantial valuation losses. - A sustained erosion of confidence in US fiscal capacity could trigger significant ripple effects in the international monetary system. - Persistent reliance on current account surpluses to accommodate domestic imbalances risks backlash from countries absorbing global imbalances and could provoke retaliation and escalation, splintering the world economy and affecting cross-border trade, financial flows, and the IMS. ### Narrowing Domestic Imbalances (Convergence Scenario) - Scenario assumptions (April 2025 WEO, Box 1.1, scenario B): rebalancing and productivity gains in China, lower US government debt (revenue-neutral fiscal consolidation), and higher public spending in the euro area. - Key domestic responses and external outcomes: - China: - Structural reforms and strengthened social safety nets increase market dynamism and productivity gains. - Private consumption booms and the saving rate falls significantly in the medium term. - REER appreciates, imports grow, exports are dampened, and the current account surplus decreases substantially. - United States: - Sustained revenue-neutral fiscal consolidation substantially reduces government dissaving, increasing the domestic saving rate in the medium term. - Growth-friendly fiscal consolidation avoids negative effects on output; medium-term investment rate broadly unchanged after an initial decline. - REER depreciates, supporting exports and constraining imports; the current account increases in the medium term. - Euro area: - Sustained increase in public investment and defense spending widens the government deficit and increases debt. - Aggregate demand rises short term, increasing interest rates and inducing higher private saving; domestic saving rate goes up. - Higher public capital raises productivity and potential output permanently; aggregate investment rate increases in the medium term. - Medium-term REER broadly unchanged; public stimulus boosts imports and reduces the current account surplus. - Aggregate effects on global balances: - Domestic macro forces remain the largest contributors to external sector adjustments, with sizable spillovers. - The large and sustained decline in saving and current account surplus in China increases current account balances in the euro area and the United States, accounting for 30 percent of the increase for the United States. - Convergence scenario reduces medium-term global current account balances by about ½ percentage point of world GDP. - The large decline in the saving rate in China contributes 68 percent to the overall decline by 2030, with US and euro area fiscal policies providing significant additional contributions. ### Rising Trade Barriers and Geopolitical Tensions - Tariff surges through the first five months of 2025 or a further escalation of the trade war would have significant negative macroeconomic effects. - Short term: tariffs reduce global demand, produce a negative supply shock (especially for imposing countries), and add to inflationary pressures through rising import prices. - Discriminatory tariffs divert trade away from tariff-imposing countries toward third markets, potentially prompting further protectionist responses. - Over time: rising trade costs lead to reduced capital accumulation, resource misallocation, and loss of efficiency and knowledge hubs, producing uniformly negative effects on economic activity across countries. - Rising geopolitical tensions could open up the possibility of changes in the IMS, with implications for macro-financial stability. - Impact of tariffs on current accounts: - Tariffs’ direct effect—discouraging imports—could increase trade balances, but full effects on current accounts work through aggregate saving and investment. - Model-based scenario calibrated to the April 2025 escalatory tariff episode between the United States and China finds import tariffs do not have a robust impact on the gap between aggregate saving and investment, with varying short-term and longer-term current account responses in major economies. - Even for very large tariffs, the response of the current account is limited in economic terms. - Quantitative model results suggest the April 2025 tariff hikes between the United States and China would reduce medium-term global balances by 0.12 percent of world GDP, while producing significant negative macroeconomic effects. ### Prolonged High Trade Policy Uncertainty - Policy uncertainty, especially trade policy uncertainty, has surged to unprecedented levels. - Unpredictability about tariffs poses risks to global investment and growth, separate from the level of tariffs. - Effects include diminished domestic demand through undermined consumer and business confidence, increased financial market volatility, and persistent appreciations of the US dollar with negative spillovers to emerging markets. - Cross-country heterogeneity: - The degree of increase in uncertainty varies significantly across economies, depending on exposure to protectionist measures and broader geopolitical linkages. - This heterogeneity could cause domestic demand and investment rates to fall disproportionately and current accounts to increase in more exposed countries and decrease in less exposed economies. - If the United States is disproportionately exposed, the result would be a somewhat narrower US current account deficit, temporarily mitigating global imbalances. - If current account surplus economies are disproportionately affected, prolonged uncertainty would temporarily increase surpluses. - Quantitative findings indicate that even for a large and heterogeneous surge in uncertainty, impacts on external balances are limited. ### Policy Priorities for Promoting External Rebalancing - Both excess current account surplus and deficit economies must act collectively to promote external rebalancing. - Domestic macroeconomic policies are key: - Durable market-oriented structural reforms to boost insufficient domestic demand and lift medium-term growth prospects, promoting investment. - Fiscal consolidation, where warranted, to rebuild fiscal buffers and increase saving. - Trade and industrial policy guidance: - Underlying trade tensions should be resolved to promote clarity and transparency; deepen economic integration through nondiscriminatory reductions in trade barriers or pursuing comprehensive free trade agreements at the regional, plurilateral, or multilateral level. - Industrial policies should be limited to specific objectives where externalities or market failures prevent effective market solutions, undergo comprehensive cost-benefit analyses in the context of limited fiscal space, and be consistent with international obligations. - Pragmatic international cooperation remains vital in sustaining global growth. *Source: IMF staff calculations and analysis (2025 External Sector Report, Chapter 1).* ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### Global policy priorities and liquidity - Multilateral initiatives are preferred to address global-commons challenges, while flexible plurilateral or regional solutions can address trade issues and modernization of trade rules; unilateral trade restrictions should be avoided. - Sustaining liquidity in the global financial system is essential given heightened uncertainty and increased risks. - Monetary policy needs careful calibration because uncertainty intensifies central banks’ trade-offs. - The IMF’s Integrated Policy Framework provides guidance on policy responses based on country-specific factors. - The approval of the 16th General Review of Quotas "further fortifies liquidity in the global financial system" and requires follow-up by members consenting to their respective quota increase. ### Policies to promote external rebalancing (tailored guidance) - Economies with stronger-than-warranted external positions: - Focus on policies that promote investment and limit excess saving. - China: expansionary fiscal policy to support consumption by scaling up social spending, and market-oriented structural reforms including a scale-back of industrial policies to reduce excess saving. - India: liberalizing the FDI regime. - Poland: easing regulatory hurdles. - Germany: expansionary fiscal policy to invest in transportation and energy. - Singapore: expansionary fiscal spending on health care and human capital. - Improve social safety nets where needed to promote private consumption and decrease excess saving. - Economies with weaker-than-warranted external positions: - Focus on policies that boost saving and competitiveness. - United States: fiscal consolidation, together with growth-enhancing easing of regulatory burden to put the debt-to-GDP ratio on a downward path and increase public saving, supporting rebalancing. - Australia, Canada, Italy: promote and invest in research and development. - Belgium: reform labor and product markets. - Economies with positions broadly in line with fundamentals: - Continue to address domestic imbalances to head off excessive external imbalances. - Fiscal consolidation often needed (examples: Brazil, France, Hong Kong SAR, Japan, Saudi Arabia, South Africa). - Structural reforms to improve productivity and increase investment (France), increase competitiveness (Brazil, South Africa), and diversify the economy (Saudi Arabia). - Over the medium term, increasing fiscal space to address needs of an aging population (Korea). ### Box 1.1 — Measuring Current Account Balance: two measurement challenges - Measurement challenges have increased with deeper cross-border transactions, complex multinational enterprise operations, and implementation in full of the Balance of Payments (BoP) change-of-ownership principle in some countries. - Two highlighted challenges: 1. Trade Balance Estimates under Complex Production Chains - BoP should capture change in ownership of goods between residents and non-residents; customs data capture physical movement of goods. - Deepening production arrangements and corporate structures increase divergence between BoP and customs concepts. - Adjustments (merchanting, goods-for-processing, factoryless goods production, transport and insurance margins) are needed to make customs data consistent with BoP principles. - These adjustments typically require company surveys; failing to implement change-of-ownership measurement can cause discrepancies between current and financial accounts (errors and omissions). 2. Expanding Primary Income Flows - International balance sheets have grown and become more complex. - Global primary income flows expanded markedly following monetary policy normalization in 2022 and the associated rise in interest rates (Donato and Tille 2025). - These expanded income flows should be correctly reflected in current account data. ### Customs-BoP trade flow differences — analysis and findings - Approach: - Re-arranged BoP-based current account identity to isolate the customs-BoP difference term: (T_B^BOP_G − T_B^CUS_G)/GDP_Global. - Country-level customs-BoP differences are normalized by global GDP. - Findings: - Cross-country variance of customs-BoP trade flow differences—measured in percent of global GDP—exhibits a three-fold increase after 2020 relative to the prior period. - The rise in variance is driven by several countries including China, Ireland, Singapore, Switzerland, the United Kingdom and the United States. - The most globally sizable change since 2020 has been China. - A gap between BoP and customs does not necessarily indicate measurement error; it can reflect legitimate change-of-ownership reporting where goods change ownership without crossing borders. - Countries still adjusting customs data (rather than using entity surveys) to approximate change-of-ownership may exhibit small differences, but that absence of a gap is not definitive evidence of correct measurement. - Recommendations: - All countries should aim to implement the latest international standards and measure trade in goods on a change-of-ownership basis in the BoP. - For countries with large gaps, conduct further analysis on drivers (e.g., trends in factoryless goods production) to improve transparency and dispel data concerns. - Broader cross-country coverage and reporting (including bilateral partner data and merchanting contributions) are needed to validate multilateral consistency of adjustments. - Lack of such information risks mismeasuring current account data in globally systemic countries and mis-representing global imbalances. ### Rising interest rates and primary income balance — analysis and findings - Method: - Compared implied yields on foreign assets for the 10 largest economies and examined the global adding-up constraint for primary income flows. - Change relative to 2021 in yields calculated as primary income credit divided by the lag of total foreign assets; bilateral yields derived with the same approach. - Top 10 economies: United States, China, Germany, Japan, India, the United Kingdom, France, Italy, Brazil, and Canada. - Findings: - Consistent with the global rise in interest rates, implied yields from BoP primary income flows after 2021 increased in all major economies except China. - The top 10 largest economies saw implied yields on assets (and liabilities) increase significantly during 2022-24 relative to 2021. - China experienced a sizable decline in the implied yield on assets; in 2024 it is estimated to have remained below the 2021 level. - Further analysis of China’s decline is hindered by the lack of detailed primary income flow data (China stopped reporting primary income flow credit and debit breakdowns into BoP items after 2004). - Two alternative checks: - Bilateral implied yields from the United States and the euro area (which jointly account for 31 percent of China’s foreign portfolio assets) show increasing yields of China’s portfolio assets, which does not support the decline implied by China’s BoP data. - The global discrepancy in primary income flows has widened after 2021 beyond levels observed over the previous decade. - The widening discrepancy could be related to declining primary income yields in China or to measurement issues elsewhere. - Implications and recommendations: - There is uncertainty about the size of China’s primary income balance credit flows and hence its primary income balance and current account. - Steps should be taken by the authorities to address these data gaps. - Current account mismeasurement in systemic countries could adversely impact monitoring of global current account balances and External Balance Assessment (EBA). - Proper monitoring of external sector risks calls for improving transparency and confidence in data quality, especially for globally systemic countries. *Source: IMF, April 2025 World Economic Outlook; IMF staff calculations.* ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### Spillovers from Large Current Account Surpluses and Deficits - Large current account deficits are subject to market discipline, manifesting as gradual increases in spreads or rapid balance of payments crises; foreign capital inflows can fuel excessive borrowing and eventual fiscal or financial crises with national and global consequences. - Large current account surpluses face fewer countervailing market forces; surplus adjustments are infrequent and more protracted than deficit adjustments. - Large and persistent surpluses can: - Suppress global real interest rates via excess savings, encouraging risk-taking and excessive leverage in deficit countries. - Increase gross exposure and create indirect financial linkages among borrowing deficit countries, exacerbating financial contagion. - Be symptomatic of domestic distortions (for example, financial repression) or create new vulnerabilities when external positions grow too large to be effectively hedged. - Historical examples and empirical findings: - Correlation between emerging market bond premiums and net worth of global banks after Lehman Brothers (2008). - Common-creditor behavior widened crises in Asia before the Asian financial crisis and in European periphery before the European debt crisis. - Trade and adjustment effects: - Increasing surpluses in large economies can alter policy trade-offs for trading partners, particularly when partners face the effective lower bound. - Export-promoting policies (subsidies, industrial policy) can produce terms-of-trade shocks with mixed spillovers: disinflationary benefits for some partners but exacerbated internal imbalances for others. - Rapid increases in large surpluses can produce significant adverse distributional effects on employment and incomes in trade-exposed industries and regions; gradual adjustment can be socially more efficient than fast adjustment. *This box was prepared by Martin Caruso Bloeck and Ting Lan.* ### Tariff Scenario, Investment, Saving, Current Account, and Global Balances - Tariff assumptions (April 2–9, 2025): - The United States imposes permanent tariffs including a baseline 10 percent tariff on most imports and an escalated 125 percent tariff on imports from China. - China imposes retaliatory tariffs of 84 percent. - Resulting effective import tariff changes by 2030: - United States: increase of 15.6 percent. - China: increase of 10.1 percent. - Rest of the world: 0.0 percent. - Macroeconomic channels and model findings (IMF Global Integrated Monetary and Fiscal model): - Investment: - Tariffs decrease investment rates; tariffs are a negative supply shock, reduce efficiency and expected investment returns, and raise prices of imported capital goods. - Fall in the investment rate is gradual in the United States and China due to short-term reallocations; some economies exposed to tariffs but not retaliating experience real effective exchange rate depreciation that attenuates negative investment effects (for example, marginal medium-term investment rate increase in the euro area). - Saving: - Saving rate responses vary across countries and are driven by private saving. - United States and China see a large initial drop in saving rates, followed by partial recovery. - Euro area initially experiences an increase in the saving rate, followed by a decline. - Globally, saving rates and interest rates fall to align with the fall in investment. - Current account: - In the United States and China, current account initially falls (mirroring front-loaded saving declines) but in the medium term reverts toward zero (China) or increases (United States). - Euro area shows initial current account increase followed by a decrease. - Quantitative impacts are limited: effects amount to no more than one-tenth of reference current account balances. - Global balances: - On impact, global current account balances, as a share of world GDP, increase by 0.15 percentage point, driven by a larger initial US deficit and higher euro area surplus which more than offset a reduced surplus in China. - In the medium term, global current account balances narrow by 0.12 percentage point. - Context: in 2023–24 global balances increased by 0.6 percent of world GDP; after the global financial crisis they declined by more than 2 percent of world GDP. - Alternative scenario (relative to April 9 tariff scenario): - Excludes United States–China tariff escalation; bilateral import tariffs at 35 percent; pause on tariffs on 57 countries. - Effective import tariffs reduced to 9.5 percent in the United States and to 3.3 percent in China. - Caveats: model may omit channels such as degree of tariff permanence, increased tariff uncertainty, valuation effects on existing external asset/liability stocks, and tariff-jumping via cross-border reallocation of production. *This box was prepared by Roman Merga and Dirk Muir.* ### Policy Uncertainty and External Balances - Model scenario and calibration: - Tariff shocks in April 2025 sparked a global uncertainty jump about 50 percent larger than the 2018–19 spike and equivalent to a three-standard-deviation increase in the global EPU measure. - Country-specific incidence: policy uncertainty in the United States is about six times higher than in China and three times higher than in the euro area. - Global macroeconomic effects (IMF Global Integrated Monetary and Fiscal model): - Global investment falls by 3.3 percent at its trough in 2026. - Global output declines by 0.9 percent relative to the baseline. - Global consumption contracts; saving declines; global interest rate falls; global trade openness declines. - Heterogeneous country responses and risk sharing: - Investment falls in all economies, more in countries more exposed to the uncertainty; global demand rebalances toward less affected economies. - Consumption falls less than income due to lower interest rates, implying lower saving rates across regions. - United States: largest fall in investment rate and somewhat smaller fall in saving. - China: smallest fall in investment rate, but saving falls by more than investment. - Implication for current accounts (two years after the shock): - United States current account increases by 0.05 percentage point of GDP. - China current account decreases by 0.11 percentage point of GDP. - Euro area current account falls by 0.08 percentage point of GDP. - Quantitative effects on current accounts in major economies are limited but can be considerably larger in smaller, more open economies disproportionately affected by the uncertainty. - Global current account dispersion and magnitude: - Varying exposure to uncertainty narrows global current account balances; global current account balances decline by 0.05 percentage point of world GDP by 2026. - The effect is temporary; global balances widen again as uncertainty dissipates. *This box was prepared by Dirk Muir and Josef Platzer.* *International Monetary Fund | 2025* ### Box 1.4 (continued) ### Box 1.4 (continued) ### Annex Table 1.1.1 — Selected Economies: Foreign Reserves, 2021–24 — Key statistics and patterns - Aggregate (External Sector Report economies) gross official reserves: - 2021: 12,834 (Billions of US Dollars) - 2022: 11,898 (Billions of US Dollars) - 2023: 12,404 (Billions of US Dollars) - 2024: 12,439 (Billions of US Dollars) - Percent of GDP: 13.1 (2021), 11.7 (2022), 11.7 (2023), 11.3 (2024) - Advanced Economies (AEs) aggregate reserves: - 2021: 6,234 (Billions of US Dollars) - 2022: 5,591 (Billions of US Dollars) - 2023: 5,822 (Billions of US Dollars) - 2024: 5,952 (Billions of US Dollars) - Emerging Market and Developing Economies (EMDEs) aggregate reserves: - 2021: 6,600 (Billions of US Dollars) - 2022: 6,306 (Billions of US Dollars) - 2023: 6,581 (Billions of US Dollars) - 2024: 6,486 (Billions of US Dollars) - Selected country-level reserves (Billions of US Dollars and Percent of ARA metric where shown): - China: 2021: 3,428; 2022: 3,307; 2023: 3,450; 2024: 3,265 — Percent of ARA metric: 18.8 (2021), 18.1 (2022), 18.9 (2023), 17.4 (2024) - Japan: 2021: 1,406; 2022: 1,228; 2023: 1,295; 2024: 1,160 — Percent of ARA metric: 27.9 (2021), 28.8 (2022), 30.7 (2023), 28.8 (2024) - United States: 2021: 716; 2022: 707; 2023: 773; 2024: 910 — Percent of ARA metric: 3.0 (2021), 2.7 (2022), 2.8 (2023), 3.1 (2024) - Russia (russian Federation): 2021: 631; 2022: 582; 2023: 599; 2024: 609 — Percent of ARA metric: 34.5 (2021), 25.3 (2022), 29.1 (2023), 28.2 (2024) - Saudi Arabia: 2021: 455; 2022: 460; 2023: 437; 2024: 437 — Percent of ARA metric: 46.3 (2021), 37.1 (2022), 35.9 (2023), 35.3 (2024) - FXI (foreign exchange intervention) data publication frequency examples: - Australia: Yes, daily - Canada: Yes, monthly - Euro area: Yes, quarterly - Hong Kong SAR: Yes, daily - Japan: Yes, daily - China: no (FXI data publication not available) - India: Yes, monthly - Mexico: Yes, monthly ### Annex Table 1.1.2 — Summary of External Assessment Indicators, 2024 — Overall external positions - Economy assessments (selected excerpts): - argentina: Overall Assessment — Weaker; Current Account (Percent of GDP) actual: 1.0; IMF Staff CA Gap: –0.5 to –2.0 (midpoint –1.3) - Australia: Moderately weaker; Current Account actual: –1.9 - China: Moderately stronger; Current Account actual: 2.3; IMF Staff REER Gap: –8.5 (IMF staff assessment) - Germany: Stronger; Current Account actual: 5.7 - India: Moderately stronger; Current Account actual: –0.8 - Japan: Broadly in line; Current Account actual: 4.8 - Singapore: Substantially stronger; Current Account actual: 17.5 - United States: Moderately weaker; Current Account actual: –3.9 - International Investment Position (IIP) and related indicators are reported per country in the table (values preserved in source). ### Annex Table 1.1.3 — IMF Staff–Assessed Current Account Gaps and Adjustments, 2024 — Method and selected outcomes - Columns reported include: Actual CA Balance [A], Cycl. Adj. CA Balance [B], EBA CA Norm [C], EBA CA Gap [D = B − C], IMF Staff–Assessed CA Gap [E = D + F], IMF Staff Adjustments [F = G − H], with comments on adjustments. - Selected country snapshots (midpoint IMF staff–assessed CA gap where reported): - argentina: Actual CA 1.0; Cycl. Adj. –0.5; IMF Staff–Assessed CA Gap midpoint: –2.0 (note: adjustment for weak reserves coverage/external sustainability) - Canada: Actual CA –0.5; Cycl. Adj. –0.9; IMF Staff–Assessed CA Gap midpoint: –1.8 (adjustment: Measurement biases) - Euro area: Actual CA 2.8; Cycl. Adj. 2.9; IMF Staff–Assessed CA Gap midpoint: 1.0 (adjustment: Measurement biases) - Hong Kong SAR: Actual CA 12.9; Cycl. Adj. 12.8; IMF Staff–Assessed CA Gap midpoint: –0.5 (comment: nIIP and gold trade) - Singapore: Actual CA 17.5; Cycl. Adj. 18.0; IMF Staff–Assessed CA Gap midpoint: 5.1 (comment: Measurement biases, nFA composition, health spending) ### Annex Table 1.1.4 — REER gaps and elasticities, 2024 — Key metrics - Table reports: IMF Staff–Assessed REER Gap, REER Gap Implied by IMF Staff–Assessed CA Gap, EBA REER-Level Gap, EBA REER-Index Gap, CA/REER Elasticity, and REER percent changes (Average 2024/Average 2023; March 2025/Average 2024). - Selected entries (IMF Staff–Assessed REER Gap; CA/REER elasticity; REER percent change Average 2024/Average 2023): - Argentina: IMF Staff–Assessed REER Gap 12.2; CA/REER elasticity 0.16; REER % change Average 2024/Average 2023 = 1.5 - China: IMF Staff–Assessed REER Gap –8.5; CA/REER elasticity 0.14; REER % change Average 2024/Average 2023 = –2.6 - Japan: IMF Staff–Assessed REER Gap –3.3; CA/REER elasticity 0.18; REER % change Average 2024/Average 2023 = –5.4 - United States: IMF Staff–Assessed REER Gap 11.9; CA/REER elasticity 0.11; REER % change Average 2024/Average 2023 = 2.4 ### Annex Table 1.1.5 — EBA CA regression policy gap contributions, 2024 — Overview of identified drivers - The EBA regression decomposes EBA current account gaps into policy gap contributions: Fiscal Gap, Public Health Expenditure Gap, Private Credit Gap, and Foreign Exchange Intervention and Capital Controls Gap (domestic and foreign contributions). - Notable country decompositions (total identified domestic and foreign contributions preserved as in table): - argentina: EBA Gap —1.3; Fiscal total identified domestic contribution: 1.2; Public Health total identified domestic contribution: 0.6; Private Credit total identified domestic contribution: 0.3; FXI/KC total identified: 0.7 (coefficients and components reported in table) - Australia: EBA Gap —1.9; Fiscal total identified domestic contribution: 1.1; Private Credit total identified domestic contribution: –0.6; FXI/KC total identified: –14.6 (table reports FXI P and P* components) - China: EBA Gap 1.2; Fiscal total identified domestic contribution: –0.6; Private Credit total identified domestic contribution: –1.3; FXI/KC total identified: –4.2 - Euro area (aggregate): EBA Gap 1.4; Fiscal total identified domestic contribution: 0.6; Private Credit total identified domestic contribution: –0.6; FXI/KC total identified: –0.3 - Türkiye: EBA Gap —1.3; Fiscal total identified domestic contribution: 1.8; Private Credit total identified domestic contribution: –0.4; FXI/KC total identified: —25.7 (FXI and KC P/P* large negative contributions noted) - Note: A fixed foreign policy gap contribution equals 0.2 