## _042013

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---

### 1. Last GPA and context
- At the time of the last IMFC meeting, the global recovery had suffered renewed setbacks, with output contracting in the euro area and growth decelerating in many other countries, including major emerging markets.
- At the previous IMFC presentation, policy priorities for the membership and the Fund to secure the recovery and anchor the future were outlined.

### 2. Economic developments
- The global economy is in a better place than last fall and increasingly moving at three speeds:
  - Many emerging market and developing countries: activity has already strengthened and continue to post relatively high growth rates.
  - United States: fiscal withdrawal will weigh on recovery, but private demand appears to be gradually reviving.
  - Euro area: the handover from public to private demand and economic recovery remains elusive; risks of relapse into crisis persist.
  - Japan: continues to face deflation but will see a stimulus-driven rebound of activity.

### 3. Policy record — members and Fund
- Overall assessment:
  - Policy implementation generally encouraging in emerging market economies and low-income countries; more mixed in advanced economies and in countries in transition in the MENA region.
- Euro area:
  - Policy action reduced tail risks.
  - Program countries delivered on difficult reforms, including fiscal adjustment.
  - ESM became operational but has yet to provide direct support to banking systems.
  - Some key elements of a robust banking union adopted, including agreement on the Single Supervisory Mechanism (SSM).
  - Fiscal governance being strengthened, but a common vision for a full fiscal union remains wanting.
- United States:
  - A last minute deal averted the tail risk of a fiscal cliff but not the sequester.
  - A comprehensive medium-term plan remains lacking and the debt ceiling needs to be lifted.
- Japan:
  - Commitment to fight deflation has been dramatically stepped up while the start of fiscal adjustment was postponed.
  - Warrants a stronger medium-term fiscal plan to achieve sustainability.
- Emerging market economies:
  - Many have taken measures to support slowing demand and have averted a hard landing.
  - Some measures have given rise to new vulnerabilities and stability concerns that need addressing.
  - Continued efforts to strengthen policy frameworks, including macroprudential tools, to deal with volatile capital flows and potential financial excesses.
  - Several have renewed precautionary arrangements with the Fund.
- Low-income countries (LICs):
  - Policy implementation largely in line with commitments; countries with buoyant growth have made efforts to rebuild policy buffers.
  - A few countries facing falling external demand could have made better use of existing policy buffers.
- MENA region:
  - Protracted transitions and continued social instability have made maintaining macroeconomic stability and implementing structural policies difficult.
  - Despite important financial contributions from key regional partners, stepped-up and better-coordinated donor support is needed, including from partners in the Deauville Partnership.
- Fund progress:
  - Strengthened surveillance framework through the Integrated Surveillance Decision (ISD).
  - Clarified the institutional view on capital flows.
  - Implemented the Financial Surveillance Strategy.
  - Advanced policy and analytical work to support member countries.

### 4. Risks identified
- Global economy faces headwinds and lingering risks of a prolonged slump; limited progress in post-crisis reforms and new risks from a three-speed recovery.
- Specific medium-term and country risks:
  - U.S. public finances remain unsustainable; a comprehensive and backloaded plan involving higher revenues and entitlement reform is urgently needed.
  - Euro area: without steady progress on reforms critical for a robust banking union—such as the Single Resolution Mechanism and common deposit insurance, supported by a common backstop—the financial system will remain vulnerable (example: Cyprus).
  - Japan: short-term fiscal stimulus raises fiscal risks unless soon combined with an ambitious fiscal consolidation plan and growth strategy.
  - China: challenge of strengthening regulation and supervision of a rapidly expanding financial system to guard against financial excesses.
- Spillover concerns from loose and unconventional monetary policy:
  - Monetary expansion is bolstering growth in major advanced economies, but the boost from further action is diminishing as financial conditions have stabilized and may impart future stability risks.
  - Emerging market economies worry about a sharp reversal of large capital inflows that could blow to output and financial systems.
  - Concerns partly relate to whether advanced economies are using the breathing space from unconventional monetary expansion to make progress on deeper fiscal, financial, and structural reforms.
- Risk of “adjustment fatigue,” especially in Europe, with growing tensions over fairness of adjustment.
  - Policymakers should undertake fiscal consolidation and other necessary reforms while limiting impact on activity and ensuring fair distribution of the burden of adjustment.