percent of GDP for all countries in the exercise; foreign contributions for fiscal, public health, private credit, and FXI are set as fiscal = 1.0; public health = –0.1; private credit = –0.7; foreign exchange intervention = 0.0 (see table notes). ### Annex Table 1.1.6 — 2024 Individual Economy Assessments: Summary of Policy Recommendations (selected countries) - argentina (Overall: Weaker) - Implement the newly approved EFF program, which includes a strong fiscal anchor, more robust monetary and Fx regime with active measures to rebuild international reserves, and competitiveness-enhancing reforms. - Increase exchange rate flexibility and gradually ease remaining Fx restrictions, multiple currency practices (MCPs) and capital flow management measures (CFMs). - australia (Overall: Moderately weaker) - Implement the planned gradual medium-term fiscal consolidation. - Commit to structural policies that boost competitiveness: promote R&D, reduce barriers to labor mobility, upgrade competition policies, stimulate innovation to improve export quality and reduce unit labor costs. - Belgium (Weaker) - Rebuild fiscal buffers through a credible, expenditure-led consolidation while preserving or ideally increasing public investment. - Strengthen competitiveness via significant structural reforms: wage-setting mechanism, pension and social benefits, taxation, labor and product markets. - Brazil (Broadly in line) - Raise national savings to allow sustainable investment expansion; continue fiscal consolidation to increase net public savings. - Implement structural reforms to improve efficiency and reduce cost of doing business. - Canada (Moderately weaker) - Boost competitiveness in non-fuel and services exports by investing in R&D and physical capital including infrastructure; remove internal trade barriers; promote FDI including outflows. - Ensure government support to ease adjustment costs balances external rebalancing and medium-term fiscal sustainability. - China (Moderately stronger) - Boost domestic demand and expand fiscal policy to support consumption and the property sector; further ease monetary policy and increase exchange rate flexibility. - Implement structural reforms to reduce household savings, boost services-sector investment, and scale back industrial policies. - Euro area (Moderately stronger) - Support productivity and lift investment and private domestic demand through reforms to boost energy security, enhance the EU budget for efficient public goods investment, and improve the business environment. - Deepen the EU single market: lower regulatory burdens, reduce administrative barriers, streamline trade procedures, enhance labor mobility, integrate financial services. - Germany (Stronger) - Promote investment and reduce excess saving through higher fiscal deficits in the medium term to increase public investment in defence, transportation, energy and digitization. - Implement structural reforms to foster innovation and enhance employability of older workers. - India (Moderately stronger) - Further reduce import restrictions, especially on intermediate goods; improve business environment and liberalize the FDI regime; develop trade infrastructure and expand trade networks. - Italy (Weaker) - Implement comprehensive reforms to encourage private investment, modernize capital stock, boost productivity and potential growth. - Increase public sector saving supported by continued strong fiscal adjustment. - Japan (Broadly in line) - Pursue structural reforms and fiscal sustainability through a credible medium-term fiscal consolidation plan; shift to private-sector-driven growth and raise potential growth. - Korea (Broadly in line) - Increase fiscal space for aging-related needs, orderly deleverage private debt, boost innovation, diversify export destinations and supply chains; maintain exchange rate flexibility with limited intervention. - Malaysia (Moderately stronger) - Preserve exchange rate flexibility; strengthen social safety nets and public healthcare to reduce precautionary household savings and shift toward private consumption; implement structural policies to encourage private investment and productivity. *Source: IMF staff estimates and assessments as presented in the Annex tables.* ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### CHAPTER 1 ExtErnal POSItIOnS anD POlICIES ### Overall 2024 Assessment - The chapter presents "Overall 2024 Assessment" entries for individual economies, characterizing external positions as "Moderately stronger", "Substantially stronger", "Broadly in line", "Stronger", "Moderately weaker", or "Moderately weaker" depending on the country. ### Policy Recommendations (Annex Table 1.1.6. 2024 Individual Economy Assessments: Summary of Policy Recommendations) - Mexico — Moderately stronger - Implement structural reforms to boost investment in the medium and long term and maintain external sustainability, including by tackling infrastructure and governance gaps, reducing informality, promoting financial deepening, and increasing private sector participation in the energy sector. - Ensuring fiscal sustainability is also vital to buttress external stability. - the floating exchange rate should continue to serve as a shock absorber. - the IMF’s Flexible Credit line with Mexico continues to provide an added buffer against global tail risks. - the Netherlands — Substantially stronger - Boost public investment and foster private investment in infrastructure and housing. - address growth bottlenecks from nitrogen and electricity grid congestion. - Poland — Moderately stronger - Support private investment through gradual monetary policy normalization. - Ease regulatory hurdles to private investments to help catalyze investment and financing additional to the Next Generation EU grants to address infrastructure gaps and support the climate transition. - Russian Federation — Broadly in line - ... - Saudi Arabia — Broadly in line - Implement fiscal consolidation, including through enhanced revenue mobilization and energy price reforms, to help raise public saving. - Implement the structural reform agenda to diversify the economy, which is expected to support private investment and stimulate domestic consumption. - Singapore — Substantially stronger - Execute planned major high-quality and resilient infrastructure projects and continue strengthening social safety nets to help reduce external imbalances in the near term. - Higher public investment is also expected to catalyze private investment. - Over the medium term, the government should increase public investment to address the structural transformation brought about by a rapidly aging population and a transition to a green and digital economy, including spending on health care, green and other physical infrastructures, and human capital. - South Africa — Broadly in line - Implement structural reforms supporting competitiveness, jobs, and growth, that address energy and logistics bottlenecks, and improve the business environment, governance, and the functioning of labor markets. - Implement ambitious fiscal consolidation to put debt on a sustained downward path, while protecting vulnerable groups. - the flexible exchange rate should remain the main shock absorber, and maintaining an adequate level of international reserves can further support resilience to shocks. - Spain — Stronger - reduce the still sizable negative NIIP position. - Implement sustained fiscal consolidation to rebuild fiscal space and raise aggregate savings. - accelerate domestic structural reforms that boost productivity and facilitate the diversification of export products and destinations, including further efforts to complete the single Spanish market, invest in innovation, enhance education outcomes and reduce energy dependence. - Complement with policies to facilitate the reallocation of workers across sectors while providing an adequate social safety net. - Sweden — Substantially stronger - Enhance both private and public investment in productivity-enhancing projects, the green transition, and the health sector. - these structural measures will boost domestic absorption and imports, reducing external imbalances, while enabling Sweden to maintain its high living standards amid demographic pressures and support meeting the country’s ambitious climate goals. - Switzerland — Broadly in line - Support the ongoing economic recovery and address low inflation. - Use substantial fiscal policy space to support growth if downside risks materialize. - Over the medium-term implement a comprehensive medium-term plan to address increasing structural fiscal needs on aging, climate, and defense. - Monetary policy should continue to pursue price stability and avoid the risk of inflation settling at very low or negative rates. - Thailand — Broadly in line - Implement policies that promote investment, diminish precautionary saving, liberalize the services sector, and minimize tax incentives and subsidies that distort competition. - Fiscal policy should be prudent and parsimonious given the elevated public debt levels. - Efforts to reform and expand social safety nets, notably the fragmented pension schemes, should continue, and measures to address widespread informality could help reduce precautionary saving and support consumption. - Türkiye — Moderately weaker - Strengthen the policy framework to underpin external sustainability going forward. - tighten both the monetary and fiscal policy stance to contain demand, bring down inflation, make medium-term growth more sustainable, and help pave the way for lower CA deficits over the medium-term. - remove discretionary credit allocation that favors exports to enhance competition. - these policies would allow for a welcome accumulation of international reserves. - United Kingdom — Moderately weaker - Implement fiscal consolidation plans and the structural reform agenda to contain import growth and boost competitiveness. - Progress in the net zero transition to help to mitigate risks of further energy-related to t shocks. - United States — Moderately weaker - Implement fiscal consolidation aimed at achieving a general government primary surplus of about 1 percent of GDP to put the debt-to-GDP ratio on a downward path. - trade policies should seek to constructively resolve trade tensions, promote a clear, stable and predictable trade environment, and pursue pragmatic cooperation and deeper integration through regional/cross-regional trade agreements or nondiscriminatory reduction of trade barriers. - Notes and abbreviations used in the table: - “...” indicates that data are not available or not applicable. - CFM = capital flow management measure; EU = European Union; FDI = foreign direct investment; Fx = foreign exchange; MCP = macroprudential measure; R&D = research and development. ### Conceptual framing and monitoring of the International Monetary System (IMS) - Over several decades, the international monetary system (IMS) has remained broadly stable and centered on the US dollar, despite momentous global changes. - This stability has been accompanied by rising asymmetries between the global economic and monetary system as economies deepened specialization in trade or finance, while the US dollar is used as the primary global currency across various areas. - Recent geopolitical and economic developments could weaken this stability, warranting a recurrent monitoring of the evolving system. - This chapter—the first of periodic monitoring of the IMS—documents historical developments, provides some conceptual foundations, and proposes indices to track key trends in the IMS. *Source: IMF, 2024 Individual External Balance assessments; CHAPTER 1 ExtErnal POSItIOnS anD POlICIES, 2025 EXTERNAL SECTOR REPORT.* ### Introduction ### Introduction ### Role of the IMS and dollar dominance - The IMS is a critical foundation of the global economy and provides the orderly underlying conditions necessary for financial and economic stability (IMF 2016). - Since at least the late 19th century, the country at the center has contributed to IMS stability by providing global public goods: promoting open trade and steady capital flows, coordinating macroeconomic policies, and last resort lending (Kindleberger 1973, 1976, 1981; Koehane 1980). - From the 1940s onwards, that country has been the United States, with the US dollar serving as: - the vehicle for international trade and finance, - the benchmark for exchange rate stabilization, - the global safe asset (Gourinchas 2019; Rey 2024). - Dollar dominance has been resilient and at times strengthened despite major transformations (collapse of Bretton Woods, end of the Cold War, creation of the euro), underpinned by complementarities among uses and network externalities and by the depth and liquidity of US financial markets and the safe asset status of US Treasuries. ### Key questions addressed by the chapter - The chapter focuses on international currencies and payment systems as a narrower, monitorable aspect of the broader IMS. - It asks three main questions: 1. What were the salient features behind the rise of the US dollar’s dominance and what is its current state? 2. What economic transformations lay behind the dollar-centered IMS and how have they interacted with the use of international currencies? 3. What are the ongoing evolutions of the IMS? ### Summary of principal findings and contributions - The dollar’s dominance: - Emerged gradually and has been remarkably resilient, underpinned by the strength of the US economy and deep US financial markets; geopolitical developments—such as the collapse of the Soviet Union—further entrenched its de facto central role. - Composite index of international currency usage: - A new composite index underscores the stability of the dollar’s global role, attesting to network externalities and strategic complementarities across the dollar’s international functions. - Integration, specialization, and asymmetry: - The stable dollar-centered IMS supported substantial integration of global trade and finance in the 21st century, while economies became increasingly specialized, leading to shifts in centrality within trade and finance networks and growing asymmetry in currencies’ international use. New indices for centrality and asymmetry are proposed to measure these developments. - Network externalities and implications: - A rising asymmetry index suggests network externalities remain strong, reinforcing dollar stability and facilitating specialization; however, ongoing geopolitical and economic developments could weaken network externalities over time, warranting close monitoring. ### Four ongoing developments shaping the IMS - First — Geopolitical fragmentation: - Rising geopolitical fragmentation concerns have reoriented trade flows to take place within geopolitical groups rather than between them, and led to reallocation of investment flows (Gopinath and others 2025). - Second — Growing international use of the renminbi (RMB): - Motives for currency invoicing choice by firms in China are examined using a large language model analysis of Chinese data. Policy initiatives and geopolitical factors are identified as among key motives. - Third — Potential changes in the US role as global banker and insurer: - Several indicators—US treasury premium, the US excess return on external assets, and demand for gold—provide tentative signs of relative softening in the US global banker and insurer role, although the United States remains the dominant provider. - Fourth — Technological innovation in cross-border payments: - Central bank digital currencies (CBDCs) are still experimental for cross-border use. - International use of private crypto assets, especially US-dollar-backed stablecoins, has been increasing; these could reinforce the dollar’s role, though their scale remains modest compared to traditional dollar-denominated assets, and broader retail adoption could introduce financial stability risks. ### Brief history: the rise of US dollar dominance - Late 19th / early 20th century: - Pound sterling was the global reserve currency; other currencies like the French franc played regional roles. - Interwar period: - Gold accounted for at least 80 percent of reserves, making the choice between US dollar and sterling a more marginal decision (Ghosh, Ostry, and Tsangarides 2011). - Post–World War I and pre–World War II: - Sterling dominance waned as the United Kingdom faced fiscal pressures and competitiveness losses; the United States emerged as the world’s largest economy and the dollar overtook sterling as the leading form of trade credit (Chitu, Eichengreen, and Mehl 2014). - Institutional and market developments: - Establishment of the Federal Reserve in 1913 and development of deep liquid US financial markets increased the dollar’s attractiveness. - Bretton Woods and after: - Bretton Woods institutionalized the dollar as the de jure anchor; the Eurodollar market and Federal Reserve swap lines with BIS helped broaden dollar use. - After the collapse of Bretton Woods (1971), the dollar transitioned to a de facto anchor. - The collapse of the Soviet Union (1991) and integration of former Eastern bloc economies further cemented dollar dominance. ### Current state: the US dollar at the center (as of 2023) - The US dollar was dominant across multiple areas in 2023: trade, foreign exchange reserves, international loans, international debt, foreign exchange turnover, and global payment. - The share of the US dollar in these areas considerably exceeds the US economic weight in global GDP, trade, and finance. - Relative positions in 2023: - The euro is a distant second (a regional dominant currency whose share also exceeds the economic footprint). - The Japanese yen and the British pound follow. - The RMB share in international markets remains smaller than China’s economic footprint. - Index of international currency usage: - The dollar has maintained the dominant role, followed by the euro, the Japanese yen, the British pound, and the RMB. - The dollar share remained broadly stable in the 2000s, with a moderate decrease since 2015, reflecting a declining share of the dollar in global reserves. - The composite index is a simple average of each currency’s share of: - global disclosed foreign exchange reserves (25 percent weight), - trade invoicing (25 percent weight), - foreign exchange turnover (25 percent weight), - global balance sheets (25 percent weight). ### Global transformations in the 21st century: trade and financial liberalization and globalization - Integration and specialization: - The dollar-centered IMS helped lower transaction costs and reduce exchange risks, supporting greater cross-border trade and financial integration while economies specialized in trade or finance. - These dynamics reinforced the dollar’s international role through network externalities. - Evolution of trade and financial flows: - Between 2001 and the global financial crisis (GFC) in 2008, global cross-border trade of goods and services rose by about 15 percentage points of global GDP in the lead up to the GFC in 2008. - Since the GFC, global trade has largely plateaued. - Cross-border holdings of financial assets almost doubled as a share of global GDP in the run-up to the GFC, before flattening afterward. - Changing participants: - China became a key participant in global trade alongside the United States and the euro area; other emerging market economies in Asia, notably India, also gained prominence. - Network and measurement: - The chapter proposes new indices for centrality and asymmetry to capture shifts in economies’ centrality in global trade and finance networks and the international use of their currencies. *Source: Introduction, CHAPTER 2 — INTERNATIONAL MONETARY SYSTEM: CURRENCIES IN A CHANGING WORLD, 2025 EXTERNAL SECTOR REPORT* ### 1. Stock of Government Bonds ### Stock of Government Bonds ### Key findings on global financial networks and holdings - The United Kingdom accounts for the largest share of deposit and loan claims of banks, with "one-fifth" of total holdings, followed closely by the United States and the euro area. - After adjusting for offshore financial centers, the United States and the euro area each account for "just over 30 percent" of global cross-border portfolio holdings, followed by Japan and the United Kingdom, which each represent "about 10 percent." - The share of offshore financial centers (OFCs) in global cross-border holdings has doubled over the past "30 years." - Reclassifying holdings that are channeled through OFCs can materially change measured foreign holdings: total foreign holdings of the United States decrease when looking through OFCs, whereas foreign holdings increase in the euro area and the United Kingdom. - Cross-border borrowing by non-bank financial institutions has expanded, reflecting their rising role in intermediating global capital flows. - Trade networks remain organized around a few hubs; in 2001 the main hubs were the United States, the euro area, and Japan. By 2023, China has emerged as the center of the Asian trading hub. - The global financial network continues to be centered on advanced economies—particularly the United States, the euro area, the United Kingdom, and Hong Kong SAR—though several other Asian economies have gained importance. - Over the past 25 years, trade flows and financial holdings have increased within country clusters but remained broadly unchanged across clusters. ### Asymmetry index: definition, methodology, and empirical patterns - Purpose: Measures differences from a symmetric configuration among roles of major economies and their currencies in the global economy, comparing network centrality (trade and finance) with currency use (trade and finance). - Empirical pattern: - The index shows a "steady increase in asymmetry in trade" but "stability in finance." - The United States and the euro area have seen decreased centrality in trade while their currency shares remained broadly stable, increasing asymmetry. - China’s centrality in trade and finance has risen faster than the international use of the RMB. - Figure summaries: Figure 2.12.1 shows asymmetry between centrality and currency share; Figure 2.12.2 shows increasing asymmetry between trade and finance; Figure 2.12.3 shows the overall asymmetry index with a modest increase over much of the sample period. - Algebra (as presented in the source): - Let b i,t T and b i,t F denote the centrality of country i in trade (T) or financial (F) network, respectively and c i,t T and c i,t F denote the share of country i’s currency in trade (T) or finance (F) at time t, where i = United States, euro area, United Kingdom, China, Japan, and Rest of the World. Each centrality ( b i,t T, F ) and currency share ( c i,t T, F ) is bounded between 0 and 1 and sum to 1 across the six economies. Let X t = (x i,t ) = ( b i,t T , b i,t F , c i,t T , c i,t F ) denote a vector of centrality measures and currency shares and _ x t = 1 __ 4 ( b i,t T + b i,t F + c i,t T + c i,t F ) . For each country/currency, let y i,t = ( ∑ i=1 4 ( x i,t – _ x t ) 2 ) 1/2 , which measures the distance from the main diagonal (in the 4-dimensionsal space).Then the overall asymmetry index is Y t = ∑ i=1 6 ω i,t y i,t , where ω i,t is the average of an economy’s share in global trade and finance. ### Drivers and ongoing developments that could alter the IMS configuration - Geopolitical fragmentation: - Brexit, rising trade tensions, and Russia’s invasion of Ukraine have intensified geopolitical tensions, increasing trade-restrictive measures and distortive subsidies. - Evidence suggests global trade is increasingly occurring within geopolitical groups rather than between them, and FDI reallocations are occurring in response to rising trade barriers. - If geopolitical tensions deepen, networks could shrink and network externalities could weaken, potentially shifting international currency usage patterns. - Offshore financial centers and non-bank financial intermediation: - OFCs materially affect measured bilateral exposures and aggregate foreign holdings; OFC-mediated reallocations can reduce measured foreign holdings of the United States while increasing those of the euro area and the United Kingdom. - Non-bank financial institutions have increased cross-border borrowing, reflecting their expanded role in global capital flows. - Currency dynamics: - The international use of the RMB has "more than doubled since 2012," though it remains geographically concentrated in China’s trading partners and "only accounts for a small share of global trade." - The RMB reached "just over one-quarter of China’s goods trade in 2023" (use share estimated from online forum data and PBoC settlement data show consistent increases since 2012). - Network centrality shifts: - The United States has become more central in the financial network while its dominance in the trade network has declined. - Japan has increased centrality in the financial network, driven by foreign investment in the Japanese banking sector, while its trade centrality has declined. - The euro area and the United Kingdom experienced declines in centrality in both trade and financial networks. ### Implications and considerations for the international monetary system (IMS) - A high asymmetry index may reflect a unipolar configuration in which a dominant currency’s use exceeds its issuer’s economic weight; network externalities can sustain such dominance. - Transition risks: - If network externalities weaken—due to geopolitical fragmentation or reduced capacity of the center country to supply safe assets—the IMS could shift toward a more symmetric, multipolar configuration. - A multipolar system might increase the global supply of safe assets but could also raise risks of volatile capital flows or exchange rate movements among multiple safe assets. - Risks of volatility and potential instability are particularly elevated during transitions between unipolar and multipolar configurations. - Monitoring role: - The asymmetry index can help monitor signs of transitions in the IMS by tracking divergences between economic centrality and currency use across trade and finance. *Source: https://www.imf.org/-/media/files/publications/esr/2025/english/text.pdf* ### 1. Use of Renminbi in International Trade ### 1. Use of Renminbi in International Trade ### RMB use in trade invoicing and global trade - The chapter documents a rising share of the RMB in trade invoicing since 2010 through Aug. 24, and increasing use of the RMB in global trade (figure panels referenced). - Drivers of RMB adoption in trade include: - Chinese policy efforts to reduce the cost of using the RMB for trade (examples listed in text: Cross-border Interbank Payment System; swap lines with the People’s Bank of China). - Geopolitical factors: escalating trade tensions have been frequently cited by Chinese firms as a key reason for shifting to the RMB in trade. ### RMB use in international credit - The RMB has seen broader adoption in international bank credit, with Chinese banks increasingly playing a prominent role in global financing. - Limitations to broader RMB use among third parties outside China include: - China’s capital account restrictions. - Lack of a large and liquid domestic bond market. - The share of RMB in global allocated reserve assets has remained relatively low and stable (Arslanalp, Eichengreen and Simpson-Bell 2022). ### Key statistics and data sources (as reported) - Time markers and panels referenced include data through 2024 and Aug. 24 for trade invoicing and global trade panels. - Sources cited for RMB analysis: Boz and others (2025); Boz and others (2022); People’s Bank of China accessed via Haver Analytics; Bank for International Settlements Locational Banking Statistics; People’s Bank of China; and IMF staff calculation. - Note: “Others in the region” in panel 2 includes Brunei, Cambodia, Democratic People’s Republic of Korea, Indonesia, Japan, Korea, Lao P.D.R., Malaysia, Mongolia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. PBoC = People’s Bank of China; RMB = renminbi. --- ### The US dollar as a global safe asset and “exorbitant privilege” - The US dollar’s role as provider of dollar-denominated safe assets (mostly debt claims) has been a key building block of the current IMS, delivering relatively higher returns during global downturns and providing a secure store of value (Jiang, Krishnamurthy, and Lustig 2024). - Manifestations of the US “exorbitant privilege” in the external sector include: - Consistent positive valuation gains on US net external assets. - An excess return of US foreign assets over foreign liabilities. - A convenience yield for Treasury securities until recently (Figure 2.14 referenced). ### Recent changes signaling weakening of US advantages - Three main developments suggest some weakening of the United States’ exorbitant privileges and duties: - The net international investment position (NIIP) has sharply deteriorated in the past decade, due to accumulated valuation losses partially explained by the strong performance of US equities held by foreigners (Atkeson, Heathcote, and Perri, forthcoming). - The return differential between overall foreign assets and liabilities has decreased markedly over recent years; returns on the US external balance sheet have been on a low-frequency downward trend for a couple of decades (Gourinchas 2023). - The convenience yield on Treasury securities, proxied by the US Treasury premium, has declined markedly in recent years, turning negative across different maturities. Potential explanations include the large increase in debt issuances (Jiang and others 2025) and regulatory changes since the GFC (Du and others 2018). US government debt has risen to a historically high level and is projected to increase further (IMF 2025). - The US external balance sheet exposes the United States to valuation losses during market stress, fulfilling an “exorbitant duty” as world banker and insurer (Gourinchas and Rey 2007b; Gourinchas, Rey, and Andreolli 2025). ### Observed safe-haven patterns in 2024–2025 - Typical safe-haven responses (Treasury prices increase, dollar appreciates, gold prices rise) occurred when geopolitical uncertainty surged after Russia’s invasion of Ukraine; central banks increased gold holdings, making gold the second largest global reserve asset at market value in 2024 after the US dollar (ECB 2025). - In early April 2025, during a surge in trade policy uncertainty, a different pattern emerged: the spread between US Treasuries and sovereign bonds of other major advanced economies widened and the US dollar depreciated, suggesting weakened demand for US Treasuries. Possible explanations include concerns about the US fiscal trajectory, rising risk premium from policy uncertainty, or investor portfolio diversification. - Despite these episodes, the dollar depreciation through early 2025 has been smooth and moderate and only partially reversed the strong appreciation since 2021; yields on US Treasuries remain relatively low by historical standards. --- ### Cross-border payments and digital innovation - Cross-border payments rely on correspondent banks, messaging systems (including Swift), money transfer operators, credit card networks, FX markets, and central bank arrangements. Most cross-border payments are settled via correspondent banking networks, producing high transaction costs and lengthy processing times for less-integrated countries (BIS 2018; FSB 2020). - Technological advances (tokenization, encryption, programmability) have enabled alternative cross-border arrangements, including public options (CBDCs) and private options (stablecoins). - As of citations in the chapter, no existing CBDC can be used for cross-border payments, though explorative projects are ongoing (Di Lorio, Kosse, and Mattei 2024: 81 out of 86 surveyed central banks are exploring or piloting CBDC). - Privately issued crypto assets can be used for cross-border payments without separate design enhancements; they are secured by cryptography and deployed using distributed ledger technology without central bank backing. ### Crypto assets and cross-border flows - Unbacked crypto assets (majority of private crypto market capitalization; largest are Bitcoin and Ether) are highly volatile and a poor form of money, yet have been used widely—by about 90 countries—for cross-border transactions (Cerutti, Chen, and Hengge 2024). - Use of unbacked crypto assets is often for noneconomic reasons, such as circumventing capital flow management measures (Graf von Luckner, Koepke, and Sgherri 2024). - Data limitations: unbacked crypto assets are pseudo-anonymous, making holder nationality and cross-border flow attribution difficult; Balance of Payments Manual (BPM7) provides a framework but it may take several years for a full view. --- ### Stablecoins and implications for the IMS - Stablecoins (backed crypto assets) aim to anchor value to a currency denomination by holding reserves equal to issued stablecoins; major stablecoins’ market capitalization increased almost tenfold since the beginning of 2021, with US-dollar-backed stablecoins accounting for the largest share. - US-dollar-backed stablecoins can perform functions of the US dollar internationally: means of payment, store of value, and unit of account. Emerging evidence shows increasing use for cross-border transactions by private businesses and individuals (Box 2.4 referenced). - Preliminary evidence indicates foreign demand for US-dollar-backed stablecoins mirrors traditional drivers of demand for US dollar-denominated assets (Reuter, 2025). - US-dollar-backed stablecoins share qualitative features with Eurodollar deposits (dollar deposits held offshore by non-US residents), enabling settlement without accessing onshore dollars. - Holdings of US Treasuries by the two largest stablecoin issuers (Circle and Tether) are comparable to large countries, collectively ranking as the 17th largest holder of US Treasuries globally (Figure 2.18 referenced). However, stablecoin market capitalization remains significantly smaller than other dollar-denominated assets (e.g., Eurodollar deposits). - Risks of broader stablecoin adoption: - Stablecoins do not currently travel through financial intermediaries like Eurodollars and often operate without central bank liquidity access or regulatory oversight in many countries (though regulatory standards are emerging). - If stablecoins grow large without proper regulation, risks include increased likelihood of dollarization and currency substitution in vulnerable countries, and financial integrity risks. --- ### Conclusion and policy recommendations - Key conclusion: The US dollar’s dominance across trade, finance, reserves, and global payments has exceeded the US economic weight and has endured through major global shifts. Dominance is underpinned by network externalities, complementarities among uses of the dollar, and its safe asset status. - Emerging trends that could affect the IMS include: - Increasing geopolitical fragmentation concerns. - Greater use of RMB in international trade and finance. - Softening of the United States’ role as world banker and insurer. - Emergence of alternative payment systems and private digital assets. - While none of these trends appear set to displace the central role of the US dollar in the near term—given the unmatched depth of US financial markets, a fragmented capital, banking and broader EU single market, and China’s capital account restrictions—they could catalyze a gradual reconfiguration of international currency use over time. - Policy recommendations for countries to enhance resilience: - Strengthen macroeconomic fundamentals, including building fiscal space. - Maintain credible monetary and exchange rate frameworks. - Bolster external buffers, such as maintaining adequate international reserves and access to financing arrangements under the global financial safety net. - The chapter proposes continued monitoring of the IMS, including new indexes of international currency usage and asymmetry among centralities and currency use to signal potential changes in the system. *Source: 2025 EXTERNAL SECTOR REPORT — Chapter excerpt on "International Monetary System: Currencies in a Changing World."* ### CHAPTER 2 InternatIonal Monetary SySteM: CurrenCIeS In a ChangIng World ### CHAPTER 2 InternatIonal Monetary SySteM: CurrenCIeS In a ChangIng World ### RMB Use in Trade Invoicing: Patterns and Drivers - Data and method: - Analysis leverages textual data from a large Chinese online forum on international trade, merged with Chinese customs data. - Natural language processing (NLP) models extract firm-level reporting of currency invoicing and stated motivations. - Forum participants’ industry distribution aligns closely with Chinese customs data, suggesting representativeness of Chinese exporters and importers. - Aggregate trends: - Since 2009, the share of firms on the platform reporting RMB invoicing for trade has shown a steady upward trend. - The forum-based trend broadly mirrors official statistics, with a short-lived peak in the official statistics during the 2014–16 period, and reached approximately 25 percent by mid-2024. - The US dollar remains the most used currency by Chinese firms for trade invoicing; the use of the euro remained relatively moderate. - Drivers of RMB adoption (timing and evidence): - 2009–2012: Policy-driven adoption - A pilot program introduced in 2009 significantly reduced transaction costs for RMB settlement (for instance, by allowing designated foreign banks access to onshore RMB). - State-owned firms were early adopters, being more responsive to policies. - Programs expanded after 2012, though their direct effect on RMB adoption appears to have diminished. - Late 2015–early 2016: Exchange rate risk concerns - A new exchange rate mechanism in 2015 allowed greater exchange rate movement; firms reported limiting exchange rate risks as a primary reason for adopting RMB. - Many Chinese exporters rely predominantly on domestic inputs, making RMB invoicing a natural hedge against exchange rate fluctuations. - 2018–2022: Geopolitical concerns and rerouting - Escalation of US-China trade tension since 2018 was a major driver. - Forum data indicate the share of Chinese exporters engaged in rerouting increased from 6 percent during 2014-2017 to about 10 percent by the end of 2019. - Rerouting firms were more likely to use RMB for trade invoicing, especially those rerouting through Asia. - During this period, the share of RMB invoicing increased from 6 percent to 17 percent among relevant firms, while the share remained broadly unchanged for other firms. - Among firms rerouting between 2018 and 2019, RMB adopters tended to have stronger trade links with Asian countries than firms invoicing in other currencies. - 2022 onward: Russia’s invasion of Ukraine - Western sanctions on Russia, including exclusion from the Swift system, positioned the RMB as a viable alternative for Chinese firms trading with Russia. - Forum data indicate Chinese firms trading with Russia adopted or switched to the RMB for trade invoicing. - Other motivations: - “Client request” is cited as a driver in the forum data, though underlying reasons are not specified. - Commodity trade and unspecified reasons also feature in firm responses. - Data limitations noted: - Forum data infer whether a firm uses RMB in trade invoicing but cannot determine if RMB is the sole invoicing currency. - Forum data lack information on the value of exports denominated in RMB, which could explain discrepancies with official statistics. *Italic line: Box 2.1 findings prepared by Jiaqian Chen, Ting Lan, Yang Liu and Ran Pan, with support from George Cui and Kailin Gao (external consultant).* ### Global Financial Safety Net (GFSN): Size, Composition, and Role - GFSN layers and growth: - Four main layers: international reserves, bilateral swap arrangements (BSAs), regional financial arrangements (RFAs), and the IMF. - Since 2000, total international reserve holdings increased more than six times, reaching $14.5 trillion at the end of 2023. - The size of other GFSN layers grew nearly 20 times, to about $4.5 trillion. - The global network of BSAs expanded from six swap lines among advanced economy central banks in the early 2000s to more than 180 lines by 2021. - As of the current count, there are 150 swap lines in existence totaling $2 trillion (noting some pandemic-related temporary lines have expired). - Rapid expansion of Chinese BSAs since 2009 partly reflects efforts to promote RMB internationalization. - IMF’s role and capacity: - The IMF is central to the GFSN, with near-universal membership. - Total IMF lending capacity has risen significantly since the GFC and now stands at almost $1 trillion. - The recently approved 16th General Review of Quotas will boost IMF members’ quotas by 50 percent once implemented, restoring primacy of permanent resources and reducing reliance on borrowed funds. - As a share of global external liabilities, the IMF’s lending capacity has diminished from about 1 percent in early 2000 to about 1/2 percent today. - GFSN in crisis episodes: - During the COVID-19 crisis, drawdown of US dollar swap lines played an important role in early stages, helping advanced economies respond quickly to financial stability threats. - Demand for IMF lending remained consistently high since the height of the pandemic. - In the euro area crisis, RFAs (notably the European Stability Mechanism) took on a larger role, complemented by significant IMF lending in some cases. - During the pandemic, countries were unwilling or did not deem it necessary to make significant drawdowns of FX reserves prior to 2022, partly reflecting unwinding of earlier supports and extensive swap line availability. *Italic line: Box 2.2 prepared by Ernesto Crivelli.* ### Cross-Border Payment Networks via Swift: Patterns and Determinants - Data and scope: - Analysis uses a Swift data set of cross-border payments for financial institution gross payments and customer cross-border payments over 2021–24. - Three key stylized facts: - Intermediation by third-party economies: - In 2024, more than two-thirds of the financial institution cross-border payment value was intermediated by financial institutions in third-party economies—including the United States, Germany, Canada, and the United Kingdom. - For consumer payments, more than one-fifth of the cross-border payment value was intermediated. - The share of intermediated financial institution payment value denominated in the US dollar exceeded the average; the reverse was true for other SDR basket currency transactions. - Network structure: - Cross-border payment networks are highly interconnected with a core-periphery structure. - Economies with the highest centrality are predominantly major advanced economies and financial centers. - The United States and the United Kingdom rank highest in centrality for customer payments and financial institution payments, respectively. - Increasing connectivity: - Between 2021 and 2024, connectivity among economies increased, with growing numbers of links per node. - Connectivity increase was particularly pronounced for payments in RMB, albeit from a low base. - Gravity-model findings: - Bilateral cross-border payment values correlate strongly with indicators of informational proximity and economic ties. - Higher payment values are associated with geographic proximity, greater bilateral imports, portfolio investment, and foreign direct investment. - Heterogeneity by payment type and size: - Distance is a crucial factor for customer payment values but less so for financial institution payments. - Economic ties, especially investment links, positively correlate with both financial institution and customer payments. - Smaller payments are more sensitive to a common language and colonial ties; larger payments are more strongly associated with economic relationships between originator and beneficiary economies. - Coverage and limitations: - Swift statistics do not represent complete market or industry statistics because financial institutions have multiple means to exchange transaction information. - Swift disclaims liability for decisions based on Swift statistics. *Italic line: Box 2.3 prepared by Eugenio Cerutti, Melih Firat, and Martina Hengge based on Cerutti, Firat and Hengge (2025).* ### Cross-Border Stablecoin Flows: Method and 2024 Estimates - Context and motivation: - Stablecoins aim to maintain a stable value relative to a specified asset, typically the US dollar. - Stablecoin capital flows grew markedly; by some estimates, the volume of stablecoin capital flows exceeded Bitcoin capital flows by two to four times in 2023. - Methodology (Reuter 2025): - Two-step method: (1) construct a training sample of wallets with reliably identified geographic locations; (2) train a machine learning model on regional activity patterns and infer geographic locations of other wallets. - Validation: wallet activity volumes in local time zones show expected diurnal patterns (lowest at night, higher during the day), supporting training sample validity. - 2024 stablecoin flow estimates: - Analysis covers USDC and USDT on blockchains Ethereum, Binance Smart Chain, Optimism, Arbitrum, Base, and Linea (estimates are a lower bound for total stablecoin flows in 2024). - Gross stablecoin flows in 2024 total $2 trillion in 138 million transactions. - The average transaction size is $14,630. - Coverage caveat: - Because the analysis covers specified blockchains only, the estimates are a lower bound for total stablecoin flows in 2024. *Italic line: Box 2.4 prepared by Marco Reuter.* ### Box 2.4. Measuring International Stablecoin Flows ### Box 2.4. Measuring International Stablecoin Flows ### Activity profiles by region - Figure 2.4.1. Activity Profiles by Region (Percent of transactions) - Numeric sequence as shown in source: 2.0 5.5 2.5 3.0 3.5 4.0 4.5 5.0 0510 15 2023 - Regional labels preserved exactly as in source: Africa and Middle East; Asia and Pacic; Europe; Latin America and Caribbean; North America - Embedded figure annotations and numeric strings preserved exactly as in source: - i n : 1 8 1 . 8 6 - i n : 3 1 3 . 9 4 - w i t h i n : 2 2 . 4 7 - w i t h i n : 7 5 . 4 6 - w i t h i n : 2 0 9 . 2 6 - o u t : 1 7 1 . 7 0 - o u t : 2 8 8 . 9 5 - o u t : 3 9 4 . 7 4 - 3 6 3 . 1 6 - i n : 4 1 7 . 2 2 - o u t : 2 1 6 . 4 2 - w i t h i n : 1 9 8 . 9 6 - i n : 1 9 2 . 5 6 - o u t : 3 0 . 5 9 - w i t h i n : 4 0 7 . 2 4 ### 2024 stablecoin gross flows - Figure 2.4.2. 2024 Stablecoin Gross Flows (Biillions of US Dollars) - Key descriptive findings: - North America and Asia and Pacific account for the largest fraction of gross flows, followed by Europe, Africa and Middle East, and Latin America and the Caribbean. - Relative to regional GDP, flows from Africa and Latin America are larger than in the other regions, indicating the relative popularity of stablecoins in Africa and Latin America. - Flows are predominantly inter-regional, highlighting the use of stablecoins for international transfers. - Embedded figure annotations and numeric strings preserved exactly as in source (from Box 2.4 continued): - i n : 1 0 . 5 9 - i n : 2 4 . 9 9 - o u t : 0 . 4 2 - o u t : 8 . 3 0 - 5 4 . 0 6 - o u t : 8 . 6 1 - i n : - o u t : 2 . 2 1 - 2 0 . 8 0 ### Bilateral net flows and interpretation - Figure 2.4.3. 2024 Stablecoin Net Flows (Biillions of US Dollars) - Principal findings: - Almost all bilateral net flows are flows from North America to other regions, which total $54 billion. - This pattern suggests that stablecoins flowing from North America to other regions meet some of the dollar demand around the world. - There are net flows from Africa, Asia, and Latin America into Europe, consistent with evidence that crypto assets are used to facilitate capital flight (Graf von Luckner, Koepke, and Sgherri 2024). *Source: IMF staff calculations.* ### CHAPTER 2 InternatIonal Monetary SySteM: CurrenCIeS In a ChangIng World ### CHAPTER 2 InternatIonal Monetary SySteM: CurrenCIeS In a ChangIng World ### Methodology and Process - Individual economy assessments use a wide range of methods to form an integrated and multilaterally consistent view of economies’ external sector positions. - Methods are grounded in the latest vintage of the External Balance Assessment (EBA), developed by the IMF’s Research Department to estimate desired current account balances and real exchange rates. - Model estimates and associated discussions on policy distortions are accompanied by a holistic view of other external indicators, including: - capital and financial account flows and measures, - foreign exchange intervention and reserves adequacy, - foreign asset or liability positions. - Policy discussions highlight policies and reforms that contribute to supporting convergence toward (or maintenance of) external balance, in the context of a summary of overall policy advice. - EBA models provide numerical inputs for identification of external imbalances but may not capture all relevant economic characteristics and potential policy distortions; in such cases, economy-specific adjustors are applied. - IMF staff estimate an economy’s current account gap by combining the EBA model’s current account gap estimate with adjustors. - The staff estimates the real effective exchange rate (REER) gap consistent with the staff current account gap by applying a country-specific elasticity; additional information (EBA REER regression models and unit-labor-cost-based measures) is used in some cases to arrive at staff REER gap estimates. - A process was developed for multilaterally consistent external assessments for the 30 largest economies, representing about 90 percent of global GDP; these assessments are discussed with respective authorities as part of bilateral surveillance. - External assessments are presented in ranges to reflect inherent uncertainties and are categorized as: “broadly in line,” “moderately weaker (stronger),” “weaker (stronger),” or “substantially weaker (stronger).” - Ranges of uncertainty for IMF staff–assessed current account gaps are based on country-specific estimated measures; REER uncertainty ranges vary by country, reflecting country-specific factors including different exchange rate semi-elasticities applied to staff-assessed current account gaps. - Wording conventions: - For cyclically adjusted current account vs. current account norm: use “higher” or “lower” corresponding to positive or negative gaps. - A quantitative estimate of the IMF staff’s view of the REER gap is generally reported as ( ) percent “over” or “under” valued. - “Broadly in line” corresponds to current account gaps in the range of ±1 percent of GDP and REER gaps reflecting country-specific semi-elasticity (for example, ±5 percent based on an elasticity of –0.2). ### Selection of Economies and Categorization - The 30 systemic economies analyzed were chosen based on criteria including global rank in purchasing power GDP, nominal gross trade, and degree of financial integration. - External positions are labeled per Table 3.A criteria linking CA Gap and REER Gap (using elasticity of –0.2): - CA Gap > 4% and REER Gap < –20% … substantially stronger - CA Gap 2%, 4% and REER Gap –20%, –10% … stronger - CA Gap 1%, 2% and REER Gap –10%, –5% … moderately stronger - CA Gap –1%, 1% and REER Gap –5%, 5% … The external position is broadly in line with fundamentals and desirable policies. - CA Gap –2%, –1% and REER Gap 5%, 10% … moderately weaker - CA Gap –4%, –2% and REER Gap 10%, 20% … weaker - CA Gap < –4% and REER Gap > 20% … substantially weaker - Economies covered include: Argentina, Australia, Belgium, Brazil, Canada, China, Euro area, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, Poland, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, Türkiye, United Kingdom, United States. ### Two-Country Example: Distinguishing Domestic vs. Foreign Policy Distortions (Box 3.1) - Stylized two-country world illustrating analysis of policy distortions: - Country A: - large current account deficit, - large fiscal deficit, - high public and external debt. - Country B: - current account surplus (matching Country A deficit), - large creditor position, - no policy distortions. - Overall external assessment: - Country A has an external imbalance reflecting its large fiscal deficit; its exchange rate appears overvalued. - Country B has an equal and opposite surplus imbalance; its exchange rate appears undervalued. - Policy gaps: - Country A: domestic policy distortion requiring adjustment (e.g., rein in fiscal deficit). - Country B: no domestic policy gaps; adjustment by Country A would automatically eliminate the imbalance in Country B. - Individual economy write-ups differ despite symmetric numerical adjustments: - Country A write-up would note vulnerabilities from international liabilities and focus policy response on fiscal consolidation and limiting financial excesses. - Country B write-up would find no fault with policies and note that adjustment elsewhere would reduce its surplus. - Implications: - Distinguishing domestic and foreign fiscal policy gaps is critical. - Elimination of a fiscal policy gap in a systemic deficit economy helps reduce excessive surpluses in other systemic economies. - Policy actions addressing external imbalances relate to determinants of current account balances (private and public saving-investment balances). - Structural or policy distortions can contribute to excessive or inadequate saving and investment; policy advice highlights reforms and policy changes to address these gaps. - Policy advice also seeks to address vulnerabilities associated with external stock positions, including reserves and FX intervention policies. ### Argentina: Economy Assessment (Table 3.1) - Overall Assessment: - The external position in 2024 was weaker than the level implied by medium-term fundamentals and desirable policies. - Economic fundamentals have improved substantially since end-2023, but net international reserves remain critically low and sovereign spreads, while down sharply, are still elevated. - The external assessment is subject to exceptionally high uncertainty and contingent on implementation of structural reforms that boost competitiveness and productivity. - Potential Policy Responses: - Sustained implementation of the newly approved EFF program—with its strong fiscal anchor, a more robust monetary and FX regime (with active measures to rebuild international reserves), and competitiveness-enhancing reforms—is necessary to: - maintain a strong trade balance, - attract FDI, - regain market access, - safeguard external sustainability. - A more flexible exchange rate, along with gradual easing of remaining FX restrictions, multiple currency practices and CFM measures, a cautious approach to prudential policies, and reforms to create a more open and market-oriented economy, are key to build resilience and support sustainable longer-term capital inflows to boost Argentina’s external potential, including in energy and mining. - Foreign Asset and Liability Position and Trajectory - Background: - NIIP turned from –20 percent of GDP in 1999 to 24 percent of GDP on average in 2020–23 due to macroeconomic mismanagement and growing public sector external liabilities, which resulted in an exodus of private-sector savings and dampened valuations of Argentine assets. - Dynamics changed in 2024 as authorities’ stabilization plan led to: - increase in reserve assets (about 1 percent of GDP), - some decline in the public sector’s external debt (0.5 percent of GDP), - strong resident inflows supported by a tax amnesty on undeclared FX assets. - Argentinian corporates, with healthy balance sheets and limited leverage, have started tapping international capital markets while normalizing trade credit liabilities. - Gross private sector liabilities are up mostly owing to improved valuations of direct and portfolio investments in Argentina. - Assessment: - Despite recent progress, external vulnerabilities remain high. - Argentina’s large positive NIIP mostly reflects private sector holdings of external (low-yielding) assets, while the government’s foreign position remains in deep negative territory (high-yielding) and the central bank’s net reserve asset position remains critically low. - 2024 (% GDP) statistics: - NIIP: 10.6 - Gross Assets: 81.3 - Debt Assets: 56.7 - Gross Liab.: 70.7 - Debt Liab.: 45.3 - Current Account - Background: - CA reversed from a deficit of 3.4 percent of GDP in 2023 to a 1 percent surplus in 2024, driven by significant demand compression amid fiscal consolidation and exchange rate correction (at the end of 2023), recovery in grain exports (following drought), and further improvement in the energy balance. - The CA balance narrowed since mid-2024 on account of strong demand recovery, peso appreciation, and easing of many import taxes and restrictions. - Projected to reach a deficit of 0.4 percent in 2025. - Over the medium term, tight fiscal policies, a more robust monetary and FX regime, and productivity/competitiveness reforms are projected to support a small CA surplus, with structural improvements in the energy and mining balance playing an important role. - Assessment: - The 2024 EBA cyclically adjusted CA balance was estimated at about –0.5 percent of GDP. - The estimated EBA CA norm was 0.7 percent of GDP, implying an EBA CA gap of –1.3 percent of GDP. - Considering weak reserve coverage and lack of international market access, external sustainability considerations suggest a CA norm of 1.4 percent of GDP, which would be consistent with bringing reserves near 100 percent of the ARA metric over the medium term while avoiding a further increase in gross external liabilities. - This norm is subject to a high degree of uncertainty and is expected to decline as reforms are implemented under IMF-supported program to bring FX reserves closer to adequacy levels, including through more stable capital inflows. - Staff-assessed CA gap for 2024 was in the range of –3 to –1 percent of GDP. - 2024 (% GDP) statistics: - CA: 1 - Cycl. Adj. CA: –0.5 - EBA Norm: 0.7 - EBA Gap: –1.3 - Staff Adj.: –0.7 - Staff Gap: –2 - Real Exchange Rate (REER) - Background: - Average REER remained broadly unchanged in 2024 versus 2023: a sharp correction in December 2023 was followed by an appreciation of over 40 percent through the first quarter of 2025 (with the REER returning close to the highs observed in early 2017). - As of May 2025, the REER was generally unchanged relative to end of 2024 levels, in the context of adoption of a new monetary and FX regime and weakening of the US dollar. - Both price-based and wage-based REER indices exhibited similar patterns, although wage adjustments have occurred with some lags, likely reflecting shifting profit margins. - Assessment: - Staff-assessed CA gap for 2024 suggests an average REER gap for 2024 in a range of 6 to 18 percent, assuming a semi-elasticity of 0.16. - This implies an end-of-year REER gap of 15 to 25 percent. - Result is generally consistent with the EBA REER models. - Transition to a more robust monetary and FX regime (moving from a crawling peg to a flexible ER within relatively wide bands) allows a more market-determined exchange rate, although tight macroeconomic policies remain necessary to deliver a strong trade balance and reserve accumulation. - Over the medium term, a stronger REER could be justified provided ambitious structural reforms deliver stronger productivity and competitiveness. - Capital and Financial Accounts: Flows and Policy Measures - Background: - Since end-2023 and in the context of the 2025 EFF program, important steps taken to ease most FX restrictions and controls include: - elimination of the export incentive scheme and reduced periods for accessing imports, - elimination of distortionary FX access tax, impuesto pais, - a market-based solution to import and dividend payment backlogs (through BCRA FX denominated securities, BOPREALs), - easing the ability of households to convert pesos into US dollars, - full access to the official FX market for dividend flows from 2025 onwards, - elimination of the preferential exchange rate for tourism inflows. - Assessment: - Careful easing of FX restrictions, along with tight macroeconomic policies and greater exchange rate flexibility, will support the next stage of the stabilization plan to boost reserves, regain international market access, and encourage investment. - These measures need to be complemented by tight macroprudential policies to ensure sustainability of capital inflows, thereby avoiding currency mismatches and disruptive hot money flows from nonresidents. - FX Intervention and Reserves Level - Background: - NIR, after falling to negative $11 billion, rose by $6 billion during 2024, as strong FX purchases more than offset servicing of large FX public debt. - Reserve accumulation more challenging since mid-2024, with NIR falling to negative $6 billion by the end of March 2025. - GIR dynamics broadly similar, reaching $16.6 billion by the end of 2024. - Reserve situation stabilized since implementation of the new program and establishment of new exchange rate bands in mid-April. - Assessment: - Reserve coverage remains inadequate. - GIR are estimated at about 23 percent of the IMF’s composite metric as of the end of 2024. - Early efforts are essential to rebuild reserves, while allowing for greater price discovery and FX purchases to meet FX debt service obligations. *Source: CHAPTER 2 InternatIonal Monetary SySteM: CurrenCIeS In a ChangIng World (text - CHAPTER 2 InternatIonal Monetary SySteM: CurrenCIeS In a ChangIng World), IMF PDF content provided.* ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMents ### Australia - Overall Assessment: - The external position in 2024 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - CA deficit widened from 0.3 percent of GDP in 2023 to 1.9 percent of GDP in 2024. - Drivers: resource exports softened due to declining commodity prices and slow growth in external demand. - Outlook: CA balance expected to deteriorate further and then return to a slight deficit in the long term, reflecting trend decline in commodity prices, return of savings to historical levels, and pickup in investment. - Potential Policy Responses: - Planned gradual medium-term fiscal consolidation could help slow CA deterioration. - Structural policies to boost competitiveness: promoting R&D, reducing barriers to labor mobility, upgrading competition policies, stimulating innovation to improve export quality, reduce unit labor costs, and foster high-value industries. - Industrial policies: pursue cautiously, narrowly targeted, minimize trade and investment distortions. - Exchange rate: should continue to move flexibly as the key shock absorber. - Foreign Asset and Liability Position and Trajectory: - Background: NIIP improved to –24.0 percent of GDP at end-2024 (from –31.2 percent of GDP in 2023), driven by strong revaluation effects of foreign equities and AUD depreciation in final quarter of 2024. - Liability composition: roughly 48 percent of gross liabilities are debt; about half of debt liabilities are denominated in domestic currency; assets largely denominated in foreign currency. - Liability types: about one-quarter FDI, one-half portfolio investment, one-quarter other investments and derivatives. - Assessment: NIIP level and trajectory are sustainable; positive net foreign currency asset position; banking sector net foreign currency liability position mostly hedged; governments’ balance sheet strong. - 2024 (% GDP): NIIP: –24.0; Gross Assets: 161.3; Debt Assets: 39.7; Gross Liab.: 185.3; Debt Liab.: 87.9 - Current Account: - Background: CA surplus over 2020–22 reversed to slight deficit (0.3 percent of GDP) in 2023; widened to 1.9 percent of GDP in 2024 due to commodity price normalization and slowing external demand. - Trade and income components: merchandise trade balance declined from 4.8 percent of GDP in 2023 to 2.5 percent of GDP in 2024; services deficit stable at 1.4 percent of GDP; primary income deficit at 3.0 percent of GDP. - Commodity exports fell by 2.2 percent of GDP since 2023. - Outlook: CA deficit expected to widen further (commodity price decline in 2025, slowing key trading partners) before stabilizing at a slight deficit. - Assessment (EBA and staff): EBA model CA norm: –0.6 percent of GDP; cyclically adjusted CA: –2.5 percent of GDP; EBA gap: –1.9 percent of GDP (range –2.4 to –1.4 percent of GDP). Staff Adjustment: 0.0; Staff Gap: –1.9 - 2024 (% GDP): CA: –1.9; Cycl. Adj. CA: –2.5; EBA Norm: –0.6; EBA Gap: –1.9; Staff Adj.: 0.0; Staff Gap: –1.9 - Real Exchange Rate: - Background: REER in 2024 on average 1.8 percent higher than in 2023 and 4 percent higher than previous five years; declined at start of 2025; as of March 2025, REER was 3.6 below its 2024 average. - Assessment: IMF staff-assessed CA gap implies REER gap of 10.7 percent (elasticity 0.18). EBA REER level model overvaluation 19.8 percent; index model undervaluation 3.7 percent. Staff REER gap range 7.9 to 13.5 percent, midpoint 10.7 percent. - Capital and Financial Accounts: - Background: financial account recorded net inflows in 2024 driven by portfolio investment and direct investment; equity flows negative in net terms. - Assessment: vulnerabilities contained; supported by credible commitment to floating exchange rate. - FX Intervention and Reserves: - Background: currency free floating since 1983; central bank no intervention since global financial crisis. Reserve assets increased to $102 billion in 2024 from $94 billion at end-2023. - Assessment: strong commitment to floating exchange rate reduces need for reserves; domestic banks’ external liabilities mostly local currency or hedged; prudential reserve needs limited. ### Belgium - Overall Assessment: - The external position in 2024 was weaker than the level implied by medium-term fundamentals and desirable policies. - CA balance deteriorated to –0.9 percent of GDP in 2024. - Outlook: in unchanged policy scenario, CA projected to deteriorate further near term before returning to smaller deficit in medium term; outlook highly uncertain amid heightened global trade restrictions and uncertainty. - Potential Policy Responses: - Sustained fiscal adjustment through credible, expenditure-led consolidation. - Preserve or increase public investment to bolster potential growth and support green transition. - Structural reforms: wage-setting mechanism, pensions and social benefits, taxation, labor and product markets to enhance productivity and competitiveness. - Work with EU partners to deepen single market, save-and-invest union, and pursue nondiscriminatory reductions in trade barriers. - Foreign Asset and Liability Position and Trajectory: - Background: NIIP increased to 60.1 percent of GDP at end-2024 (51.5 percent end-2023; average 55 percent over 2019–23). - Drivers: gross foreign assets increased by 4.9 percentage points of GDP; gross foreign liabilities decreased by 3.7 percentage points of GDP. - Composition: net portfolio investment main positive component at 37.7 percent of GDP (up 2.1 percentage points); net FDI increased by 5.3 percentage points to 21.7 percent of GDP; net other investment liabilities fell to 6.2 percent of GDP. - Assessment: NIIP-to-GDP may decline slightly due to projected CA deficits but remains large and positive; substantial gross positions influenced by corporate treasury units without macro-relevant mismatches. - 2024 (% GDP): NIIP: 60.1; Gross Assets: 412.0; Debt Assets: 130.1; Gross Liab.: 351.9; Debt Liab.: 152.0 - Current Account: - Background: CA averaged 0.3 percent of GDP over 2014–23; CA deficit widened to 0.9 percent of GDP in 2024 from 0.7 percent in 2023 driven by wider goods and services deficit (0.8 percent of GDP in 2024). - Primary income increased by 0.4 percentage point to 1.7 percent of GDP; current transfers outflow increased by 0.3 percentage point to –1.7 percent of GDP. - Volatility reflects multinationals’ activities and trade data revisions. - Assessment: EBA CA norm 3.5 percent of GDP; cyclically adjusted CA –0.5 percent of GDP; EBA gap –4.0 percent of GDP. Staff-adjusted CA gap between –4.4 and –3.6 percent of GDP (standard error ±0.4 percent of GDP). Staff Adj.: 0; Staff Gap: –4.0 - 2024 (% GDP): CA: –0.9; Cycl. Adj. CA: –0.5; EBA Norm: 3.5; EBA Gap: –4.0; Staff Adj.: 0; Staff Gap: –4.0 - Real Exchange Rate: - Background: ULC-based and CPI-based REERs appreciated by 7.9 percent and 4.6 percent between February 2020 and December 2024. CPI-based REER appreciated by 1.0 percent in 2024 relative to 2023 average. As of March 2025, CPI-based REER was 0.9 percent above 2024 average. - Assessment: IMF staff-assessed CA gap implies REER overvaluation range 5.3 to 6.5 percent (midpoint 5.9 percent, elasticity 0.68). EBA REER index model overvaluation 8.3 percent; REER level model overvaluation 17.5 percent. - Capital and Financial Accounts: - Background: financial account balance negative at 0.3 percent of GDP in 2024. Direct investment balance strongly positive at 4.4 percent of GDP. Portfolio investment balance negative at –4.9 percent of GDP. Other investment slightly positive at 0.2 percent of GDP. - Assessment: exposed to financial market risks and vulnerabilities from high external public debt, limited by large positive NIIP. - FX Intervention and Reserves: - Background/Assessment: euro is a global reserve currency; reserves held by euro area typically low relative to standard metrics, but currency is free floating. ### Brazil - Overall Assessment: - The external position in 2024 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA deficit widened to 2.8 percent of GDP in 2024; expected to converge to 1.9 percent of GDP over the medium term as oil exports increase and net public savings improve. - Risks: geoeconomic fragmentation, heightened global uncertainty, insufficient progress on domestic reforms. - Potential Policy Responses: - Raise national savings to allow sustainable expansion in investment. - Sustained and more ambitious fiscal effort to increase net public savings. - Structural reforms to improve efficiency and reduce firms’ cost of capital. - Industrial policies should be narrowly targeted, avoid increasing barriers to trade and investment, and not favor domestic producers over imports. - Foreign Asset and Liability Position and Trajectory: - Background: NIIP rose to –34.6 percent of GDP in 2024 (from –50.3 percent in 2023; average –38 percent during 2018–22). - Drivers: gross foreign assets rose by 2.2 percentage points of GDP; gross foreign liabilities declined by 13.5 percentage points of GDP due to portfolio rebalancing and valuation effects from currency depreciation. - FDI continued to account for more than half of liabilities. External debt decreased to 33.1 percent of GDP and 212 percent of exports (from about 33.4 percent of GDP and 213 percent of exports in 2023). - Assessment: NIIP negative since series inception in 2001; gross external financing needs moderate at about 10 percent of GDP annually; NIIP projected to stabilize around –45 percent of GDP over medium term. - 2024 (% GDP): NIIP: –34.6; Gross Assets: 47.2; Res. Assets: 15.2; Gross Liab.: 81.8; Debt Liab.: 33.1 - Current Account: - Background: CA deficit averaged 2.5 percent of GDP during 2018–22, dropped to 1.3 percent in 2023, widened to 2.8 percent in 2024. Drivers: narrower trade surplus (3.0 percent of GDP) as imports rose; higher services deficit (2.5 percent of GDP). Public sector reduced saving-investment deficit partially offset by smaller private sector saving-investment surplus. - Outlook: CA deficit expected to converge to 1.9 percent of GDP over medium term supported by higher oil exports and improved net public savings. - Assessment: cyclically adjusted CA –2.9 percent of GDP in 2024; EBA cyclically adjusted CA norm –1.9 percent of GDP. IMF staff CA gap range –1.5 to –0.5 percent of GDP, midpoint –1.0 percent. EBA-identified policy gaps –1.5 percent of GDP. - 2024 (% GDP): CA: –2.8; Cycl. Adj. CA: –2.9; EBA Norm: –1.9; EBA Gap: –1.0; Staff Adj.: 0.0; Staff Gap: –1.0 - Real Exchange Rate: - Background: REER depreciated by 4.2 percent in 2024 compared to 2023 average; nominal exchange rate depreciation against USD reached around 20 percent by December 2024 at a 12-month rate. As of March 2025, REER had depreciated by 4.3 percent from 2024 average. - Assessment: IMF staff CA gap implies REER gap of 7.6 percent in 2024 (elasticity 0.13). REER index model gap –31.2 percent; level model –15.5 percent. Staff-assessed REER gap range 3.8 to 11.4 percent, midpoint 7.6 percent. - Capital and Financial Accounts: - Background: Brazil attracts sizable capital flows. Net FDI flows averaged 2.8 percent of GDP during 2015–22 and were 2.2 percent of GDP in 2024. Portfolio investment net inflows 0.1 percent of GDP. - Assessment: composition of flows favorable with positive net FDI; uncertainties from tighter global financial conditions and insufficient reforms are downside risks. - FX Intervention and Reserves: - Background: floating exchange rate. Authorities intervened in FX markets during 2020–22 and 2024 to ensure market functioning and reduce volatility. International reserves declined by $25 billion to $330 billion at end-2024. - Assessment: flexible exchange rate important shock absorber. Reserves adequate per IMF reserve adequacy metric (126 percent at end-2024). FX interventions two-sided; can be used to address episodes of higher risk premia when FX liquidity shallow. ### Canada - Overall Assessment: - The external position in 2024 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - External CA deficit narrowed slightly to 0.5 percent of GDP in 2024 (from –0.6 percent of GDP in 2023), largely due to higher investment income surplus. - Narrowing occurred despite deterioration in service and goods balance reflecting stronger domestic demand. - Outlook: current account expected to remain in slight deficit over the medium term. - Potential Policy Responses: - Boost competitiveness in non-fuel goods and services exports and diversify export markets through: investing in R&D and physical capital, removing internal trade barriers, focusing on high-multiplier public spending, promoting FDI (including outflows). - Trade policies: resolve trade tensions, promote clarity and transparency, deepen economic integration via free trade agreements. - Government support should balance easing short-term adjustment costs while minimizing long-term trade and investment distortions and ensuring medium-term fiscal consolidation. - Foreign Asset and Liability Position and Trajectory: - Background: NIIP increased sharply to 61.9 percent of GDP in 2024 from 49.4 percent of GDP in 2023 and 35.4 percent of GDP in 2022, reflecting revaluations and CAD depreciation vs USD. - Gross external debt 145.3 percent of GDP (up from 136.5 percent in 2023); about 37 percent of gross external debt is short term. - Assessment: foreign assets have higher foreign-currency component than liabilities, providing hedge against currency depreciation; NIIP level and trajectory sustainable. - 2024 (% GDP): NIIP: 61.93; Gross Assets: 322.47; Debt Assets: 98.6; Gross Liab.: 260.54; Debt Liab.: 145.32 - Current Account: - Background: estimated CA deficit 0.5 percent of GDP in 2024, slightly lower than in 2023 (–0.6 percent of GDP), mainly due to higher investment income surplus which offset trade deterioration. CA deficit smaller than 2019–23 average CA deficit of 1.0 percent of GDP. - Assessment: cyclically adjusted CA –0.9 percent of GDP in 2024; EBA CA norm 2.5 percent of GDP; EBA gap –3.4 percent of GDP. Accounting for measurement biases and retained earnings, IMF staff assesses CA gap range –2.2 to –1.3 percent of GDP, midpoint –1.8 percent of GDP. - 2024 (% GDP): CA: –0.5; Cycl. Adj. CA: –0.9; EBA Norm: 2.5; EBA Gap: –3.4; Staff Adj.: 1.6; Staff Gap: –1.8 - Real Exchange Rate: - Background: average REER for 2024 was 0.9 percent below 2023 average and about 2.5 percent weaker than 2019–23 average. As of March 2025, REER had depreciated by 3.8 percent relative to 2024 average. - Assessment: EBA REER index model overvaluation 3.2 percent; REER level model undervaluation 13 percent. Consistent with staff CA gap (elasticity 0.27), staff assesses REER overvaluation between 5.0 and 8.3 percent, midpoint 6.6 percent. - Capital and Financial Accounts: - Background: net inflows mostly from portfolio investments, moderated by outflows in FDI and other investments. Net FDI outflow 1 percent of GDP in 2024. Other investments net outflows 0.7 percent of GDP. - (Text truncated in source beyond this point.) *Italic: Source — text - CHAPTER 3 2024 IndIvIdual EconoMy assEssMents (PDF).* ### 3.7 percent of GDP in 2023. These outflows were offset by portfolio investments which recorded net inflows of 2.6 percen ### 3.7 percent of GDP in 2023. These outflows were offset by portfolio investments which recorded net inflows of 2.6 percen ### Canada — Capital Account and FX Policy - Assessment: Canada has an open capital account. Vulnerabilities are limited by a credible commitment to a floating exchange rate. - FX Intervention and Reserves Level - Background: - Canada has a free floating exchange rate regime and has not intervened in the FX market since September 1998 (except for participating in joint interventions with other central banks). - Canada has limited reserves, but its central bank has standing swap arrangements with the US Federal Reserve and four other major central banks. - The Bank of Canada has not drawn on these swap lines. - Assessment: Policies in this area are appropriate to the circumstances of Canada. The authorities are strongly committed to a floating regime which, together with the swap arrangements, reduces the need for reserve holdings. ### China — Overall Assessment and External Position (Table 3.6) - Overall Assessment: - The external position in 2024 is assessed to be moderately stronger than the level implied by medium-term fundamentals and desirable policies. - The CA surplus strengthened to 2.3 percent of GDP in 2024, driven by exports and weak imports. - Sustained net capital outflows have resulted in persistent RMB depreciation pressures despite the large CA surplus. - Considerable uncertainty around the economic outlook, including on the level of tariffs and their impact on trade flows in the short term. - Over the medium term, the CA surplus is expected to narrow modestly, supported by an eventual recovery in domestic demand. - Potential Policy Responses: - Macro policies should focus on boosting domestic demand to lower the CA surplus and mitigate domestic deflationary pressures. - More expansionary fiscal policy, with greater support for consumption (scaling up social spending) and the property sector (to finance completion of unfinished housing) should be a priority. - Further monetary easing and exchange rate flexibility can help absorb external shocks, but in the current conjuncture should be accompanied by a strong fiscal and structural package. - Structural reforms to reduce household savings (e.g., Hukou reforms), boost investment in the services sector (e.g., lighten regulatory requirements, reduce entry barriers), and scale back industrial policies. - Industrial policies should be narrowly targeted to specific objectives and avoid favoring domestic producers over imports. - Continue efforts to constructively resolve trade tensions; pursue clarity and transparency in trade policy and pragmatic cooperation, including nondiscriminatory reductions in trade barriers or free trade agreements. - Foreign Asset and Liability Position and Trajectory - Background: - NIIP reached 17.6 percent of GDP in 2024, rising from 12.0 percent in 2021 but below the peak of 29.9 percent in 2008. - The increase largely reflects the CA surpluses. - Assessment: - The NIIP-to-GDP ratio is expected to remain positive and increase modestly over the medium term. - The NIIP is not a major source of risk; assets remain high—partly reflecting sizable foreign reserves (18.4 percent of GDP)—and liabilities are mostly related to FDI. - Key statistics (2024, % GDP): - NIIP: 17.6 - Gross Assets: 54.5 - Debt Assets: 16.0 - Gross Liab.: 36.9 - Debt Liab.: 12.9 - Current Account - Background: - The 2024 CA surplus increased to 2.3 percent of GDP from 1.4 percent of GDP in 2023. - Goods balance: 4.1 percent of GDP in 2024, up from 3.3 percent of GDP in 2023. - Goods exports rose by 7.2 percent in 2024. - Services deficit widened marginally to 1.2 percent of GDP (from 1.1 percent in 2023). - Income deficit remained stable at 0.7 percent of GDP. - Higher CA largely reflected higher private savings and subdued private investment amid property sector adjustment. - Over the medium term, modest projected decline in the CA due to recovery in domestic demand, partially offset by fiscal consolidation. - Assessment: - IMF staff CA gap ranges from 0.5 to 1.8 percent of GDP, with a midpoint of 1.2 percent. - EBA-identified policy gaps estimated at –0.6 percent of GDP (–0.3 percent of GDP from relatively favorable credit conditions and –0.3 percent of GDP from looser fiscal policy). - Key statistics (2024, % GDP): - CA: 2.3 - Cycl. Adj. CA: 2.0 - EBA Norm: 0.8 - EBA Gap: 1.2 - Staff Adj.: 0.0 - Staff Gap: 1.2 - Real Exchange Rate - Background: - In 2024, the NEER appreciated 0.6 percent, while the REER depreciated by 2.6 percent. - Cumulative decline of 11 percent in the REER since 2022 (third consecutive year of REER depreciation). - As of March 2025, the REER had depreciated by 1.9 percent relative to the 2024 average. - Assessment: - IMF staff CA gap implies a REER gap of –8.5 percent. - EBA REER index regression estimates REER gap in 2024 to be –1.1 percent; EBA REER level regression estimates –0.7 percent. - Staff assesses the REER to be in the range of –3.8 to –13.1 percent with a midpoint of –8.5 percent (with an estimated elasticity of 0.14 applied). - Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2024, the financial account (excluding net errors and omissions) deteriorated to –2.5 percent of GDP (–1.3 percent of GDP in 2023). - Deterioration due to large portfolio outflows of residents and inward FDI declined to 0.1 percent of GDP (a historical low). - Authorities raised the cross-border financing macroprudential adjustment parameter for financial institutions and enterprises from 1.5 to 1.75 in January 2025 (relaxation of an inflow CFM measure) to encourage external borrowing. - Assessment: - Net outflows accelerated through 2024 due to large interest rate differential, expectations of higher trade tensions with the United States, and perceptions of weakening economic prospects in China. - In the medium term, further capital account opening likely to create substantially larger two-way gross flows. - Sequencing of capital account opening should carefully consider domestic financial stability. - CFMs should not be used to actively manage the capital flow cycle or substitute for warranted macroeconomic adjustment and exchange rate flexibility. - China should gradually phase out CFM measures in a sequence consistent with greater exchange rate flexibility and accompanying reforms. - FX Intervention and Reserves Level - Background: - Reserves increased in the first three quarters of 2024 and declined in the last quarter amid deterioration in capital flows and unfavorable valuation effects. - On net, official reserve assets rose by about $6 billion through the year, reaching $3.5 trillion by the end of 2024. - Assessment: - End-of-2024 reserve assets—103 percent of the IMF composite metric adjusted for capital controls (109 percent in 2023)—are assessed to be adequate. - Temporary FX intervention could be considered in the event of large capital outflows that pose significant risks to macroeconomic and financial stability, including if markets turn disorderly. ### Euro Area — Overall Assessment and External Position (Table 3.7) - Overall Assessment: - The external position in 2024 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - The CA balance increased to 2.8 percent of GDP in 2024—up from 1.7 