### II. Invigorating a sustainable recovery — policy priorities
- Overarching message:
  - More action is needed to disperse clouds weighing on the global economy and encourage stronger, sustainable growth.
  - Policymakers must commit to bold medium-term objectives with realistic implementation paths, balancing support for growth with overcoming weak fiscal, financial, business, or household fundamentals.
- Advanced economies — recommendations:
  - Monetary policy should remain accommodative (with due regard to cross-border spillovers) and short-term adjustment properly paced.
  - Medium-term fiscal consolidation remains key.
  - Euro area:
    - Monetary policy accommodative.
    - Countries delivering on program commitments should be eligible for OMT.
    - ESM should provide direct bank recapitalization.
    - Tangible progress toward a single resolution authority and deposit insurance backed by a common fiscal backstop required.
    - Fiscal consolidation tailored to country needs and anchored in structural targets, complemented by more integrated fiscal frameworks with stronger enforcement at union level.
    - Continue bank and corporate balance sheet repair to mend monetary transmission and improve credit flow to SMEs; implement structural reforms to rebuild competitiveness and widen tax base.
  - Japan:
    - Recently adopted higher inflation target supported by bold new quantitative and qualitative monetary easing.
    - More ambitious medium-term fiscal adjustment plans needed; structural reforms needed to support future growth.
  - United States:
    - Top priority is a credible medium-term fiscal roadmap to deliver high quality fiscal adjustment and to raise the debt ceiling timely.
    - Will mitigate risk of excessive near-term consolidation, support confidence and private demand, and ease burden on monetary policy.
  - Many other advanced economies: enhance resilience by rebuilding policy space eroded by the crisis and strengthening financial systems.
- Fund’s role for advanced economies:
  - Discuss and propose policies balancing growth support with reduction of fiscal, financial, and private balance sheet risks.
  - Continue to analyze global benefits and risks of prolonged monetary easing and exit strategies.
  - Help develop and monitor well-designed programs for crisis-impacted countries.
  - Provide further technical assistance to Europe on fiscal issues and on financial sector repair and reform.
- Emerging market economies — recommendations:
  - Begin recalibrating policies to guard against financial excesses, rebuild macroeconomic policy space, and make financial systems more resilient to eventual policy tightening in advanced economies.
  - Pace of fiscal consolidation and monetary tightening should reflect country circumstances.
  - Tighten regulation and supervision, including macroprudential measures and capital flow measures when appropriate, to avoid financial stability risks from rapid credit growth, large capital inflows, high asset prices, and rising corporate leverage and foreign exchange exposure.
- Fund’s role for emerging markets:
  - Advise on appropriate policy mix and pace of recalibration.
  - Assist monitoring and developing policies to tackle volatile capital flows and limit financial stability risks; deepen understanding of macroprudential policy effectiveness and appropriate use.
  - Continue to assist crisis bystanders via well-designed programs, building on revamped lending toolkit and increased Fund general resources.
  - Focus capacity building on strengthening policy frameworks, financial sector oversight, and capital market deepening.
  - Advance analytic, capacity building, and outreach agenda for small states; program design to reflect special needs, capacity constraints, and growth challenges.
- Low-income countries (LICs) — recommendations:
  - Use robust growth to build more resilient frameworks while meeting infrastructure and social needs.
  - Reform poorly-targeted subsidy regimes; commodity exporters should move toward budget frameworks that smooth volatile commodity prices.
  - Replenish depleted fiscal buffers, provide better-targeted support to the poorest, and build physical infrastructure for jobs and prosperity.
  - Progress financial sector deepening and improve regulation/supervision in parallel to guard against future financial stresses.
- Fund’s role for LICs:
  - Engage on policy options to rebuild policy buffers and improve priority spending.
  - Target capacity building to strengthen policy frameworks, mobilize revenue, improve spending efficiency, and deepen the financial sector.
  - Further improve tailoring and flexibility of Fund support, building on recent refinements to LIC facilities; continue efforts to raise adequate financing from members to establish a self-sustained Poverty Reduction and Growth Trust (PRGT).
- Middle East and North Africa (MENA) — recommendations:
  - Further fiscal consolidation remains a priority; reform inefficient and poorly-targeted subsidies and provide cash transfers for the poor to support consolidation and free up resources for productive investments (e.g., infrastructure).
  - Donors should promptly provide stepped-up external official financing and improved trade access to countries embarking on difficult reforms.
  - Greater exchange rate flexibility would help protect international reserves while supporting exports and activity by boosting competitiveness.
- Fund’s role for MENA:
  - Analyze and advise on policies to achieve macroeconomic stability and lay basis for sustainable growth.
  - Continue to provide financial support where appropriate.
  - Target capacity building to build strong institutions, promote equitable fiscal policies, and strengthen statistics to support informed decision making and accountability.