percent in 2023—driven mostly by lower energy imports and higher non-energy goods exports. - The euro area’s CA surplus is projected to decline in the medium term relative to 2024 but remain at about 2 percent of GDP, with sizable imbalances in some countries. - Potential Policy Responses: - Increase resilience by recalibrating the composition of domestic demand and reducing country-level imbalances where needed. - Deepen the EU single market—lower regulatory burdens, reduce administrative barriers, streamline trade procedures, enhance labor mobility, and better integrate financial services. - Complete banking and capital markets unions to strengthen public and private sector risk sharing and lift investment. - Reforms to boost energy security, enhance the EU budget for efficient public goods investment, and structural reforms to improve the business environment. - Trade policies should seek to constructively resolve trade tensions, promote clarity and transparency, and deepen economic integration via free trade agreements. - Deploy industrial policies cautiously, target specific objectives, coordinate at the EU level, and avoid favoring domestic producers over imports. - Countries with external positions stronger than the norm should strengthen domestic demand and increase investment; countries with weaker external positions should increase public sector saving and implement productivity-enhancing reforms. - Germany’s announced increase in defense and public investment and recommended rotation from public to private spending in other countries will boost investment and innovation. - Foreign Asset and Liability Position and Trajectory - Background: - NIIP turned positive in 2022 and rose to 10.9 percent of GDP by the end of 2024 (after falling to –20.5 percent of GDP in 2009). - The robust increase of 7.9 percentage points of GDP compared to 2023 was attributable to both the current account surplus and valuation effects in the fourth quarter. - Gross foreign assets were 250.3 percent of GDP and liabilities were 249.4 percent of GDP. - Gross external debt declined by 1.1 percent of GDP. - Assessment: - Projections of continued CA surpluses over the medium term suggest the NIIP-to-GDP ratio will rise further at a moderate pace. - Aggregate NIIP financing vulnerabilities appear low, but large net external debtor countries bear elevated risk of a sudden stop of gross inflows. - Key statistics (2024, % GDP): - NIIP: 10.9 - Gross Assets: 260.4 - Debt Assets: 94.1 - Gross Liab.: 249.4 - Debt Liab.: 88.2 - Current Account - Background: - The current account balance for the euro area increased to 2.8 percent of GDP in 2024, up from 1.7 percent in 2023. - Investment rate declined from 10.1 percent in 2022 to 9.8 percent in 2023 and 9.2 percent in 2024. - Primary income surplus slightly increased to 0.4 percent of GDP; secondary income deficit remained stable at –1.3 percent. - Large creditor countries maintained sizable surpluses. - In the medium term, the current account surplus is projected to decline to about 2 percent of GDP. - Assessment: - EBA model estimates a CA norm of 1.4 percent of GDP, against a cyclically adjusted CA of 2.9 percent—implying a gap of 1.4 percent of GDP. - Adjustments of –0.4 percent of GDP were made to account for measurement issues in Ireland and The Netherlands. - IMF staff assesses the CA gap to be 1.0 percent of GDP in 2024, with a range of 0.2 to 1.8 percent of GDP (considering a standard error of 0.8). - Key statistics (2024, % GDP): - CA: 2.8 - Cycl. Adj. CA: 2.9 - EBA Norm: 1.4 - EBA Gap: 1.4 - Staff Adj.: –0.4 - Staff Gap: 1.0 - Real Exchange Rate - Background: - In 2024, the CPI-based REER appreciated by 0.5 percent from 2023. - The euro area CPI-based REER appreciated by 5.3 percent between 2015 and 2024. - As of March 2025, the CPI-based REER was 0.1 percent below its 2024 average. - Assessment: - Staff assesses the REER gap to be –3.1 percent in 2024, with a range of –0.7 to –5.5 percent, based on an estimated CA-REER elasticity of 0.33. - The EBA REER index model suggests an overvaluation of 4.1 percent, and the level model suggests a 1.7 percent overvaluation. - Capital and Financial Accounts: Flows and Policy Measures - Background: - Balanced capital account and a financial account surplus of 3.2 percent of GDP in 2024 (up from 1.9 percent of GDP in 2023). - Driven mostly by a rebound of net direct investment that more than offset a decline in net other investment. - Assessment: - Aggregate risks are limited given the strength of the external position and the euro’s status as a global reserve currency. - Large external financing needs of sovereigns and the banking sector cause some vulnerability to tighter global financial conditions and sustained market volatility. - FX Intervention and Reserves Level - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by euro area economies are typically low relative to standard metrics, but the currency is free floating. *International Monetary Fund — 2025 EXTERNAL SECTOR REPORT (excerpts provided in source content)* ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMents ### France - Overall Assessment - The external position in 2024 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The CA balance increased to a surplus of 0.4 percent of GDP in 2024, driven by stronger services exports due to the Paris Summer Olympics. - Over the medium term, the CA balance is projected at –0.1 percent of GDP by 2030, as private consumption and investment improve. - Potential Policy Responses - Sustained fiscal consolidation over the medium term to help maintain the external position in line with medium-term fundamentals. - Structural reforms to support productivity and attract higher private investment to facilitate the green and digital transitions. - Industrial policies: deploy cautiously, remain targeted to specific objectives where externalities or market failures prevent effective market solutions, be coordinated at the EU level, and avoid favoring domestic producers over imports to minimize trade and investment distortions. - Foreign Asset and Liability Position and Trajectory - Background: - NIIP stood at –20.3 percent of GDP in 2024, within the 2014–19 range (between –19 percent and –28 percent of GDP). - NIIP improved by 7.8 percent of GDP since 2023, largely driven by an increase in portfolio investment. - Gross assets: 373 percent of GDP in 2024; non-FDI- and nonportfolio-related assets accounted for about 50 percent. - Gross liabilities: 393 percent of GDP in 2024; external debt about 259 percent of GDP (52 percent accounted for by banks and 22 percent by the public sector) in Q3 2024. - About three-quarters of France’s external debt liabilities are denominated in domestic currency. - Average TARGET2 balance in 2024: € –147.9 billion. - Assessment: - NIIP is negative, but its size and projected stable trajectory do not raise sustainability concerns. - Vulnerabilities from large public external debt (57.7 percent of GDP in Q3 2024), banks’ gross financing needs—the stock of banks’ external short-term debt securities was 4 percent of GDP in Q3 2024—and financial derivatives (liabilities) at about 63.9 percent of GDP. - Key 2024 figures (% GDP): NIIP: –20.3; Gross Assets: 372.5; Debt Assets: 191.7; Gross Liab.: 392.9; Debt Liab.: 231.7 - Current Account - Background: - CA balance increased to a surplus of 0.4 percent of GDP in 2024 (from a deficit of 1 percent in 2023), driven by unwinding of the large terms-of-trade shock and stronger services exports partly due to the Paris Summer Olympics. - Gross national savings increased in 2024, driven by higher private savings. - Private investment contracting since 2023 after post-pandemic recovery. - CA surplus expected to decrease to about 0.2 percent of GDP in 2025; projected about –0.1 percent of GDP by 2030. - Assessment: - 2024 cyclically adjusted CA balance estimated at 0.3 percent of GDP compared with an EBA-estimated norm of 0.1 percent. - IMF staff assesses CA gap in 2024 between –0.1 and 0.7 percent of GDP, midpoint 0.3 percent of GDP. - Main contributor to overall positive policy gap of 0.3 percent of GDP is a positive credit gap of 0.6 percent; fiscal policy gap is –0.3 percent. - Key 2024 figures (% GDP): CA: 0.4; Cycl. Adj. CA: 0.3; EBA Norm: 0.1; EBA Gap: 0.3; Staff Adj.: 0.0; Staff Gap: 0.3 - Real Exchange Rate - Background: - ULC-based REER appreciated by 0.7 percent; CPI-based REER depreciated by 0.1 percent in 2024. - As of March 2025, ULC-based REER was 2.4 percent above the 2024 average; CPI-based REER was 1.3 below the 2024 average. - Assessment: - CA gap implies a REER gap of –1.0 percent in 2024 (semi-elasticity 0.28). - EBA REER level model does not point to a REER gap; EBA REER index model points to a REER gap of –7.8 percent. - Staff assesses the REER to be broadly in line with fundamentals and desirable policies with a midpoint of –1.0 percent and a range of uncertainty of ±1.4 percent. - Capital and Financial Accounts - Background: Inward and outward FDI recovered in 2024 after a temporary dip in 2023; financial account is open. - Assessment: France remains exposed to financial market risks owing to large refinancing needs of the sovereign and banking sectors. - FX Intervention and Reserves Level - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Germany - Overall Assessment - The external position in 2024 was stronger than the level implied by medium-term fundamentals and desirable policies. - CA increased slightly in 2024 versus 2023. - In 2025, CA expected to decline mainly because the trade balance is projected to weaken in response to fiscal easing and euro appreciation in early 2025. - Over the medium term, CA projected to gradually decline closer to its norm due to fiscal expansion, including increased infrastructure and defense spending. - Policy Recommendations - Policies to promote investment and diminish excess saving to support external rebalancing and reduce the CA balance toward its norm. - Expected higher fiscal deficits over the medium term from higher defense spending and higher public investment in transportation, energy, and digitalization. - Structural reforms to accelerate licensing and permitting and increase availability of equity financing for young, innovative firms. - Training to enhance employability of older workers to extend working lives and reduce the need for savings. - Industrial policies: deploy cautiously, targeted, coordinated at the EU level, and avoid favoring domestic producers over imports. - Foreign Asset and Liability Position and Trajectory - Background: - NIIP increased to 79 percent of GDP in 2024 versus 70 percent in 2023. - Increase due to CA surplus and valuation gains on external assets, mainly portfolio investments. - TARGET2 claims rose to €1.2 trillion at end-2024 from €1.1 trillion at end-2023. - Between 2017 and 2024, NIIP increased by 37 percent of GDP. - Assessment: Germany’s exposure to the Eurosystem remains large. - Key 2024 figures (% GDP): NIIP: 79; Gross Assets: 312; Debt Assets: 153; Gross Liab.: 233; Debt Liab.: 143 - Current Account - Background: - CA surplus 5.7 percent of GDP in 2024, compared with 5.6 percent in 2023 and 8.0 percent on average over 2017–19. - Increase driven mainly by higher primary income and lower secondary income deficit, offsetting an increase in services deficit. - Household savings-investment surplus rose as private consumption remained subdued despite higher real incomes. - Assessment: - Cyclically adjusted CA balance estimated by EBA model at 5.5 percent of GDP in 2024. - IMF staff assess CA norm between 3 and 4 percent of GDP, midpoint 3.5 percent. - CA gap for 2024 in range 1.6–2.6 percent of GDP, midpoint 2.1 percent of GDP. - Key 2024 figures (% GDP): CA: 5.7; Cycl. Adj. CA: 5.5; EBA Norm: 3.5; EBA Gap: 2.1; Staff Adj.: 0.0; Staff Gap: 2.1 - Real Exchange Rate - Background: - REER recovered to pre-pandemic levels after early 2021–mid-2022 depreciation. - REER based on consumer prices appreciated by 0.3 percent during 2024; largely unchanged in March 2025 versus the 2024 average. - Assessment: - IMF staff CA gap implies a REER gap of –6.6 percent in 2024 (elasticity 0.32). - EBA REER level and index models suggest undervaluation of 11.4 percent and overvaluation of 5.8 percent, respectively. - Staff assesses the REER to be undervalued, midpoint 6.6 percent, range of uncertainty +/–1.6 percent. - Capital and Financial Accounts - Background: - In 2024, significant capital exports corresponding to the CA surplus remained largely in “other investments”; major change was portfolio investments abroad with sharp increase into foreign equity assets. - Net outward FDI increased slightly as inward FDI declined. - Assessment: Risks limited given Germany’s safe-haven status and strength of its external position. - FX Intervention and Reserves Level - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by euro area economies are typically low relative to standard metrics. The currency floats freely. ### Hong Kong Special Administrative Region - Overall Assessment - The external position in 2024 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA surplus widened to 12.9 percent of GDP in 2024 as the goods balance increased due to strong external demand; services continued gradual recovery driven by financial services. - CA surplus expected to decline moderately over the medium term with recovery in domestic investment. - Under the Linked Exchange Rate System (LERS), short-term REER movements largely reflect US dollar developments. - Credibility of the currency board arrangement supported by transparent rules, large fiscal and FX reserves, strong regulation and supervision, flexible economy, and prudent fiscal framework. - Potential Policy Responses - Gradual fiscal consolidation to secure balanced recovery and ensure external position remains broadly in line with fundamentals by raising public savings to offset stronger private investment. - Reforms to create a vibrant and well-regulated financial ecosystem. - Maintain policies supporting wage and price flexibility to ensure flexible REER adjustment and smooth functioning of the currency board arrangement. - Trade policies: resolve trade tensions, promote clarity and transparency, deepen economic integration, maintain open trading regime and pursue free trade agreements. - Foreign Asset and Liability Position and Trajectory - Background: - NIIP rose to 500 percent of GDP in 2024 from 460 percent in 2023. - Significant increase in gross assets (+36 percentage points of GDP); gross liabilities declined slightly (–3 percentage points of GDP). - Both gross assets and liabilities are high, reflecting international financial center status. - Change in NIIP (39.4 percentage points of GDP) exceeded the financial account balance (15.3 percent of GDP) in 2024. - Assessment: - Vulnerabilities low given positive sizable NIIP and favorable composition. - FX reserves large: 104 percent of GDP at end-2024. - Direct investments account for large share of gross assets and liabilities (36 and 55 percent, respectively); only 11 percent of gross liabilities are portfolio investments. - Key 2024 figures (% GDP): NIIP: 500; Gross Assets: 1,654; Debt Assets: 1 409; Gross Liab.: 1,154; Debt Liab.: 1 216 - Current Account - Background: - CA surplus rose to 12.9 percent of GDP in 2024 from 8.5 percent in 2023, reflecting significant increase in domestic savings (+4 percentage points of GDP) as household consumption declined. - Goods deficit narrowed from –4.2 to –0.5 percent, driven by increased exports to the Chinese mainland and other Asian markets. - Services inflows remained strong; tourism recovery hampered by slower growth in key markets. - Income balance rose strongly, driven by higher investment income flows, in part reflecting higher global interest rates in first half of the year. - CA projected to gradually decline over medium term as private domestic demand recovers. - Gross national savings projected to remain about 29 percent of GDP; investment projected to pick up by 3.8 percentage points of GDP by 2030, largely driven by higher private investment. - Assessment: - Cyclically adjusted CA surplus estimated at 12.8 percent of GDP in 2024, within IMF staff-assessed CA norm range of 12.7 to 13.8 percent (midpoint 13.3 percent). - Staff-assessed CA gap range between –1 to +0.1 percent of GDP, midpoint –0.5 percent. - CA norm estimated by applying EBA-estimated coefficients and adjusted for NIIP composition and measurement issues. - Key 2024 figures (% GDP): CA: 12.9; Cycl. Adj. CA: 12.8; EBA Norm: —; EBA Gap: —; Staff Adj.: —; Staff Gap: –0.5 - Real Exchange Rate - Background: - Under the currency board, REER dynamics determined by US dollar developments and inflation differentials. - REER appreciated by 2.4 percent in 2024 (NEER +2.1 percent; domestic inflation 1.7 percent). - In March 2025, REER appreciated further by 1.3 percent relative to 2024 average (NEER +1.1 percent; domestic inflation 1.2 percent). - Assessment: - IMF staff assesses REER gap, based on staff-assessed CA gap range, to be in range –0.2 to 3.1 percent, midpoint 1.5 percent (average CA-REER elasticity –0.32). - Capital and Financial Accounts - Background: - Open capital account; net outflow in non-reserve financial flows increased to 18.2 percent of GDP in 2024 from 10.8 percent in 2023, driven by net portfolio outflows. - Financial account typically very volatile reflecting conditions in Hong Kong SAR and the Chinese mainland, shifting US monetary policy expectations, and arbitraging in FX and rates markets. - Assessment: - Large financial resources, proactive supervision/regulation, and deep liquid markets help limit risks from volatile capital flows. - Greater financial exposure to Chinese mainland could pose risks through trade, tourism, bank credit exposures, and fundraising by Chinese firms. - Hong Kong SAR’s banking system, with high capital buffers and profitability, assessed to be broadly resilient to macro-financial shocks. - FX Intervention and Reserves Level - Background: - Hong Kong dollar traded smoothly within the Convertibility Zone in 2024; HKMA conducts FX operations as part of currency board. - Convertibility Undertaking not triggered in 2024 following $6.6 billion sold in 2023. - Total reserve assets $422 billion at end-2024 (1.7 times the monetary base); decreased to 104 percent of GDP from 111 percent of GDP at end-2023. - Fiscal reserves about 21 percent of GDP at end-2024. - Assessment: FX reserves adequate for precautionary purposes and should evolve with the automatic adjustment inherent in the currency board system. ### India - Overall Assessment - The external position during fiscal year 2024/25 (ending in March 2025) is assessed to be moderately stronger than the level implied by medium-term fundamentals and desirable policies. - External vulnerabilities from weakening external demand, geoeconomic fragmentation, and potentially volatile global financial conditions and commodity prices. - CA deficit projected to remain smaller than its estimated norm but converge to it over the medium term given development needs. - Trade and capital account regimes remain relatively restricted despite recent steps toward opening, weighing on exports and imports. - Potential Policy Responses - Near term: expected strengthening of private consumption will decrease the CA balance. - To facilitate external rebalancing: - Further reduce import restrictions, especially on intermediate goods. - Improve business environment to boost private investment and liberalize the FDI regime. - Develop trade infrastructure and expand trade networks. - Pursue industrial policies cautiously, narrowly targeted, minimizing trade and investment distortions. - Maintain exchange rate flexibility as main shock absorber; limit intervention to periods marked by destabilizing risk premiums. - Foreign Asset and Liability Position and Trajectory - Background: - By end-2024, India’s NIIP estimated to have improved to –9.6 percent of GDP, from –10.5 percent of GDP at end-2023, reflecting valuation changes and nominal GDP growth partly offsetting the CA deficit. - Gross foreign assets declined to about [content truncated in source]. - (No further information in the supplied content.) *International Monetary Fund | text - CHAPTER 3 2024 IndIvIdual EconoMy assEssMents* ### 27.9 percent of GDP (from 28.1 percent of GDP at the end of 2023), while gross foreign liabilities declined to about 37. ### India: External Sector Assessment (extract) ### Foreign Asset and Liability Position and Trajectory - Background: NIIP was 27.9 percent of GDP (from 28.1 percent of GDP at the end of 2023), while gross foreign liabilities declined to about 37.5 percent of GDP (from 38.6 percent of GDP at the end of 2023). The bulk of assets were in the form of official reserves and FDI, whereas liabilities included mostly debt and FDI. - Assessment: - With the CA deficit projected to remain below its norm in FY2024/25 and gradually widen toward it, the NIIP-to-GDP ratio is expected to decline modestly over the medium term as robust nominal GDP expansion mitigates the nominal NIIP decline resulting from the projected CA deficits. - India’s external debt liabilities are relatively low compared with its peers, and short-term rollover risks are limited. - The moderate level of foreign liabilities reflects India’s incremental approach to capital account liberalization. - Key statistics (2024, % GDP): - NIIP: –9.6 - Gross Assets: 27.9 - Debt Assets: 4.4 - Gross Liab.: 37.5 - Debt Liab.: 19.2 ### Current Account - Background: - The CA deficit is projected to have widened to about –0.8 percent of GDP in FY2024/25, from –0.7 percent of GDP in the previous year, driven by rising domestic demand for imports amid buoyant services exports. - Gross domestic investment: 33.4 percent of GDP. - Gross domestic savings: 32.6 percent of GDP. - Trade restrictions, while declining, still weigh on exports and imports. - The CA deficit is projected to increase to about –0.9 percent of GDP in FY2025/26, largely reflecting resilient domestic demand and a slowdown in external demand. - Over the medium term, the CA deficit is projected to widen to around its norm of –2 percent of GDP. - Assessment: - The EBA cyclically adjusted CA balance is projected at –0.6 percent of GDP in FY2024/25. - The EBA CA model estimates a norm of –2.0 percent of GDP, with a standard error of 0.7 percent. - IMF staff assesses the CA gap to be 1.4 percent of GDP, within a range of 0.7 to 2.1 percent of GDP. - Positive policy contributions to the CA gap stem mostly from the fiscal balance, while negative contributions come mostly from domestic private credit. - Key statistics (2024/25, % GDP): - CA: –0.8 - Cycl. Adj. CA: –0.6 - EBA Norm: –2.0 - EBA Gap: 1.4 - Staff Adj.: 0.0 - Staff Gap: 1.4 ### Real Exchange Rate - Background: - In the first half of 2024, the contained CA deficit and portfolio investment inflows—in part driven by India’s inclusion in the global bond indices—resulted in appreciation pressures on the rupee. - This reversed in the second half of 2024 when a strategic shift by international equity investors, a reassessment of the US monetary policy outlook, and elevated global uncertainty triggered portfolio investment outflows. - As of March 2025, the REER was about 2.7 percent below its 2024 average. - Assessment: - The IMF staff CA gap implies a REER gap of –7.9 percent (applying an estimated semi-elasticity of 0.18). - EBA REER index and level models suggest an overvaluation of 5.4 percent and 4.1 percent. - Consistent with the staff CA gap, staff project a REER gap in the range of –11.6 to –3.9 percent, with a midpoint of –7.9 percent, for FY2024/25. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - In FY2024/25, net FDI inflows are expected to have decreased to an almost zero balance, as steady gross inflows are offset by rising disinvestment and outward FDI. - Net portfolio investment inflows and outflows are also expected to be almost evenly balanced, reflecting large equity outflows in late 2024, despite India’s inclusion in global bond indices. - Other investments, reflecting mostly debt-creating inflows, are projected to remain steady at about 1.5 percent of GDP. - During the year, the Indian authorities widened the scope of government bonds available for foreign investors and relaxed FDI restrictions, which should help moderate the interest costs associated with financing the CA deficit. - Assessment: - The expected rebound in net FDI inflows is projected to cover more than half of the CA deficit over the medium term. - The compression of net FDI inflows in FY2024/25 warrants further structural reforms and improvement of the investment regime to promote FDI. - Volatile portfolio flows are sensitive to changes in global financial conditions and country risk premiums. - The inclusion of India in international bond indices has significantly increased foreign participation in India’s bond market (though from a low base) and supported net portfolio inflows that financed the CA deficit. ### FX Intervention and Reserves Level - Background: - Official FX reserves increased overall in FY2024/25. - The Reserve Bank of India’s FX interventions aimed to smooth market volatility that the authorities considered to be excessive and contributed to the rupee’s exchange rate stability. - Reserves increased from $646.4 billion at the end of FY2023/24 to $665.4 billion at the end of FY2024/25, reflecting increases through September followed by a decline in the following months on equity outflows. - Assessment: - At the end of FY2024/25, official FX reserves represented about 209 percent of short-term debt (on residual maturity), about 107 percent of the IMF’s composite metric, and over eight months of import coverage. - In view of India’s moderately strong external position, generally deep and liquid FX markets, limited FX mismatches, well-anchored inflation expectations, and adequate reserves, Integrated Policy Framework analysis indicates that FX interventions should be limited to periods marked by destabilizing risk premiums. *International Monetary Fund* ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMents ### Japan — Overall Assessment and Policy Responses - Overall Assessment: - The external position in 2024 is assessed as broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA surplus increased to 4.8 percent of GDP in 2024 from 3.8 percent in 2023; about half of the rise explained by an increase in the primary income balance. - Goods trade deficit has shrunk, supported by easing of cost pressures on goods import prices and rising yen-denominated export prices. - Japan’s CA surplus is expected to decline over the medium term, mainly driven by a smaller primary income surplus owing to an expected fall in the rate of return on its large stock of net foreign assets due to declining corporate profits and global interest rates. - Potential Policy Responses: - Focus on structural reforms and fiscal sustainability (a credible and specific medium-term fiscal consolidation plan) to maintain an external position consistent with medium-term fundamentals and desirable policies. - Shift economy drivers to private sector and raise potential growth over the medium term. - Priority: labor market and fiscal reforms that support private demand, raise potential growth, and promote digital and green investment. - Industrial policies: pursue cautiously and remain narrowly targeted to specific objectives where externalities or market failures prevent effective market solutions; aim to minimize trade and investment distortions. ### Japan — Foreign Asset and Liability Position and Trajectory - Background: - NIIP rose to 90 percent of GDP in 2024, from 80 percent at the end of 2023, significantly higher than the prepandemic (2016–19) average of 62 percent. - Driven by an increase in both net FDI and portfolio outflows and positive valuation effects from yen depreciation. - Japan holds the world’s largest stock of net foreign assets, valued at $3.6 trillion at the end of 2024. - Assessment: - Foreign asset holdings well diversified by geography and risk classes. - As of 2024, gross foreign assets largely comprised portfolio investment accounting for about 42 percent of the total, followed by FDI with 21 percent. - Of that portfolio investment, about 20 percent was denominated in yen and 56 percent was denominated in the US dollar. - Yen appreciation against the dollar could produce negative valuation effects. - Vulnerabilities associated with liabilities are contained; equity and direct investment account for about 35 percent of gross foreign liabilities. - NIIP generated a net annual investment income return of about 7.4 percent in 2024, larger than the prepandemic (2016–19) average of 6.2 percent. Improved return partly driven by increasing share of FDI in external assets. - Large positive NIIP partly related to asset accumulation for old-age consumption; gradual decumulation expected over the long term. - Key statistics (2024, % GDP): - NIIP: 89.8 - Gross Assets: 273.7 - Debt Assets: 115.8 - Gross Liab.: 183.9 - Debt Liab.: 111.4 ### Japan — Current Account - Background: - CA surplus reflects sizable income balance owing to large net foreign asset position. - CA surplus increased to 4.8 percent of GDP in 2024 from 3.8 percent in 2023. - Income balance improved from 6.1 percent in 2023 to 6.6 percent in 2024, reflecting increased overseas direct investment and effects of yen depreciation. - Goods trade balance improved from –1.1 to –0.6 percent of GDP but remains in deficit. - Offshoring of production has offset some positive impact of yen depreciation on exports; increasing competition in some export sectors. - Services balance broadly unchanged in 2024 after surge in inbound tourism in 2023. - Rising private savings rate in 2024 explains most of the increase in the current account. - Medium-term projection: CA balance projected to average 3.0 percent, below current levels, reflecting moderation in the income balance. - Assessment: - 2024 cyclically adjusted CA balance: 4.9 percent of GDP. - Cyclically adjusted CA norm: 4.3 percent (range between 3.2 and 5.5 percent of GDP). - 2024 CA gap midpoint: +0.6 percent of GDP (range between –0.5 and 1.7 percent). - EBA-identified policy gap: small (–0.4 percent of GDP), largely reflecting a positive credit gap in relation to medium-term desired policy. - Unexplained residual may reflect structural impediments and country-specific factors not in model (investment bottlenecks, entrepreneurship entry barriers, corporate savings distortions). - Key statistics (2024, % GDP): - CA: 4.8 - Cycl. Adj. CA: 4.9 - EBA Norm: 4.3 - EBA Gap: 0.6 - Staff Adj.: 0.0 - Staff Gap: 0.6 ### Japan — Real Exchange Rate - Background: - REER depreciated in 2024 by 5.4 percent, following a depreciation of similar magnitude in 2023, reflecting yen nominal depreciation due to wide interest rate differentials. - As of March 2025, REER appreciated by 4.1 percent relative to the 2024 average. - Assessment: - IMF staff CA gap implies a REER gap of –3.3 percent in 2024 (applying an estimated elasticity of 0.18). - EBA REER index and level models deliver gaps of –38.9 and –35.4 percent, respectively. - Staff assesses REER gap to be in the range of –9.6 to 3.0 percent, with a midpoint of –3.3 percent. ### Japan — Capital and Financial Accounts: Flows and Policy Measures - Background: - Financial account recorded net outflows in 2024, mirroring the CA surplus, and increased to 4.5 percent of GDP in 2024 from 4.2 percent in 2023. - Net FDI outflows of 4.8 percent of GDP driven by outward FDI flows to Asia, Europe, and North America. - Net portfolio outflows of 2.4 percent of GDP remained high following outflows of 4.7 percent in 2023, reflecting higher demand for foreign assets from domestic investors and lower demand for yen-denominated assets due to divergence of real interest rates. - Assessment: - Vulnerabilities are limited. - Inward investment tends to be equity based; home bias of Japanese investors is strong. - Outward spillovers from Japan’s policies to financial conditions in other economies are contained so far. ### Japan — FX Intervention and Reserves Level - Background: - Reserves stood at about $1.3 trillion, or about 32 percent of GDP, at the end of 2024; little changed since end-2023. - Assessment: - Exchange rate is free floating, although FX interventions occurred in April, May, and July of 2024. - FX interventions should be isolated and limited to addressing disorderly market conditions. --- ### Korea — Overall Assessment and Policy Responses - Overall Assessment: - The external position in 2024 was assessed to be broadly in line with the level implied by medium-term fundamentals and desirable policies. - Strong recovery of semiconductor exports significantly increased the CA surplus in 2024. - Surplus projected to moderate in the medium term as semiconductor cycle normalizes and demand in major trading partners declines. - Potential Policy Responses: - Increase fiscal space to meet aging-related needs. - Orderly deleveraging of private debt. - Boost innovation to maintain export competitiveness. - Diversify export destinations and supply chains to help keep external position in line with fundamentals. - Exchange rate flexibility, with intervention limited to preventing disorderly market conditions, to help absorb external shocks. - Industrial policies: remain narrowly targeted where externalities or market failures prevent effective market solutions and aim to minimize trade and investment distortions. ### Korea — Foreign Asset and Liability Position and Trajectory - Background: - NIIP positive since 2014 and significantly increased in past decade. - 2024 estimated nominal NIIP value: $1.1 trillion and NIIP-to-GDP ratio: 59 percent, increased significantly relative to 2023. - NIIP projected to rise further in 2025 and over medium term, to over 75 percent of GDP in 2030, on back of continued CA surpluses. - Assessment: - Large and positive NIIP supports external resilience. - Foreign asset holdings diversified, with 40 percent in equity or debt securities. - About 60 percent of foreign assets denominated in US dollars, implying won depreciation against the dollar can have large positive valuation effects in aggregate. - Structure of liabilities limits vulnerabilities: direct investment and long-term loans together account for 57 percent of total liabilities and 65.7 percent of liabilities denominated in Korean won. - Key statistics (2024, % GDP): - NIIP: 59.0 - Gross Assets: 133.6 - Debt Assets: 57.1 - Gross Liab.: 74.7 - Debt Liab.: 35.8 ### Korea — Current Account - Background: - CA surplus increased from 1.8 percent of GDP in 2023 to 5.3 percent in 2024, mainly driven by rebound in semiconductor exports. - From a saving-investment perspective, a significant drop in the investment rate drove the increase in surplus in 2024 despite a moderate increase in the saving rate. - Since the pandemic, CA developments driven significantly by the global semiconductor cycle. - Semiconductor exports fell by about 2 percent of GDP in 2023 and recovered strongly, up by 44 percent in 2024. - Medium-term projection: CA projected to be around 4 percent of GDP by 2030, reflecting need to build precautionary savings for aging and orderly private debt deleveraging. - Assessment: - EBA CA model estimates cyclically adjusted CA at 5.5 percent of GDP. - IMF staff estimates CA norm at 4.7 percent of GDP, with a standard error of 0.9 percent of GDP. - 2024 CA gap midpoint estimated at 0.8 percent of GDP, with a range of –0.1 to 1.7 percent of GDP. - Net contribution of relative policy gap is 1.1 percent of GDP (contribution from lower health spending and tighter fiscal stance outweighing a more positive credit gap). - Key statistics (2024, % GDP): - CA: 5.3 - Cycl. Adj. CA: 5.5 - EBA Norm: 4.7 - EBA Gap: 0.8 - Staff Adj.: 0 - Staff Gap: 0.8 ### Korea — Real Exchange Rate - Background: - REER depreciated by 2.2 percent in 2024 on average relative to 2023, reversing nearly all the appreciation in 2023. - Depreciation in 2024 mainly driven by won depreciation against US dollar and Chinese Yuan. - As of March 2025, REER had depreciated by about 5.4 percent relative to 2024 average. - Assessment: - EBA CA gap implies a REER undervaluation of 2.4 percent (applying an estimated elasticity of 0.33). - EBA REER index model estimates undervaluation of 6.5 percent; EBA level model estimates 7.2 percent undervaluation. - Staff assesses REER gap to be in range of –5.1 to 0.3 percent, with midpoint about –2.4 percent. ### Korea — Capital and Financial Accounts: Flows and Policy Measures - Background: - Net capital outflows, on declining trend since 2016, estimated to rebound to 5 percent of GDP in 2024 from 2 percent of GDP in 2023. - Net FDI and portfolio outflows picked up by 1.8 percent and 2.7 percent of GDP, reflecting increased residents’ outbound investment and reduction of inflows. - Assessment: - Korea demonstrated resilience amid multiple global shocks, weathering short-term capital flow volatility. - Inclusion of Korea’s government bonds in the World Government Bond Index should lead to higher capital inflows from a diversified investor base. - Present configuration of capital flows appears sustainable over medium term, mirroring projected increase in CA surplus and NIIP. ### Korea — FX Intervention and Reserves Level - Background: - Korea has a floating exchange rate; FX intervention since 2015 has been two-sided. - 2024 FX intervention slightly increased from net sales $9.6 billion (0.5 percent of GDP) in 2023 to $11.2 billion (0.6 percent of GDP) in 2024, mostly during periods of heightened exchange rate volatility. - As of end-2024, reserves stood at $416 billion, lower than year-earlier $420 billion. - Assessment: - Exchange rate volatility generally does not pose significant economic challenges given limited currency mismatches and manageable pass-through to consumer prices. - FX market depth higher than most emerging markets but lags advanced economy peers; periods of high global uncertainty could see herding behavior and sharp FX movements. - Intervention should remain limited to preventing disorderly market conditions. - Recently introduced FX market reforms expected to deepen FX markets and improve efficiency and resilience. - As of end-2024, FX reserves were about 22 percent of GDP, 2.1 times short-term debt, 6.4 months of imports, or 13 percent of M2. - Systemwide stress tests show reserves provide sufficient FX liquidity buffers under a wide range of plausible shocks. *International Monetary Fund | text - CHAPTER 3 2024 IndIvIdual EconoMy assEssMents* ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMents ### Malaysia — Overall Assessment and Policy Responses - Overall Assessment: Malaysia’s external position in 2024 is assessed to be moderately stronger than the level implied by medium-term fundamentals and desirable policies. - Short-run developments: After falling in 2023 amid a challenging external environment, the current account surplus fell slightly in 2024 as higher intermediate and capital goods imports outweighed higher exports due to an upturn in the global semiconductor cycle. - Medium-term projection: The current account surplus is projected to increase slightly as the services balance benefits from a continuing recovery in tourism. - Potential Policy Responses: - Near-term: Preserve exchange rate flexibility to facilitate external adjustments driven by fundamentals. - Medium-term: Strengthen social safety nets and public health care, including through a reorientation of fiscal spending, to reduce precautionary household savings and shift toward private consumption. - Structural policies: Implement measures to encourage private investment and improve productivity growth. - Industrial policy: Remain narrowly targeted to specific objectives where market solutions cannot deliver because of externalities or other market imperfections; avoid discriminatory measures that distort trade and investment flows. ### Malaysia — Foreign Asset and Liability Position and Trajectory - Background: - Malaysia’s NIIP has averaged about 2.6 percent of GDP over the last decade, increasing to 5.4 percent at the end of 2023, supported by strong current account surpluses during the pandemic that helped increase reserve assets. - The NIIP declined to –0.6 percent of GDP at the end of 2024 because of an increase in direct and portfolio investment liabilities. - Total external debt increased to 69.7 percent of GDP at the end of 2024, compared to 68 percent at the end of 2023, and remains manageable. - One-third of external debt is ringgit-denominated, and so not exposed to valuation risks. - Short-term external debt accounts for 42.8 percent of external debt; most is intragroup borrowing or trade credits. - Assessment: NIIP is expected to increase over the medium term, supported by projected CA surpluses. Balance sheet strength, exchange rate flexibility, and increased domestic investor participation support resilience to a variety of shocks. - 2024 (% GDP) key positions: - NIIP: –0.6 - Gross Assets: 128.2 - Debt Assets: 26.8 - Gross Liab.: 128.8 - Debt Liab.: 40.3 ### Malaysia — Current Account - Background: - CA surplus averaged 2.9 percent over the last five years, supported by robust external goods demand. - The current account surplus decreased to 1.4 percent in 2024, from 1.5 percent in 2023, as strong exports driven by a recovery in demand for electrical and electronic products was offset by higher capital goods imports. - Declining trend over past five years reflects a narrowing saving-investment gap driven by increased private investment and decline in public savings. - CA surplus expected to grow slightly over the medium term as tourism recovers, improving the services balance. - Assessment: - EBA CA model estimates: cyclically adjusted CA balance of 1.9 percent of GDP and a norm of –0.1 percent, implying a model-assed CA gap of 1.9 percent. - Staff-assessed CA gap: range of 1.4 to 2.4 percent, midpoint 1.9 percent. - Relative policy gaps contributing to excess surplus: weaker social safety nets (proxied by health care expenditure) +0.4 percent; looser fiscal policies abroad +0.5 percent; stronger credit growth –0.2 percent. - 2024 (% GDP) key CA metrics: - CA: 1.4 - Cycl. Adj. CA: 1.9 - EBA Norm: –0.1 - EBA Gap: 1.9 - Staff Adj.: 0.0 - Staff Gap: 1.9 ### Malaysia — Real Exchange Rate - Background: - Ringgit appreciated by 4 percent against the US dollar in 2024 after depreciation pressures in the previous two years. - Real exchange rates rose about 1.1 percent and the nominal effective exchange rates rose about 1.6 percent in 2024. - REER remains about 5 percent below the NEER, reflecting lower inflation in Malaysia compared to trading partners over that period. - As of March 2025, the REER was 3.7 percent above its 2024 average. - Assessment: - Using a semi-elasticity of 0.51, the staff-assessed CA gap implies a REER undervaluation of 3.7 percent in 2024. - REER index and level models estimate Malaysia’s REER to be undervalued by 27.9 percent and 30.6 percent, respectively. - Staff assesses REER undervaluation in a range of 2.7 to 4.8 percent, with a midpoint of 3.7 percent. ### Malaysia — Capital and Financial Accounts: Flows and Policy Measures - Background: Periods of significant capital flow volatility driven by portfolio flows in and out of the local-currency debt market, responding to global financial conditions and domestic factors. - Assessment: - Exchange rate flexibility and macroeconomic policy adjustments should play the central role in responding to capital flow volatility. - Capital flow management (CFM) measures should be gradually phased out, with due regard for market conditions. ### Malaysia — FX Intervention and Reserves Level - Background: - Gross international reserves increased to $116.2 billion at the end of 2024 from $113.5 billion at the end of 2023. - Assessment: - Based on the IMF’s composite reserve adequacy metric (ARA), reserves at the end of 2024 were about 105.4 percent of the ARA metric, lower than 114.9 percent at the end of 2023 but above the 100 percent adequacy threshold. - Decline driven by higher increases in export revenues, broad money, and short-term external debt relative to reserve increases. - Reserve coverage projected to equal about 4.8 months of prospective imports, or about 70 percent of short-term debt. - Staff assesses Bank Negara Malaysia engaged in largely two-sided FX interventions over the year. - Role for FX interventions: address disorderly market conditions and smooth large changes in hedging and financing premia in Malaysia’s shallow FX market; not a substitute for policy adjustment nor to lean against fundamentals-driven exchange rate pressures. --- ### Mexico — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2024 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - 2024 CA development: CA deficit held steady at 0.3 percent of GDP in 2024, reflecting the stable trade balance and robust secondary income driven by remittances. - Medium-term projection: CA deficit is expected to widen moderately in 2025 and hover around a deficit of 1 percent of GDP over the medium term. - Potential Policy Responses: - Further structural reforms to boost investment in the medium to long term: tackle infrastructure and governance gaps, reduce informality, promote financial deepening, increase private sector participation in the energy sector. - Trade policy: seek to resolve trade tensions, promote clarity and transparency, deepen economic integration. - Exchange rate policy: maintain floating exchange rate as shock absorber; use FX interventions only in exceptional circumstances to counter disorderly market conditions. - Maintain fiscal sustainability to buttress external stability. - Note: IMF’s Flexible Credit Line with Mexico provides an added buffer against global tail risks. ### Mexico — Foreign Asset and Liability Position and Trajectory - Background: - NIIP stood at –32 percent of GDP in 2024, improving from –42 percent in 2023, and compared to the –45 percent average during 2019–23. - Main driver of change: valuation adjustments from peso depreciation reducing the market value of liabilities in US dollar terms. - Foreign assets in 2024: mostly direct investment (14 percent of GDP) and international reserves (12½ percent). - Foreign liabilities: direct investment (42 percent of GDP) and portfolio investment (25¼ percent). - IMF staff projects NIIP to slightly improve over the medium term to about –30 percent of GDP. - Assessment: - NIIP remains sustainable; relatively high share of local-currency denomination in foreign public liabilities limits FX risks. - Gross foreign portfolio liabilities could be a vulnerability in times of global financial distress, though foreign holdings in local debt markets have fallen considerably. - Exchange rate volatility vulnerabilities moderate; most Mexican firms with FX debt have natural hedges and actively manage FX exposures. - 2024 (% GDP) key positions: - NIIP: –32 - Gross Assets: 43 - Debt Assets: 13 - Gross Liab.: 75 - Debt Liab.: 32 ### Mexico — Current Account - Background: - CA deficit was 0.3 percent of GDP in 2024, similar to 2023, reflecting a stable trade balance and robust secondary income surplus driven by remittances. - Expansion of the primary income deficit (increased retained earnings paid to foreign firms) was offset by improvements in the service balance (lower service imports). - CA deficit expected to widen moderately in 2025, with projection subject to uncertainty from trade tensions and US migration policies. - Medium term: CA projected to hover around a deficit of 1 percent of GDP. - Assessment: - EBA model estimates a cyclically adjusted CA balance of 0.1 percent of GDP and a cyclically adjusted CA norm of –1.3 percent of GDP. - IMF staff estimates the 2024 CA gap midpoint at 1.3 percent of GDP, range 0.9 to 1.7 percent of GDP. - Overall contribution from identified policy gaps: –0.1 percent of GDP (negative from credit gap largely offset by positive contributions from other policy gaps, primarily health expenditure). - Fiscal policy gap contribution: 0 (Mexico’s fiscal policy gap similar to the rest of the world). - A large residual may reflect country-specific or policy distortions not included in the model. - 2024 (% GDP) key CA metrics: - CA: –0.3 - Cycl. Adj. CA: 0.1 - EBA Norm: –1.3 - EBA Gap: 1.3 - Staff Adj.: 0 - Staff Gap: 1.3 ### Mexico — Real Exchange Rate - Background: - Peso displayed a modest average depreciation of 3 percent against the US dollar in 2024 compared to 2023, with end-of-period change nearly 20 percent due to sharper depreciation in the second half of 2024. - As of March 2025, the REER stood about 9 percent lower than its 2024 average. - Assessment: - IMF staff CA gap implies a REER undervaluation of 4.1 percent in 2024 (semi-elasticity 0.33). - EBA REER index and level models point to overvaluations of 5.7 percent and 24.3 percent. - Staff’s overall 2024 REER assessment: undervaluation in the range of 2.9 to 5.3 percent, midpoint 4.1 percent. ### Mexico — Capital and Financial Accounts: Flows and Policy Measures - Background: - Net financial account inflows in 2024 were 0.2 percent of GDP, slightly lower than 0.3 percent in 2023. - Net FDI inflows stable at about 1.7 percent of GDP, partially offsetting net portfolio outflows (0.4 percent of GDP) and other investment outflows (0.7 percent), and reserve accumulation. - Assessment: - Long maturity of sovereign debt and high share of local-currency-denominated debt reduce government exposure to FX depreciation and refinancing risks. - Banking sector is resilient; FX risks of nonfinancial corporate debt generally covered by natural and financial hedges. ### Mexico — FX Intervention and Reserves Level - Background: - Authorities committed to a free floating exchange rate and used FX intervention only on limited occasions; no FX intervention was conducted in 2024. - Gross international reserves at end-2024: $232 billion (12½ percent of GDP), up from $214 billion at end-2023. - Assessment: - Reserves at end-2024 were 128½ percent of the ARA metric and 317 percent of short-term debt (at remaining maturity), and remain adequate. - IMF staff recommends maintaining adequate reserves over the medium term. - Flexible Credit Line arrangement provides an additional buffer. *Source: CHAPTER 3 2024 IndIvIdual EconoMy assEssMents (text - CHAPTER 3 2024 IndIvIdual EconoMy assEssMents).* ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMents ### The Netherlands — Overall assessment and policy responses - Overall Assessment: The external position in 2024 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. The Netherlands’ status as a global trading hub, financial center, and host country for multinational corporations (MNCs)—complicates the external assessment, in particular because of the large and volatile primary income flows and measurement issues of portfolio equity retained earnings of MNCs. In 2024, the external CA surplus remained stable at 9.9 percent of GDP as in 2023. In the medium term, the CA surplus is expected to remain sizable, reflecting lower than desirable investment, and structurally high private saving despite population aging. - Potential Policy Responses: - Boost public investment and foster private investment in infrastructure and housing. - Address growth bottlenecks from nitrogen and electricity grid congestion. - National and EU trade policies should reduce trade barriers, minimize non-tariff barriers that restrict exports, and deepen regional, plurilateral, or multilateral economic integration. ### The Netherlands — Foreign asset and liability position and trajectory - Background: - Data refinements by Statistics Netherlands as part of its 5-year benchmark revisions resulted in significantly lower net direct and portfolio investment and downward revision of the NIIP from 71.8 percent to 52.9 percent of GDP in 2023. - The NIIP increased to 59.6 percent of GDP in 2024. The increase was mainly driven by positive net transactions and price and exchange rate effects that affected the net stock of portfolio investments. - FDI remains the largest component of the IIP, accounting for more than half of external assets and liabilities. - Debt liabilities composition: long-term debt securities 54 percent (of which 68 percent are denominated in euro and 23 percent are denominated in US dollars), currency and deposits 27 percent (of which 62 percent are denominated in euro), and long-term loans 6 percent. - Assessment: The Netherlands’ safe-haven status and its sizable foreign assets limit risks from its large foreign liabilities. - Key 2024 (% GDP) figures: - NIIP: 59.6 - Gross Assets: 888.7 - Debt Assets: 220.5 - Gross Liab.: 829.1 - Debt Liab.: 240.4 ### The Netherlands — Current account - Background: - In 2024, the CA surplus is estimated to have remained stable at 9.9 percent of GDP (10.1 percent of GDP cyclically adjusted) as in 2023. - Goods and services balance improved by 0.9 percentage point of GDP to 12.1 percent of GDP in 2024—the result of a larger decline in imports than exports—offset by primary and secondary income balance decreases by 0.6 and 0.3 percentage points of GDP, respectively. - Public net saving rebounded with phasing out of most support measures to cushion the energy price shock and under-execution of investment. - Private net saving remained robust supported by a strong labor market and high wage growth, despite significantly lower financial sector corporate saving. - Measurement biases of portfolio equity retained earnings may contribute to an overstatement of net accumulation of wealth attributed to Dutch residents. - The CA surplus is projected to remain large at 10.2 percent of GDP in 2025. - Assessment: - EBA CA model estimates a CA norm of 3.8 percent of GDP, against a cyclically adjusted CA surplus of 10.1 percent of GDP in 2024, implying an EBA CA gap of 6.2 percent of GDP. - Policy gaps account for 4.1 percentage points of the CA gap, primarily reflecting a relatively tighter fiscal stance and a negative credit gap. - The portfolio retained earnings bias is assessed at –2.2 percent of GDP. - Overall IMF staff assesses the CA gap to be in the range of 3.5 to 4.5 percent of GDP, with a midpoint of 4.0 percent of GDP, partly reflecting strong saving from the second-pillar retirement program. - Key 2024 (% GDP) figures: - CA: 9.9 - Cycl. Adj. CA: 10.1 - EBA Norm: 3.8 - EBA Gap: 6.2 - Staff Adj.: –2.2 - Staff Gap: 4.0 ### The Netherlands — Real exchange rate - Background: - The annual average CPI-based REER appreciated by 1.2 percent in 2024. The ULC-based REER depreciated by 0.4 percent. - As of March 2025, the CPI-based REER (ULC-based REER) was 1.2 percent (0.4 percent) above its 2024 average. - Assessment: - Assuming a semi-elasticity of the CA balance to the REER of 0.65, the IMF staff CA gap of 4.0 percent of GDP implies a REER undervaluation in the range of 5.4 to 7.0 percent, with a midpoint of 6.2 percent. - EBA REER model estimates for 2024 range from an overvaluation of 6.2 percent (level model) to 19.1 percent (index model). - IMF staff assesses the REER to be undervalued by about 5.4 to 7.0 percent, with a midpoint of 6.2 percent. ### The Netherlands — Capital and financial accounts; FX intervention and reserves - Capital and financial accounts: - About 20 percent of gross foreign assets and liabilities are attributable to special-purpose entities. - A notable part of capital outflows represents channeling of corporate profits by multinationals abroad as FDI. - Assessment: The strong external position limits vulnerabilities to capital outflows. The financial account deficit is likely to remain as it is primarily the flip side of a CA recording sustained—and structural—surpluses. - FX intervention and reserves: - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency floats freely. ### Poland — Overall assessment and policy responses - Overall Assessment: The external position in 2024 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. The