### III. Restoring resilience — structural priorities
- Restoring resilience requires decisively addressing medium-term structural issues; progress has been uneven and lagging in some areas.
- Financial system reform — priorities:
  - Enhanced capital rules and G-SIFI surcharges are largely agreed.
  - Major remaining priorities:
    - Address the “too big to fail” problem (competing plans risk regulatory arbitrage).
    - Reform over-the-counter derivatives trading.
    - Agree on consistent accounting standards and shadow banking regulations.
  - Consistent implementation of reforms is essential once agreed.
- Membership actions called for (financial reform):
  - (i) Make further progress on global reform agenda, including greater international cooperation on remaining issues.
  - (ii) Avoid proliferation of uncoordinated national initiatives that may hamper reform effectiveness.
  - (iii) Monitor credit and asset market developments closely to address emerging excesses early, including through macroprudential policies.
- Fund actions (financial reform):
  - (i) Help identify and advise on action plans to remove obstacles and bottlenecks to completing the global reform agenda.
  - (ii) Continue to monitor, with the Financial Stability Board (FSB), unintended consequences of regulatory reforms on emerging market and developing countries and highlight emerging inconsistencies across national initiatives.
  - (iii) Analyze and monitor closely emerging financial stability risks given continued monetary easing in key advanced economies.
  - (iv) Undertake analysis of structural constraints on banks.
  - (v) Continue to support implementation of the G20 Data Gaps Initiative with FSB.
- High deficit and debt — issues and actions:
  - Lingering concerns over public and private debt trajectories underscore need for durable fiscal adjustment and institutional reform.
  - Many advanced economies have steadily lowered fiscal deficits; some are close to achieving primary surpluses that stabilize debt ratios, but large deficits and high public and private debt still reduce potential growth and leave economies vulnerable.
  - Many emerging markets and LICs are running primary deficits and need to restore policy buffers to pre-crisis levels.
- Membership actions (debt and fiscal):
  - (i) Ambitious medium-term fiscal consolidation plans remain critical in many countries, involving subsidy and tax subsidy reforms, broadening the tax base, and, in some advanced countries, entitlement reforms.
  - (ii) Reduce overhang of private debt to complement bank balance sheet clean-up.
  - (iii) Where debt is unsustainable, consider ways to reduce the debt burden.
- Fund actions (debt and fiscal):
  - (i) Assist countries to identify risks to fiscal sustainability, including contingent liabilities, using revamped tools for debt sustainability in emerging and advanced economies.
  - (ii) Assist countries to manage debt portfolios by supporting design of effective medium-term debt management strategies and strengthening debt management institutions.
  - (iii) Draw and apply lessons from previous episodes of unsustainable debt.
  - (iv) Analyze links between financial sector characteristics and public debt accumulation.
  - (v) Strengthen design of debt limits policy in Fund-supported programs.
  - (vi) Strengthen tools to assess fiscal transparency and improve fiscal institutions.
  - (vii) Continue to advise on employment-friendly fiscal policies.
- Jobs and growth — priorities:
  - Job creation and inclusive growth are imperatives across membership; priorities differ by country:
    - Advanced economies: active labor market policies to prevent disengagement; euro area periphery needs to rebuild competitiveness via productivity growth and job-friendly wage setting to gain export market shares.
    - Emerging markets: identify and address most binding constraints to growth; use labor market policies that protect workers without impeding resource reallocation.
    - LICs: generate employment growth to absorb labor released from subsistence agriculture.
    - MENA in transition: implement economic transformation agendas to foster inclusive growth and create jobs.
- Fund actions (jobs and growth):
  - (i) Provide more systematic and tailored analysis of growth and employment challenges; help countries identify most binding constraints on growth.
  - (ii) Enhance advice on tax and expenditure reforms to encourage labor force participation, robust job creation, and equity in income distribution.
  - (iii) Enhance advice on labor market policies based on current empirical evidence and greater collaboration with institutions such as the World Bank, OECD, and ILO to assess impacts on growth, productivity, job creation, and inclusion.