CA registered a small surplus of 0.2 percent of GDP in 2024, down substantially from 1.8 percent in 2023, driven by weaker trading partners’ demand and the continued domestic economic recovery. Stronger consumption, the lagged impact of significant and persistent REER appreciation, the release of EU funds, and subdued external demand are expected to reduce the CA balance to –1.6 percent of GDP over the medium term. The CA gap will narrow but likely remain positive in view of Poland’s structurally low investment-to-GDP compared to peer emerging markets. - Potential Policy Responses: - Disinflation coupled with continued wage deceleration to open scope for gradual monetary policy normalization supporting private investment. - Ease regulatory hurdles to private investment to catalyze investment and financing additional to the NextGenerationEU grants. - Deploy industrial policies cautiously and coordinated at the EU level, targeted where externalities or market failures exist, and avoid favoring domestic producers over imports. ### Poland — Foreign asset and liability position and trajectory - Background: - The negative NIIP has declined markedly over the past decade, transitioning toward more stable FDI. - The NIIP rose to –28.2 percent of GDP in 2024 from –33.8 in 2023. - Gross external debt declined to 50.2 percent of GDP in 2024 from 52.7 percent in 2023. - Assessment: - External debt level has declined substantially; rollover risk mitigated by about 70 percent of total debt being long-term and about 30 percent being intercompany lending. - Gross reserves at 162 percent of short-term debt are adequate and reduce residual rollover risk. - Key 2024 (% GDP) figures: - NIIP: –28.2 - Gross Assets: 59.5 - Reserve Assets: 24.4 - Gross Liab.: 87.6 - Gross External Debt: 50.2 ### Poland — Current account - Background: - CA recorded a small surplus of 0.2 percent of GDP in 2024, from 1.8 percent in 2023. The decline was driven by the domestic economic recovery, normalization of the inventory cycle, and weaker demand from major trading partners. - CA balance is expected to go into deficit territory in 2025 and converge toward a deficit of 1.6 percent over the medium term due to robust consumption growth, sustained EU fund inflows, and increased military spending. - Assessment: - EBA CA model estimates a CA norm of –1.7 percent of GDP compared with a cyclically adjusted CA surplus of 0.2 percent of GDP in 2024, implying an EBA model CA gap between 1.5 and 2.4 percent of GDP, with a midpoint of 1.9 percent of GDP. - Policy gaps of 1.2 percent of GDP and an unexplained residual of 0.8 percent of GDP comprise the gap. - Staff estimates that desirable policies will help narrow the policy gap over the medium term. - Key 2024 (% GDP) figures: - CA: 0.2 - Cycl. Adj. CA: 0.2 - EBA Norm: –1.7 - EBA Gap: 1.9 - Staff Adj.: 0.0 - Staff Gap: 1.9 ### Poland — Real exchange rate - Background: - The NEER and the CPI-based REER both appreciated by 7.5 percent in 2024 relative to 2023. - As of March 2025, the CPI-based REER was 3.8 percent above its 2024 average. - Assessment: - IMF staff CA gap implies a REER gap of –4.8 percent in 2024 with an estimated elasticity of 0.4. - EBA REER index model estimates a REER gap of 16.3 percent; the REER level model estimates –15.6 percent. - Staff’s overall assessment: REER gap in the range of –5.9 to –3.7 percent, with a midpoint of –4.8 percent. ### Poland — Capital and financial accounts; FX intervention and reserves - Capital and financial accounts: - Capital account balance broadly stable at 0.3 percent of GDP in 2024, from 0.2 percent in 2023. - Capital account surplus projected to increase to 1.1 percent of GDP in 2025 and 2026, supported by inflows of EU funds. - Financial account experienced a net inflow of 0.8 percent of GDP in 2024. Net FDI inflow was 1.2 percent of GDP in 2024, down from 2.4 percent in 2023. - Assessment: Capital account projected to remain a strong source of support for investment; vulnerability to capital outflows is contained; central bank has adequate tools to manage volatility. - FX intervention and reserves: - Background: - FX reserves increased to $223 billion in 2024 from $194 billion in 2023. - Net reserves stood at about $197 billion in 2024 from $167 billion in 2023. - No FX intervention was conducted in 2023 and 2024. The zloty is considered free floating. - Assessment: At about 156 percent of the IMF’s reserve adequacy metric, Poland’s level of gross reserves is adequate to guard against external shocks and disorderly market conditions. ### Russia — Overall assessment and foreign asset and liability trajectory (partial) - Overall Assessment: Based on the EBA current account model and available data, Russia’s external position in 2024 would appear to be broadly in line with the level implied by medium-term fundamentals and desirable policies. However, the models do not fully account for Russia’s idiosyncratic situation and data uncertainties. Due to sanctions, current account surpluses may not translate into an accumulation of readily accessible foreign assets in reserve currencies. The range of uncertainty surrounding the projections remains exceptionally large in the context of shifting sanctions and global economic developments. - Foreign Asset and Liability Position and Trajectory (partial Background): - Russia’s NIIP rose to 43.6 percent of GDP at the end of 2024, an increase of 2.0 percentage points of GDP from its 2023 level. *International Monetary Fund | text - CHAPTER 3 2024 IndIvIdual EconoMy assEssMents* ### 41.6 percent. In 2024, gross assets declined by 4.3 percentage points of GDP, moving further away from the peak of 105.4 ### text - 41.6 percent. In 2024, gross assets declined by 4.3 percentage points of GDP, moving further away from the peak of 105.4 ### Russia — Foreign Asset and Liability Position and Trajectory - Gross assets declined by 4.3 percentage points of GDP in 2024, moving further away from the peak of 105.4 percent of GDP in 2020. - Gross liabilities fell to 27.5 percent of GDP in 2024, down from 33.9 percent of GDP in 2023. - At end-2024: - Share of external debt held in domestic currency: remained stable at about one-third. - No obvious maturity mismatches between gross asset and liability positions. - Share of nonresident holdings of domestic government debt: declined from 32.2 percent at end-2019 to 4 percent by end-2024. - 2024 (% GDP) key statistics: - NIIP: 43.6 - Gross Assets: 71.2 - Reserve Assets: 28.0 - Gross Liab.: 27.5 - Debt Liab.: 11.0 - Assessment: - Recurring positive current account surpluses continue to bolster Russia’s NIIP and contribute to accumulation of external buffers. - Despite low external vulnerabilities at present, a share of international reserves is currently immobilized due to sanctions and additional reserves accumulation in traditional reserve currencies is hampered. ### Russia — Current Account - Background: - CA surplus widened to 2.9 percent of GDP in 2024 aided by an export-led rebound in the trade balance. - Energy exports increased in part due to slightly higher volumes of oil and gas exports. - The CA is projected to decline to 1.6 percent of GDP in 2025, weighed down by falling oil prices and a slowing global economy; projection subject to high uncertainty, including data uncertainty. - Assessment: - EBA CA model estimates: - Norm for 2024: 2.6 percent of GDP - Cyclically adjusted CA surplus for 2024: 2.9 percent of GDP - Identified policy gaps account for 0.7 percentage points (about half driven by fiscal balance gap and reflects larger consolidation needs in the rest of the world compared with Russia). - Unexplained residual accounts for –0.5 percentage points. - Range of uncertainty surrounding the CA gap estimates remains exceptionally large due to difficulty estimating cyclically adjusted CA and CA norm amid sanctions. - 2024 (% GDP) key statistics: - CA: 2.9 - Cycl. Adj. CA: 2.9 - EBA Norm: 2.6 - EBA Gap: 0.3 - Staff Adj.: 0.0 - Staff Gap: 0.3 ### Russia — Real Exchange Rate - Background: - Ruble appreciated by 1.3 percent in 2024, partly due to sanctions pressures and shift in trade patterns. - Bank of Russia raised policy rate by an additional 500 basis points in several steps, reaching 21 percent by October 2024. - BoR maintained repatriation and surrender requirements of export proceeds and extended FX controls. - REER depreciated by 10 percent between end-2023 and July 2024, reversed losses by December 2024, ending just 1 percent lower for the year. - As of March 2025, the REER was 7.6 percent above the 2024 average. - Assessment: - EBA REER index model suggests a REER undervaluation for 2024 of 23.8 percent. - EBA REER level model points to a 44.6 percent undervaluation. - IMF staff assesses the REER gap to be in the range of –6.9 to 3.4 percent, with a midpoint of –1.7 percent (undervalued), assuming an estimated elasticity of 0.16. - Models do not fully account for Russia’s idiosyncratic situation amid successive rounds of sanctions, contributing to large residual. ### Russia — Capital and Financial Accounts: Flows and Policy Measures - Background: - Capital control measures introduced in early 2022 were subsequently relaxed, but restrictions on repatriation of foreign investment (including FDI), restrictions on cash FX withdrawals from bank accounts, and cash exports remain in place. - Net private capital outflows increased modestly from 2.0 percentage points of GDP in 2023 to 2.4 percentage points in 2024. - Assessment: - Russia’s large FX reserves and floating exchange rate regime help absorb shocks. - Remaining capital controls effectively curtailed capital outflows and helped preserve buffers despite sanctions. ### Russia — FX Intervention and Reserves Level - Background: - Official reserves increased by $10.5 billion to $609.1 billion in 2024 (of which about $300 billion are immobilized), mainly due to revaluation effects. - Sanctions continue to constrain reserves accumulation despite recurrent CA surpluses. - BoR implemented additional FX interventions to support the ruble, including mirroring withdrawals from the National Wealth Fund related to the NWF’s investment in domestic assets and suspension of FX purchases prescribed by the 2023 fiscal rule. - Since January 2023, BoR resumed buying and selling FX, but only in the Chinese renminbi; transactions in traditional reserve currencies are prohibited by sanctions. - The 2023 fiscal rule set the benchmark oil and gas revenues (in rubles); when revenues exceeded the benchmark (in rubles), authorities were required to purchase FX. In 2024, the Ministry of Finance announced reverting to an earlier (benchmark oil price-based) version of the fiscal rule, which became binding in the 2025 budget. - Assessment: - At end-2024, international reserves stood at 318 percent of the IMF’s reserve adequacy metric (about 180 percent of the ARA metric excluding immobilized reserves). - Given substantial share of international reserves immobilized due to sanctions, assessment of reserve adequacy is subject to high uncertainty. *International Monetary Fund, 2025 External Sector Report (excerpts for Russia and Saudi Arabia).* ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMents ### Singapore - Overall Assessment: - The external position in 2024 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. - Assessment is subject to a wide range of uncertainty, reflecting Singapore’s open economy and status as a global trading and financial center. - Over the medium term, the CA surplus is projected to narrow gradually alongside higher public spending, stronger social safety nets, and an increase in household consumption as the share of the prime working age population actively saving for retirement declines. - Potential Policy Responses: - Planned execution of major high-quality and resilient infrastructure projects and continued strengthening of social safety nets should help reduce external imbalances in the near term. - Higher public investment is expected to catalyze private investment. - Over the medium term, higher public investment on health care, green and other physical infrastructures, and human capital, together with reforms strengthening social safety nets, would help reduce external imbalances by reducing net saving in both the public and private sectors. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP stood at 146.9 percent of GDP in 2024, down from 179.3 percent in 2023 and below the 224.7 percent average during 2019–23. - Gross assets and liabilities are high; over half (53.5 percent) of foreign liabilities are in FDI, and about one-fifth are in currency and deposits. - The CA surplus has been a main driver of the NIIP since the global financial crisis. In 2024, valuation effects drove an NIIP decline, mainly because the NEER appreciated under the exchange-rate-based monetary policy of the Monetary Authority of Singapore (MAS). - CA and growth projections imply that the NIIP will rise over the medium term. - The large positive NIIP in part reflects private savings accumulated in foreign assets for old-age consumption, which are expected to be gradually unwound over the long term. - Assessment: - Large gross non-FDI liabilities (433.9 percent of GDP in 2024)—predominantly cross-border deposit taking by foreign bank branches—present some liquidity risks, but these are mitigated by large gross asset positions, banks’ large short-term external assets, and the authorities’ close monitoring of banks’ liquidity risk profiles. - Singapore has large official reserves and other official liquid assets. - Key statistics (2024, % GDP): - NIIP: 146.9 - Gross Assets: 1079.9 - Res. Assets: 68.1 - Gross Liab.: 932.9 - Debt Liab.: 319.1 - Current Account: - Background: - CA surplus was 17.5 percent of GDP in 2024, down from 17.7 percent in 2023, mainly reflecting a decline in the goods surplus from lower goods exports. - CA balance is broadly in line with the average of 17.4 percent since 2018 and lower than the post-global-financial-crisis peak of 22.9 percent in 2010. - Large CA balance reflects significant private and public sector savings surpluses, which in 2024 manifested as a strong goods balance and a small surplus in the services balance partly offset by a deficit in the income account balance. - Structural factors and policies that boost saving include Singapore’s status as a financial center, consecutive fiscal surpluses in most years, rapid aging, and a mandatory defined-contribution pension program (assets worth about 83.3 percent of GDP in 2024). - CA surplus is projected to narrow over the medium term as a result of increased infrastructure and social spending. - In 2024, public saving increased as the fiscal balance improved with stronger-than-anticipated economic activity, while private saving dipped. - Assessment: - Guided by the EBA framework, IMF staff assesses the 2024 CA gap to be in the range of 3.1 to 7.1 percent of GDP, with a midpoint of 5.1 percent. - Identified policy gaps in 2024 reflect Singapore’s more contractionary fiscal policy compared to the rest of the world, as well as a large, negative credit gap. - Key statistics (2024, % GDP): - CA: 17.5 - Cycl. Adj. CA: 18.0 - EBA Norm: – - EBA Gap: – - Staff Adj: – - Staff Gap: 5.1 - Real Exchange Rate: - Background: - Singapore dollar has appreciated notably since 2000. - REER appreciated by 2.9 percent in 2024 reflecting the appreciation of the NEER by 2.4 percent. - This followed a cumulative REER appreciation of 13.5 percent and NEER appreciation of 5.3 percent between 2020 and 2023. - As of March 2025, the REER was 0.2 percent above its 2024 average. - Assessment: - Consistent with the IMF staff CA gap, staff assesses the REER to be undervalued in the range of 6.2 to 14.2 percent, with a midpoint of 10.2 percent in 2024 (applying an estimated elasticity of 0.5). - Capital and Financial Accounts: Flows and Policy Measures: - Background: - Singapore has an open capital account. - As a trade and financial center, changes in market sentiment can affect Singapore significantly. - The financial account balance reflects reinvestment abroad of income from official foreign assets, sizable net inward FDI and smaller, more volatile net bank-related flows. - In 2024, the capital and financial account featured lower outflows of 12.0 percent of GDP, compared to 41.1 percent in 2022 (outflows ranged from 4.8 to 41.1 percent in 2021–23). - Assessment: - The financial account is likely to remain in deficit as long as the trade surplus remains large. - FX Intervention and Reserves Level: - Background: - With the NEER as the intermediate monetary policy target, intervention is undertaken to achieve inflation and output objectives, making net FX purchases endogenous to monetary policy. - Aggregate data on foreign exchange intervention operations has been published since April 2020 (with a six-month lag). - In the first half of 2024, net FX purchases increased to $25 billion, up from $12 billion in the first half of 2023 but broadly in line with the $24 billion of interventions in the second half of 2023. - Official reserves held by MAS reached $384 billion (70.1 percent of GDP) in 2024. - Assessment: - In addition to FX reserves held by MAS, Singapore also has access to other official foreign assets managed by Temasek and GIC. - The current level of official external assets appears adequate, and there is no clear case for further accumulation for precautionary purposes. --- ### South Africa - Overall Assessment: - The external position in 2024 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The CA deficit declined to 0.6 percent of GDP in 2024 from 1.6 percent in 2023, as imports contracted more than exports. - The CA deficit is projected to widen to 1.2 percent of GDP in 2025 and reach 2.2 percent over the medium term, driven by recovering imports that more than offset rising exports. - Potential Policy Responses: - A combination of bold structural reforms and fiscal consolidation is necessary to safeguard macroeconomic stability and bolster growth and can help support South Africa’s external position. - Structural reforms should focus on addressing energy and logistics bottlenecks (including promoting private sector participation), improving the business environment, governance, and labor market functioning. - Ambitious fiscal consolidation is needed to put debt on a sustained downward path while protecting vulnerable groups. - Trade policy should aim to resolve trade tensions, promote clarity and transparency, and deepen integration, including through the African Continental Free Trade Area. - Flexible exchange rate should remain the main shock absorber, and maintaining an adequate level of international reserves can further support resilience. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP was 28.8 percent of GDP at the end of 2024, slightly above 2023 and above the 22.4 percent average during 2019–23, as rising portfolio assets more than offset an increase in portfolio liabilities. - Gross external debt was 41.9 percent of GDP in 2024, broadly unchanged from 2023. - Gross external debt is expected to gradually rise to about 48 percent of GDP by 2030, while short-term external debt (residual maturity basis) is projected to decline to about 11.3 percent of GDP by 2030 from 12.7 percent in 2024. - Assessment: - Level and composition of NIIP and gross external debt indicate external position is sustainable. - Risks from large gross external liabilities are mitigated by limited sectoral FX mismatches, large foreign asset position (including gross direct and portfolio investment), and liability composition (mostly equities; 43 percent of external debt being rand denominated). - Key statistics (2024, % GDP): - NIIP: 28.8 - Gross Assets: 126.5 - Debt Assets: 16.7 - Gross Liab.: 97.7 - Debt Liab.: 41.9 - Current Account: - Background: - CA deficit was 0.6 percent of GDP in 2024, lower than 2023 (1.6 percent) but higher than 2019–23 average (0.2 percent). - Over the medium term, CA deficit projected to widen to about 2.2 percent of GDP as import growth recovers alongside domestic demand. - Assessment: - Staff estimates a CA gap in the range of 0.3 to –1.5 percent of GDP in 2024 (–0.6 percent midpoint estimate). - Cyclically adjusted CA is estimated at –1.0 percent of GDP in 2024, relative to a model-based EBA CA norm of 0.7 percent. - Accounting for South Africa’s lower life expectancy, an adjustor of 1.1 percentage points is applied, bringing the staff-adjusted CA norm to –0.4 percent of GDP. - This results in a staff CA gap of –0.6 percent of GDP, largely explained by structural factors outside the model. - Key statistics (2024, % GDP): - CA: –0.6 - Cycl. Adj. CA: –1.0 - EBA Norm: 0.7 - EBA Gap: –1.7 - Staff Adj.: 1.1 - Staff Gap: –0.6 - Real Exchange Rate: - Background: - Following an 8.1 percent depreciation in 2023, the CPI-based REER appreciated by about 4 percent in 2024 compared to the 2023 average. - As of March 2025, the REER was 1.4 percent above its 2024 average. - Over the past five years, the REER has depreciated by about 7 percent. - Assessment: - Based on the CA model and uncertainties, staff assesses the REER gap to be –1.1 to 6.2 percent (midpoint of 2.5 percent, estimated elasticity 0.24). - REER-based regression points to a gap ranging between –7.8 percent (level approach) and –15.4 percent (index approach). - Capital and Financial Accounts: Flows and Policy Measures: - Background: - Net FDI inflows declined to 0.9 percent of GDP in 2024 from 1.7 percent in 2023. - Net portfolio outflows decelerated to 0.3 percent (from 1.7 percent). - Derivative net inflows declined to 0.1 percent of GDP from 0.6 percent. - Other net investment rose slightly to 0.2 percent of GDP in 2024 from 0 percent in 2023. - Gross external financing needs were 13 percent of GDP in 2024, down from 14.8 percent in 2023, driven by a reduction in short-term debt service. - Assessment: - Risks from reliance on non-FDI inflows are mitigated by relatively small currency mismatches, large equity liability composition of NIIP, and a large and liquid domestic investor base, reducing asset price volatility during stress. - FX Intervention and Reserves Level: - Background: - Exchange rate regime classified as floating; central bank intervention is rare. - International reserves reached 16.7 percent of GDP at end-2024, covering about 6.1 months of imports, and representing 128.6 percent of short-term debt. - Reserves comprise about 96 percent of IMF’s composite ARA reserve adequacy metric (107.4 percent when capital controls are taken into account), broadly in line with recommended range of 100 to 150 percent. - Assessment: - Maintaining an adequate level of international reserves well within the recommended range can further support South Africa’s resilience to shocks. --- ### Spain - Overall Assessment: - The external position in 2024 is assessed to be stronger than the level implied by medium-term fundamentals and desirable policies. - Large negative NIIP continued to shrink in 2024; strengthening it further will require sustaining relatively high CA surpluses in coming years. - CA balance will exceed the norm in the near term, but this gap is projected to shrink in the medium term as tourism flows normalize, non-energy imports regain strength, and private saving slowly declines toward pre-COVID levels. - Potential Policy Responses: - Policies that would weaken competitiveness and the CA should be avoided. - A better policy mix could keep the saving-investment balance and projected CA path broadly unchanged while better supporting growth and fiscal sustainability. - Sustained fiscal consolidation efforts would rebuild fiscal space and raise aggregate savings. - Structural reforms to boost productivity and diversify exports and destinations: complete the single Spanish market, invest in innovation, enhance education outcomes, and reduce energy dependence. - Policies should facilitate reallocation of workers across sectors while providing an adequate social safety net. - Fiscal support for firms and sectors adversely affected by trade restrictions should remain temporary and narrowly targeted. - Industrial policies should be coordinated at the EU level and avoid favoring domestic producers over imports. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP reached –44.0 percent of GDP by end-2024, reflecting a larger increase in gross assets relative to liabilities between 2023 and 2024. - Gross liabilities increased to 245.2 percent of GDP by end-2024; 67 percent corresponded to external debt. - Most of the negative NIIP is attributed to the general government and the central bank, with TARGET2 liabilities amounting to 27.3 percent of GDP by December 2024. - NIIP projected to continue improving in the medium term, supported by sustained CA surpluses and temporary impact of NextGenerationEU funds disbursements on the capital account. - Assessment: - Still large negative NIIP comes with vulnerabilities, including large gross financing needs and potential adverse valuation effects. - Mitigating factors: long maturity of outstanding sovereign debt (averaging almost eight years) and limited share of debt denominated in foreign currency (11.4 percent of total external debt). - Key statistics (2024, % GDP): - NIIP: –44.0 - Gross Assets: 201.2 - Debt Assets: 94.4 - Gross Liab.: 245.2 - Debt Liab.: 144.5 - Current Account: - Background: - CA surplus continued to rise in 2024, reaching 3.0 percent of GDP. - Strength of services exports (tourism and non-tourism) more than offset a modest increase in imports; higher public saving and subdued private investment more than offset a rise in public investment and a decline in private savings. - In 2025, CA surplus forecast to shrink by 0.5 percentage points of GDP amid a deterioration of the international environment and a strong rebound of imports driven by a pickup in domestic demand. - In the medium term, CA surplus projected to continue shrinking gradually as tourism inflows normalize and non-energy imports regain strength, with investment-driven imports rising. - Assessment: - Cyclically-adjusted CA balance is 3.5 percent of GDP in 2024. - IMF staff assesses the CA norm to be between 0.6 and 2.4 percent of GDP, midpoint 1.5 percent, in line with the EBA CA model. - The CA gap is in the range of 1.2 to 2.9 percent of GDP, midpoint 2.0 percent. - Identified policy gaps contribute –0.4 percent of GDP (–0.3 percent from high health spending and –0.1 percent from credit growth relative to the rest of the world). - Key statistics (2024, % GDP): - CA: 3.0 - Cycl. Adj. CA: 3.5 - EBA Norm: 1.5 - EBA Gap: 2.0 - Staff Adj.: 0.0 - Staff Gap: 2.0 - Real Exchange Rate: - Background: - In 2024, CPI- and ULC-based REER remained broadly stable with changes relative to 2023 average of 0.6 and –0.5 percent, respectively. - As of March 2025, CPI and ULC-based REER were 0.3 percent above and 0.2 percent below the 2024 average, respectively. - Assessment: - IMF staff CA gap implies a REER gap of –7.3 percent in 2024 (elasticity 0.28). - EBA REER index and level models suggest instead an overvaluation for 2024 of 4.9 and 20.4 percent, respectively, driven by large unexplained residuals. - Consistent with the staff CA gap, staff assesses the REER to be moderately undervalued, with a midpoint of 7.3 percent and a range of uncertainty of ±3.1 percent. - Capital and Financial Accounts: Flows and Policy Measures: - Background: - Capital account surplus remained high due to flows associated with NextGenerationEU funds. - Financial account balance increased slightly by 0.4 percent of GDP to 4.4 percent in 2024. - Increase in financial account surplus largely driven by “Other Investment” flows; Bank of Spain’s net liability position continued to shrink, though less in 2024 than in 2023. - Assessment: - Despite improvements, still large external financing needs leave Spain vulnerable to sustained market volatility and tighter global financial conditions. - FX Intervention and Reserves Level: - Background: - The euro has the status of a global reserve currency. - Assessment: - Euro area economies typically hold low reserves relative to standard metrics, but the currency is free floating. --- ### Sweden - Overall Assessment: - The external position in 2024 is substantially stronger than the level implied by medium-term fundamentals and desirable policies. - Current account surplus increased to 7.4 percent of GDP in 2024 from 7 percent in 2023. - Surplus expected to gradually decrease to 4.5 percent of GDP by 2030, at its longer-term average, as the economy recovers with stronger domestic demand, rising investment and consumption, and slowing exports. - Potential Policy Responses: - With inflation around target, both monetary and moderately expansionary fiscal policies can support recovery and current account adjustment. - Scope to enhance private and public investment in productivity-enhancing projects, the green transition, and the health sector to boost domestic absorption and imports, reducing external imbalances while maintaining high living standards amid demographic pressures. - Industrial policies, if implemented, should be targeted and coordinated at the EU level to avoid favoring domestic producers over imports. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP reached 66 percent of GDP in 2024, an increase of 27.4 percentage points from 2023. - Increase driven by continued CA surpluses and net valuation gains related to equity and bond markets, strong multinational FDI returns, and slower liability growth. - Gross liabilities increased to 279.5 percent of GDP in 2024, with more than half being gross external debt (168.3 percent of GDP). - Other financial institutions (94.7 percent of GDP) hold bulk of net foreign assets followed by Social Security Funds (23.5 percent), households (20.5 percent), and the Riksbank (7.1 percent), while nonfinancial corporations (36.2 percent), monetary financial institutions (37.9 percent), and the general government (4.1 percent) are net external debtors. - Half of the NIIP is in foreign currency. - Assessment: - NIIP expected to firm up further in the medium term with continued CA surpluses. - Foreign currency assets are almost three times as high as foreign currency liabilities, providing a hedge against valuation changes. - Estimates subject to uncertainty as NIIP data typically include errors and omissions averaging about 1.5 percent of GDP in the past decade. - Rollovers of external debt pose some vulnerability, but risks are moderated by banks’ ample liquidity and large capital buffers. - NIIP level and trajectory do not raise sustainability concerns. - Key statistics (2024, % GDP): - NIIP: 66 - Gross Assets: 345.5 - Debt Assets: 170.5 - Gross Liab.: 279.5 - Debt Liab.: 140.4 - Current Account: - Background: - 2024 current account increased to 7.4 percent of GDP, reflecting a wider trade surplus in goods and a narrowing trade deficit in services; declining energy prices; and krona depreciation. - Primary income contributed positively to overall surplus, while secondary income deficit widened. - In 2024, gross saving increased by 0.2 percentage points to 32.1 percent of GDP, while gross investment decreased by [content truncated in source]. *International Monetary Fund* ### 0.2 percentage points to 24.6 percent; the increase in gross saving is driven by the private sector. Sweden continues to ### Sweden: Economy Assessment ### Current Account and Saving–Investment Balance - Background: Gross saving increased by 0.2 percentage points to 24.6 percent; the increase in gross saving is driven by the private sector. Sweden continues to be a net oil importer with the oil deficit estimated at 1 percent of GDP. - Projection: Over the medium term, as domestic policies shift toward more supportive stance and long-term spending needs are addressed, the current account surplus is anticipated to decline to 4.5 percent of GDP. - Assessment: - The cyclically adjusted current account is estimated at 7.1 percent of GDP in 2024, 5.5 percentage points above the cyclically adjusted EBA norm of 1.6 percent of GDP, with cyclical contributions estimated at 0.3. - The estimated EBA norm is low and continues to be below the actual CA outcome for the past two decades, suggesting factors not captured by the model—such as Sweden’s mandatory contributions to fully-funded pension programs and an older labor force—may be driving the saving–investment balances. - Staff assesses the CA gap at 5.5 percent of GDP in 2024, with a model-estimated range of 5.1 to 5.9 percent of GDP (using the model’s standard error of ±0.4 percent of GDP). - Policies that would explain this gap make up 1 percentage point, with fiscal policy (less expansionary compared to the rest of the world) accounting for 0.5 percent, health policy contributing –0.8 percent, and the credit gap contributing 1.2 percent. - Complementary EBA tools suggest that Sweden’s pension system could explain about 1 percentage point of the gap. - Key 2024 (% GDP) figures: - CA: 7.4 - Cycl. Adj. CA: 7.1 - EBA Norm: 1.6 - EBA Gap: 5.5 - Staff Adj.: 0.0 - Staff Gap: 5.5 ### Real Exchange Rate - Background: - In 2024, the krona depreciated by 0.6 percentage points in real effective terms (OECD-ULC based) relative to 2023. - As of March 2025, the CPI-based REER was 3 percent above its 2024 average. - Assessment: - The IMF staff CA gap implies a REER gap of –14.1 percent (applying an estimated elasticity of –0.39), with a range between –15.1 to –13.1 percent (using the model standard error of ±0.4 percent of GDP). - The REER index and level models suggest gaps of –15.3 percent and –19.1 percent, respectively, for 2024. - By 2024, the ULC-based REER index had depreciated by 18.7 percent since the krona was floated in 1993. - Anchored by the ULC-based REER index and its standard deviation, staff assesses the krona to be undervalued by 14.7 percent (the midpoint, and within a range of –21.6 to –7.9 percent). ### Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2024, Sweden’s financial account showed robust net lending of 13.8 percent of GDP, more than doubling in comparison to 2023. - Direct investment recorded net lending of 1.5 percent of GDP. - The change in net outflows was mainly driven by an increase in net portfolio investment of 9.2 percent of GDP constituting two-thirds of the financial account. - The increase in other net investment (2.6 percent of GDP) was driven by an increase in investments in Sweden of almost 3 percent of GDP. - While the overall value of Sweden’s foreign assets increased, liabilities to foreign entities also rose. - Assessment: - Large movements in capital flows are common in countries with large financial sectors such as Sweden, where banking sector assets are nearly three times GDP. - Risks can be mitigated through strong financial regulation, supervision, and a sound financial sector. - According to the recent FSAP assessment, the banking system would be resilient in the face of large liquidity shocks despite a substantial share of wholesale funding. ### FX Intervention and Reserves Level - Background: - The exchange rate is de facto free floating. - Foreign currency reserves increased by $3.1 billion to $63.8 billion in 2024, equivalent to 23.7 percent of the short-term external debt of monetary and financial institutions, and sufficient to cover about three months’ worth of imports. - Assessment: - Despite its free floating exchange rate regime, Sweden should maintain adequate foreign reserves in view of the high dependence of commercial banks on wholesale funding in foreign currency, and potential for disruptions in such funding during episodes of global financial distress. - The Riksbank has standing swap lines with the European Central Bank (€10 billion). *International Monetary Fund.* ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2024 IndIvIdual EconoMy assEssMEnts ### Türkiye — Overall assessment and policy response - Overall Assessment: - The external position in 2024 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - Assessment mainly driven by the negative CA gap and low reserves despite recent recovery. - CA deficit narrowed substantially to below 1 percent of GDP in 2024, reflecting lower energy prices, declining gold imports, and robust tourism receipts. - External financing needs have come down and the NIIP became less negative. - Macro policies remain insufficiently tight to bring down inflation sustainably to the central bank’s inflation target, even in the medium term. - External vulnerabilities remain present as the March 2025 reserve loss episode showed, and core reserves are still at risk of falling into negative territory. - Potential Policy Responses: - Tighten monetary and fiscal policy stance to contain demand, bring down inflation, make medium-term growth more sustainable, and help pave the way for lower CA deficits over the medium term. - Maintain open trade policies, including removing discretionary credit allocation that favors exports, to enhance competition and external sustainability. - Strengthen policy credibility to sustain capital inflows and allow for accumulation of international reserves. ### Türkiye — Foreign asset and liability position and trajectory - Background and recent trajectory: - NIIP averaged –34.5 percent of GDP over 2020–24. - NIIP improved from –27.5 percent at the end of 2023 to –22.3 percent at the end of 2024, mainly driven by valuation effects (especially the effect of gold price increase on reserves), including a 7 percent reduction in direct investment (equity) liabilities in dollar terms and a 25 percent reduction in short-term central bank liabilities. - External debt declined from 43.4 percent of GDP in 2023 to 39.0 percent in 2024. - Private and public sector each hold about half of Türkiye’s external debt. - 43.8 percent of external debt is short term (on a remaining-maturity basis). - Assessment: - Given the size and composition of gross external liabilities, Türkiye is vulnerable to liquidity shocks, sudden shifts in investor sentiment, and global upswings in interest rates, even though reserve position improved substantially during 2024 (+10 percent in US dollar terms). - FX exposure of Türkiye’s nonfinancial corporations deteriorated substantially; short-term net FX position also deteriorated but remains in positive territory. - NIIP expected to remain stable over the medium term at about –23 percent of GDP due to projected improvements in the CA balance, but unwinding of recent valuation effects could negatively affect the NIIP trajectory. - External debt is sustainable over the medium term but subject to risks, particularly from a large depreciation in the REER. - Key 2024 statistics (% GDP): - NIIP: –22.3 - Gross Assets: 27.7 - Debt Assets: 10.6 - Gross Liab.: 50.0 - Ext. Debt.: 39.0 ### Türkiye — Current account - Background: - CA deficit averaged 2.9 percent of GDP over 2020–24. - CA deficit in 2024 decreased to 0.8 percent of GDP (from 3.5 percent of GDP in 2023), helped by tourism receipts, favorable energy prices, and reduced gold imports. - Improvement mainly reflects private sector developments, with decreased private investments as a percentage of GDP outweighing the reduction in private savings. - Assessment: - EBA CA model estimates: cyclically adjusted CA balance of –0.3 percent of GDP and a CA norm of 1.0 percent of GDP in 2024. - Overall CA gap assessed in the range of –1.9 to –0.7 percent of GDP, with a midpoint of –1.3 percent. - Key 2024 statistics (% GDP): - CA: –0.8 - Cycl. Adj. CA: –0.3 - EBA Norm: 1.0 - EBA Gap: –1.3 - Staff Adj.: 0.0 - Staff Gap: –1.3 ### Türkiye — Real exchange rate - Background: - CPI-based REER depreciated by an annual average of 6.1 percent over 2020–23. - In 2024, CPI-based REER appreciated by 12.0 percent compared to the 2023 average as domestic inflation slowed and capital inflows were not fully sterilized. - As of March 2025, CPI-based REER appreciated by 10.2 percent relative to the 2024 average (but only by 1.6 percent relative to December 2024). - PPI-based REER appreciated by 3.7 percent in 2024. - Assessment: - Staff assesses the REER to be overvalued by 5.2 percent, with a range from 2.8 percent to 7.6 percent (applying an estimated REER elasticity of 0.25). - EBA REER index and level models suggest the REER was undervalued in 2024 by 29.0 and 42.6 percent, respectively, although model residuals are very large for Türkiye. ### Türkiye — Capital and financial accounts, flows and measures - Background and recent flows: - Net capital inflows were 1.7 percent of GDP in 2024, slightly lower than 4.5 percent in 2023. - Portfolio investments: net inflow of 0.9 percent of GDP in 2024. - Direct investment: moderate net inflow of 0.4 percent of GDP in 2024. - Assessment: - Projected annual gross external financing needs average about 18.5 percent of GDP over 2025–30. - Türkiye remains vulnerable to adverse shifts in global investor sentiment. - Authorities’ policy normalization since May 2023 contributed to rebound in capital flows up to early 2025; sustaining inflows ran into problems in March 2025. - Need to further strengthen policy credibility and carefully reduce market distortions; CFMs on capital outflows should be phased out as conditions improve. ### Türkiye — FX intervention and reserves level - Background: - De jure exchange rate is free floating; de facto classification assessed as a crawl-like arrangement. - Gross international reserves increased to $155 billion in 2024 from $141 billion in 2023, supported by capital inflows, increasing gold prices, and a lower CA deficit. - As of May 2025, reserves have fallen substantially since depreciation pressures increased in March 2025. - Assessment: - Gross international reserves were at 72 percent of the IMF’s ARA metric at end-December 2024 (for a de facto crawl-like exchange rate arrangement), below the floor of the recommended range of 100 to 150 percent. - International reserves net of off-balance-sheet swaps and other short-term liabilities were negatively impacted by the March 2025 outflow episode. - Quality of reserves remains an issue; non–SDR basket currencies account for about 19 percent of FX reserves by end-2024. - Given shallow FX market, interventions may be needed to avoid excessive exchange rate volatility while not preventing warranted macroeconomic adjustments. - Going forward, significant reserves buildup is needed, but accumulation should be opportunistic given uncertain market environment. --- ### United Kingdom — Overall assessment and policy response - Overall Assessment: - The external position in 2024 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - CA deficit deteriorated in recent years due to weak exports, reversal of temporarily positive net primary income, and heightened fiscal deficits sustaining imports. - CA deficit expected to narrow moderately through the medium term, driven by fiscal consolidation and improvements in the terms of trade. - Evolution of external position is uncertain given the UK’s status as a global financial center amid shifts in the international economic environment. - Potential Policy Responses: - Fiscal consolidation and structural reforms (“growth” mission) to support external rebalancing by containing import growth and boosting competitiveness. - Progress in the net zero transition to mitigate energy-related terms of trade shock risks. - Resolve trade tensions and deepen economic integration through nondiscriminatory reductions in trade barriers or free trade agreements. - Deploy industrial policies cautiously, targeted to specific objectives and avoid favoring domestic producers over imports. ### United Kingdom — Foreign asset and liability position and trajectory - Background: - NIIP deteriorated slightly from –9.3 percent of GDP in 2020 to –9.8 percent of GDP in 2024. - Valuation effects have largely offset CA deficits; primarily related to strong global equity growth affecting foreign asset holdings. - IMF staff projects the NIIP will moderately deteriorate over the medium term; large and volatile valuation effects make estimates particularly uncertain. - Assessment: - External position vulnerable to changes in market sentiment but has buffers. - UK has a sizable stock of external liabilities (over 500 percent of GDP), much of which is short-term debt. - Large mismatch between sterling-denominated liabilities relative to assets, paired with exchange rate flexibility, are mitigating factors. - Intragroup bank holdings make up a large portion of external liabilities and are less reactive to market sentiment. - Key 2024 statistics (% GDP): - NIIP: –9.8 - Gross Assets: 509 - Debt Assets: 261 - Gross Liab.: 519 - Debt Liab.: 278 ### United Kingdom — Current account - Background: - CA deficit deteriorated from –0.4 percent of GDP in 2021 to –3.5 percent of GDP in 2023 and was –2.7 percent of GDP in 2024. - Weak export volume growth, weakened price competitiveness (REER), hydrocarbon and vehicle production constraints weighed on export growth in 2024. - Import growth recovered in line with improved domestic demand. - Net primary income weakened since 2023 as rising yields on debt liabilities began to outweigh strong profits from global equities. - Heightened fiscal deficits since the pandemic have driven recent deterioration in the CA, offset to an extent by a temporary spike in private savings. - Following a deterioration in 2025, fiscal consolidation and projected recovery in the terms of trade expected to moderate the CA deficit to –3.0 percent of GDP over the medium term. - Assessment: - EBA CA model estimates a norm deficit of –0.3 percent of GDP, implying an unadjusted CA gap of –2.4 percent of GDP in 2024. - Measurement adjustments of 0.7 percent of GDP are made to account for differences between statistical definition of income and economic concept. - Adjusting for this, IMF staff assesses the CA gap at –1.7 percent of GDP, within a range of –1.4 to –2.0 percent of GDP. - Key 2024 statistics (% GDP): - CA: –2.7 - Cycl. Adj. CA: –2.7 - EBA Norm: –0.3 - EBA Gap: –2.4 - Staff Adj: 0.7 - Staff Gap: –1.7 ### United Kingdom — Real exchange rate - Background: - REER appreciated by close to 4.2 percent in 2024 compared to 2023 and stands 10 percent stronger than before the pandemic, weighing on price competitiveness. - Appreciation driven primarily by NEER appreciation as interest rates remain higher in the UK than across other advanced economies; elevated relative inflation also contributed. - As of March 2025, CPI-based REER was 2.6 percent above its 2024 average. - Assessment: - EBA REER level and index models suggest an overvaluation of 8.7 and 1.5 percent, respectively, for 2024. - Staff assesses the REER gap to be 6.5 percent in 2024 (applying an estimated 0.26 elasticity), with a range of 5.5 to 7.6 percent. ### United Kingdom — Capital and financial accounts, flows and policy measures - Background: - Very open financial account with limited capital flow measures. - Portfolio investment and other investment make up a large share of UK financial flows, often driven by intragroup bank transactions. - Portfolio investment debt inflows were an important source of financing for the CA deficit in 2024, counterbalanced by increased direct investment asset outflows. - Assessment: - Large fluctuations in capital flows are inherent given a large financial sector; volatility is a potential vulnerability. - Vulnerability mitigated by a robust financial stability framework overseen by the Financial Policy Committee (FPC) of the Bank of England, including macroprudential tools. ### United Kingdom — FX intervention and reserves level - Background: - Pound has status of a global reserve currency. - Share of global reserves in sterling grew slightly from averaging 4.5 percent prepandemic (2016–19) to close to 5.0 percent in 2024. - Assessment: - Reserves held by the UK are typically low relative to standard metrics; currency is free floating. - Reserve levels have been stable, with a minimal drawdown in 2024. --- ### United States — Overall assessment and policy response - Overall Assessment: - The external position in 2024 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - CA deficit of 3.9 percent of GDP in 2024 (versus 3.3 percent of GDP in 2023), driven by deterioration in the trade balance (increase in goods deficit) and a shift in the primary income balance. - CA deficit projected to decline to about 2½ percent of GDP over the medium term reflecting a gradual rise of private savings. - Potential Policy Responses: - Fiscal consolidation aimed at achieving a general government primary surplus of about 1 percent of GDP to put debt-to-GDP on a downward path and adjust external position to levels implied by fundamentals and desirable policies. - Maintain narrowly targeted industrial policies and avoid favoring domestic producers over imports. - Promote external stability by constructively resolving trade tensions, promoting a clear and predictable trade environment, and pursuing pragmatic cooperation and deeper integration through regional/cross-regional trade agreements or nondiscriminatory reduction of trade barriers. ### United States — Foreign asset and liability position and trajectory - Background: - NIIP stood at –89.9 percent of GDP at end-2024, weakening from –71.6 percent in 2023 and compared to the prepandemic (2016–19) average of about –46½ percent. - Main driver of change was valuation adjustments from significant rise in US stock prices relative to foreign stocks and a small appreciation of the US dollar (about 2.4 percent) that reduced US dollar value of foreign-currency-denominated assets. - Assessment: - Despite declining NIIP, US gross external debt stabilized at the 2016–19 average of about 95 percent of GDP (down from 2020 peak of nearly 100 percent), driven by output rebound and a stronger dollar. - About 60 percent of US assets are FDI and portfolio equity claims. - Investment income balance shifted from positive to negative in 2024 amid surging dividend and interest payments and higher US yields. - Substantial share of external assets denominated in foreign currencies (about 70 percent in 2024) combined with even larger share of US-dollar-denominated external liabilities remains a channel for exchange rates to affect NIIP through valuation changes. - Financial stability vulnerabilities could arise from unexpected decline in foreign demand for US fixed-income securities, but mitigated by the US dollar’s dominant reserve status, strong institutions, deep and liquid asset markets, and diverse investment instruments. - Key 2024 statistics (% GDP): - NIIP: –89.9 - Gross Assets: 123.0 - Debt Assets: 35.9 - Gross Liab.: 212.8 - Debt Liab.: 79.5 ### United States — Current account - Background: - CA deficit was 3.9 percent of GDP in 2024, up from 3.3 percent in 2023 (2016–19 average deficit about 2 percent). - Trade deficit increased moderately to 3.1 percent of GDP in 2024, primarily due to rising goods deficit. - Income balance deteriorated by 0.3 percent of GDP while service surplus was broadly stable. - Assessment: - EBA model estimates cyclically adjusted CA balance of –3.6 percent of GDP against a CA norm of –2.2 percent, with a standard error of 0.7 percent. - Model-based CA gap of –1.4 percent of GDP for 2024, with identified policy gaps contributing –0.5 percent (primarily from more expansionary fiscal policy relative to rest of world leading to –0.6 percent contribution). - IMF staff assesses a CA gap in a range of –2.0 to –0.7 percent of GDP, with a midpoint of –1.4 percent. - Key 2024 statistics (% GDP): - CA: –3.9 - Cycl. Adj. CA: –3.6 - EBA Norm: –2.2 - EBA Gap: –1.4 - Staff Adj.: 0.0 - Staff Gap: –1.4 ### United States — Real exchange rate - Background: - REER appreciated by 2.4 percent in 2024, resulting in cumulative appreciation of 12 percent relative to the prepandemic level in 2019. - As of March 2025, REER was 2.8 percent above its 2024 average. - Assessment: - IMF staff CA gap implies a REER overvaluation of 11.9 percent in 2024 (with an estimated elasticity of 0.11 applied). - EBA REER index model suggests overvaluation of 10.9 percent; level model suggests overvaluation of 20.9 percent. - Considering estimates and uncertainties, consistent with the CA gap, IMF staff assesses the 2024 midpoint REER overvaluation to be *International Monetary Fund — CHAPTER 3 2024 IndIvIdual EconoMy assEssMents (extracted content).* ### 11.9 percent, with a range of 6.1 to 17.8 percent (the range is obtained from the CA standard error using the estimated ### Capital and Financial Accounts: Flows and Policy Measures ### Background - The CA elasticity is estimated at 0.11, yielding a CA estimate of 11.9 percent, with a range of 6.1 to 17.8 percent (the range is obtained from the CA standard error using the estimated CA elasticity of 0.11). - In 2024, the financial account balance stood at –4.3 percent of GDP, a moderate deterioration from the –3.3 percent of GDP recorded in 2023. This reflected increased inflows of net direct investment, net portfolio investment, and net other investment. ### Assessment of Capital Account and Vulnerabilities - The United States has an open capital account. - Vulnerabilities are limited by the US dollar’s status as a reserve currency. ### FX Intervention and Reserves Level - Assessment: The US dollar has the status of a global reserve currency. - Reserves held by the United States are typically low relative to standard metrics. - The currency is free floating. ### Selected Technical Endnotes — Key Quantitative Findings - Argentina - Gross liabilities increased by over $60 billion in 2024, with only about $3 billion being due to the incurrence of new liability inflows. - Despite a positive NIIP, Argentina has a primary income deficit of about 2 percent of GDP. - Gross reserve assets exclude the inactivated portion of the bilateral swap with the PBoC (about 2 percent of GDP). - Canada - Statistical treatment estimates generate a downward bias in the income balance of 0.6 percent and 1 percent of GDP, respectively, totaling 1.6 percent of GDP. - China - As of the end of March 2025, the total Qualified Domestic Institutional Investor quota stood at $167.8 billion. - Hong Kong SAR - Adjustments to the EBA model yield an adjusted CA norm of 13.3 percent of GDP (the midpoint of a range of 12.7 to 13.8 percent of GDP). - One adjustment deducts 5.8 percentage points of GDP (midpoint of an estimated 5.3–6.4 percentage-points range) to the EBA model’s implied contribution of the NIIP position. - A further deduction of 4.4 percentage points of GDP is made to account for a decline in the gold trade balance due to increased physical settlement of gold futures contracts. - Singapore - Applying adjustments, the staff-estimated CA gap is about 5.1 percent of GDP, to which the fiscal gap contributes about 1.5 percent of GDP, the credit gap is about 2.1 percent of GDP, public health spending about 0.2 percent of GDP, and reserves about 0.2 percent of GDP. - External assets managed by GIC and Temasek amount to at least 100 percent of GDP. - Sweden - The upper and lower bounds are derived by adding/subtracting the standard deviation (6.7 percent) from the average outcome (midpoint) to reflect uncertainty around the EBA estimated norm. - Saudi Arabia - Using the EBA-Lite CA model, the cyclically adjusted CA norm is estimated at 0.56 percent of GDP (lower than the CA norm of 5.9 percent of GDP in 2023). - The CA gap in 2024 of –0.95 percent of GDP represents IMF staff’s overall assessment; the range for the gap is calculated using the standard error of Norway (2 percent), a comparable oil-rich economy in the EBA sample. - Türkiye - The observed dynamics of the exchange rate since July 2022 prompted reclassification of Türkiye’s de facto exchange rate regime by the IMF from “floating” to “crawl-like arrangement” as of the Article IV consultation in October 2024, while the de jure classification remained “free floating.” *Source: 2025 EXTERNAL SECTOR REPORT — Chapter 3: 2024 Individual Economy Assessments (text).* --- _Source: https://www.imf.org/-/media/files/publications/esr/2025/english/text.pdf_