*Source: IMF content unit _042013 - 1.      Last GPA. At the time of the last IMFC meeting, the global recovery had suffered*

### 14. Global external imbalances have continued to narrow, but policy action needs to
- Narrowing of global imbalances and drivers:
  - Most of the adjustment took place during the Great Recession of 2008–09, reflecting negative global growth and the correction of past financial excesses.
  - The adjustment in real exchange rates since 2007 also facilitated some narrowing of global imbalances.
  - Additional fiscal and structural policy actions are needed to ensure that the imbalances continue to narrow.
- Risks from currency valuations and unconventional monetary policy:
  - Exceptionally accommodative monetary policy in key advanced economies can have side effects through exchange rates and capital flows, including high asset prices in recipient countries and associated misallocation of resources that should be monitored.
  - Over time, unconventional monetary policies are likely to have their largest impact through their effects on underlying market conditions.
  - If unconventional monetary policies help lower tail risks, they can reduce underlying volatility; if they delay more fundamental reforms, they are likely to prolong financial uncertainty and ultimately put pressure on other economies.
- Policy recommendations for the membership:
  - Membership:
    - (i) large surplus economies should continue to raise consumption (China) and investment (Germany), and major deficit countries should boost national savings through fiscal and structural reforms, including entitlement reforms (U.S.);
    - (ii) major economies need to factor in cross-border implications of their policies when weighing alternative policy options.
- Fund actions and analytic work:
  - Fund:
    - (i) to highlight the interconnectedness of policy measures, the upcoming Spillover Report will examine the impact of unconventional monetary policy, highlight risks of negative spillovers, and analyze cross-border impacts of policies being undertaken to restore growth;
    - (ii) a revamped External Sector Report will focus more on capital flows and enhance the methodology of External Balance Assessment, incorporating feedback on last year’s pilot report;
    - (iii) the ISD, in effect since January, will strengthen analysis of interconnectedness and spillovers in bilateral Article IV consultations. These discussions are supported by global risk assessment matrices (G-RAMs), which are now produced regularly as a tool to inform risk analysis and spillovers across countries and regions.
  - Cluster-based surveillance in Article IV reports and regional reports should improve assessment of risks from common shocks and allow for consistent examination of policy responses.
- Adapting institutional governance and resources:
  - It is imperative that the 2010 reform package be adopted by the membership without delay. The package marks an important milestone in the quota and governance reform that started in 2006.
  - Two of the three conditions needed for the 2010 reform to take effect have been fulfilled; the remaining condition is to secure the 85 percent of the total voting power needed for the Board Reform Amendment to enter into force.
  - Election of a new Executive Board was completed in October 2012, resulting in further progress in consolidating advanced European constituencies.
  - Continued reform of quota and governance structure is key to the Fund’s legitimacy and effectiveness. The 15th General Review of Quotas will offer an opportunity to review the adequacy and composition of Fund’s resources over the medium term, as well as the distribution of quota shares.
  - The quota formula review was completed at end-January 2013 and the membership agreed that work on a new quota formula should be integrated with work of the 15th General Review of Quotas.
  - The membership will need to coalesce around a reform package that can garner the broadest possible support.
  - The Fund should also make further progress promoting the diversity of staff, a key component of the Fund’s legitimacy.
- Independent Evaluation Office and follow-up:
  - The second external evaluation of the Independent Evaluation Office (IEO) was discussed at the Board in March 2013.
  - There was wide acknowledgement that the IEO has played an important role in supporting the Fund’s governance and transparency, and enhancing its learning culture.
  - Many of the external evaluators’ recommendations to further enhance the effectiveness of the IEO—including on evaluation topics and the process of following up on recommendations—were strongly endorsed.
  - Specific follow up actions on implementing these recommendations are being prepared for discussion by the Evaluation Committee and the Board.
- Long-term trends and strategic implications:
  - The growing clout of emerging market economies is setting the stage for an increasingly multi-polar world.
  - Debt overhangs in advanced economies and continued rapid growth of financial sectors in emerging market economies and developing countries are likely to raise the risk and cost of future crises.
  - Growing output and populations in some countries will put pressure on the environment; low-income countries are the most vulnerable to climate change.
  - These trends should be explored for their consequences for the Fund and incorporated into strategic planning.

*Source: IMF content unit titled "14.      Global external imbalances have continued to narrow, but policy action needs to" (provided content).*

### 1.      Last GPA. At the time of the last IMFC meeting, the global recovery had suffered

### _042013 - 1.      Last GPA. At the time of the last IMFC meeting, the global recovery had suffered

### 1. Last GPA and context
- At the time of the last IMFC meeting, the global recovery had suffered renewed setbacks, with output contracting in the euro area and growth decelerating in many other countries, including major emerging markets.
- At the previous IMFC presentation, policy priorities for the membership and the Fund to secure the recovery and anchor the future were outlined.

### 2. Economic developments
- The global economy is in a better place than last fall and increasingly moving at three speeds:
  - Many emerging market and developing countries: activity has already strengthened and continue to post relatively high growth rates.
  - United States: fiscal withdrawal will weigh on recovery, but private demand appears to be gradually reviving.
  - Euro area: the handover from public to private demand and economic recovery remains elusive; risks of relapse into crisis persist.
  - Japan: continues to face deflation but will see a stimulus-driven rebound of activity.

### 3. Policy record — members and Fund
- Overall assessment:
  - Policy implementation generally encouraging in emerging market economies and low-income countries; more mixed in advanced economies and in countries in transition in the MENA region.
- Euro area:
  - Policy action reduced tail risks.
  - Program countries delivered on difficult reforms, including fiscal adjustment.
  - ESM became operational but has yet to provide direct support to banking systems.
  - Some key elements of a robust banking union adopted, including agreement on the Single Supervisory Mechanism (SSM).
  - Fiscal governance being strengthened, but a common vision for a full fiscal union remains wanting.
- United States:
  - A last minute deal averted the tail risk of a fiscal cliff but not the sequester.
  - A comprehensive medium-term plan remains lacking and the debt ceiling needs to be lifted.
- Japan:
  - Commitment to fight deflation has been dramatically stepped up while the start of fiscal adjustment was postponed.
  - Warrants a stronger medium-term fiscal plan to achieve sustainability.
- Emerging market economies:
  - Many have taken measures to support slowing demand and have averted a hard landing.
  - Some measures have given rise to new vulnerabilities and stability concerns that need addressing.
  - Continued efforts to strengthen policy frameworks, including macroprudential tools, to deal with volatile capital flows and potential financial excesses.
  - Several have renewed precautionary arrangements with the Fund.
- Low-income countries (LICs):
  - Policy implementation largely in line with commitments; countries with buoyant growth have made efforts to rebuild policy buffers.
  - A few countries facing falling external demand could have made better use of existing policy buffers.
- MENA region:
  - Protracted transitions and continued social instability have made maintaining macroeconomic stability and implementing structural policies difficult.
  - Despite important financial contributions from key regional partners, stepped-up and better-coordinated donor support is needed, including from partners in the Deauville Partnership.
- Fund progress:
  - Strengthened surveillance framework through the Integrated Surveillance Decision (ISD).
  - Clarified the institutional view on capital flows.
  - Implemented the Financial Surveillance Strategy.
  - Advanced policy and analytical work to support member countries.

### 4. Risks identified
- Global economy faces headwinds and lingering risks of a prolonged slump; limited progress in post-crisis reforms and new risks from a three-speed recovery.
- Specific medium-term and country risks:
  - U.S. public finances remain unsustainable; a comprehensive and backloaded plan involving higher revenues and entitlement reform is urgently needed.
  - Euro area: without steady progress on reforms critical for a robust banking union—such as the Single Resolution Mechanism and common deposit insurance, supported by a common backstop—the financial system will remain vulnerable (example: Cyprus).
  - Japan: short-term fiscal stimulus raises fiscal risks unless soon combined with an ambitious fiscal consolidation plan and growth strategy.
  - China: challenge of strengthening regulation and supervision of a rapidly expanding financial system to guard against financial excesses.
- Spillover concerns from loose and unconventional monetary policy:
  - Monetary expansion is bolstering growth in major advanced economies, but the boost from further action is diminishing as financial conditions have stabilized and may impart future stability risks.
  - Emerging market economies worry about a sharp reversal of large capital inflows that could blow to output and financial systems.
  - Concerns partly relate to whether advanced economies are using the breathing space from unconventional monetary expansion to make progress on deeper fiscal, financial, and structural reforms.
- Risk of “adjustment fatigue,” especially in Europe, with growing tensions over fairness of adjustment.
  - Policymakers should undertake fiscal consolidation and other necessary reforms while limiting impact on activity and ensuring fair distribution of the burden of adjustment.

### II. Invigorating a sustainable recovery — policy priorities
- Overarching message:
  - More action is needed to disperse clouds weighing on the global economy and encourage stronger, sustainable growth.
  - Policymakers must commit to bold medium-term objectives with realistic implementation paths, balancing support for growth with overcoming weak fiscal, financial, business, or household fundamentals.
- Advanced economies — recommendations:
  - Monetary policy should remain accommodative (with due regard to cross-border spillovers) and short-term adjustment properly paced.
  - Medium-term fiscal consolidation remains key.
  - Euro area:
    - Monetary policy accommodative.
    - Countries delivering on program commitments should be eligible for OMT.
    - ESM should provide direct bank recapitalization.
    - Tangible progress toward a single resolution authority and deposit insurance backed by a common fiscal backstop required.
    - Fiscal consolidation tailored to country needs and anchored in structural targets, complemented by more integrated fiscal frameworks with stronger enforcement at union level.
    - Continue bank and corporate balance sheet repair to mend monetary transmission and improve credit flow to SMEs; implement structural reforms to rebuild competitiveness and widen tax base.
  - Japan:
    - Recently adopted higher inflation target supported by bold new quantitative and qualitative monetary easing.
    - More ambitious medium-term fiscal adjustment plans needed; structural reforms needed to support future growth.
  - United States:
    - Top priority is a credible medium-term fiscal roadmap to deliver high quality fiscal adjustment and to raise the debt ceiling timely.
    - Will mitigate risk of excessive near-term consolidation, support confidence and private demand, and ease burden on monetary policy.
  - Many other advanced economies: enhance resilience by rebuilding policy space eroded by the crisis and strengthening financial systems.
- Fund’s role for advanced economies:
  - Discuss and propose policies balancing growth support with reduction of fiscal, financial, and private balance sheet risks.
  - Continue to analyze global benefits and risks of prolonged monetary easing and exit strategies.
  - Help develop and monitor well-designed programs for crisis-impacted countries.
  - Provide further technical assistance to Europe on fiscal issues and on financial sector repair and reform.
- Emerging market economies — recommendations:
  - Begin recalibrating policies to guard against financial excesses, rebuild macroeconomic policy space, and make financial systems more resilient to eventual policy tightening in advanced economies.
  - Pace of fiscal consolidation and monetary tightening should reflect country circumstances.
  - Tighten regulation and supervision, including macroprudential measures and capital flow measures when appropriate, to avoid financial stability risks from rapid credit growth, large capital inflows, high asset prices, and rising corporate leverage and foreign exchange exposure.
- Fund’s role for emerging markets:
  - Advise on appropriate policy mix and pace of recalibration.
  - Assist monitoring and developing policies to tackle volatile capital flows and limit financial stability risks; deepen understanding of macroprudential policy effectiveness and appropriate use.
  - Continue to assist crisis bystanders via well-designed programs, building on revamped lending toolkit and increased Fund general resources.
  - Focus capacity building on strengthening policy frameworks, financial sector oversight, and capital market deepening.
  - Advance analytic, capacity building, and outreach agenda for small states; program design to reflect special needs, capacity constraints, and growth challenges.
- Low-income countries (LICs) — recommendations:
  - Use robust growth to build more resilient frameworks while meeting infrastructure and social needs.
  - Reform poorly-targeted subsidy regimes; commodity exporters should move toward budget frameworks that smooth volatile commodity prices.
  - Replenish depleted fiscal buffers, provide better-targeted support to the poorest, and build physical infrastructure for jobs and prosperity.
  - Progress financial sector deepening and improve regulation/supervision in parallel to guard against future financial stresses.
- Fund’s role for LICs:
  - Engage on policy options to rebuild policy buffers and improve priority spending.
  - Target capacity building to strengthen policy frameworks, mobilize revenue, improve spending efficiency, and deepen the financial sector.
  - Further improve tailoring and flexibility of Fund support, building on recent refinements to LIC facilities; continue efforts to raise adequate financing from members to establish a self-sustained Poverty Reduction and Growth Trust (PRGT).
- Middle East and North Africa (MENA) — recommendations:
  - Further fiscal consolidation remains a priority; reform inefficient and poorly-targeted subsidies and provide cash transfers for the poor to support consolidation and free up resources for productive investments (e.g., infrastructure).
  - Donors should promptly provide stepped-up external official financing and improved trade access to countries embarking on difficult reforms.
  - Greater exchange rate flexibility would help protect international reserves while supporting exports and activity by boosting competitiveness.
- Fund’s role for MENA:
  - Analyze and advise on policies to achieve macroeconomic stability and lay basis for sustainable growth.
  - Continue to provide financial support where appropriate.
  - Target capacity building to build strong institutions, promote equitable fiscal policies, and strengthen statistics to support informed decision making and accountability.

### III. Restoring resilience — structural priorities
- Restoring resilience requires decisively addressing medium-term structural issues; progress has been uneven and lagging in some areas.
- Financial system reform — priorities:
  - Enhanced capital rules and G-SIFI surcharges are largely agreed.
  - Major remaining priorities:
    - Address the “too big to fail” problem (competing plans risk regulatory arbitrage).
    - Reform over-the-counter derivatives trading.
    - Agree on consistent accounting standards and shadow banking regulations.
  - Consistent implementation of reforms is essential once agreed.
- Membership actions called for (financial reform):
  - (i) Make further progress on global reform agenda, including greater international cooperation on remaining issues.
  - (ii) Avoid proliferation of uncoordinated national initiatives that may hamper reform effectiveness.
  - (iii) Monitor credit and asset market developments closely to address emerging excesses early, including through macroprudential policies.
- Fund actions (financial reform):
  - (i) Help identify and advise on action plans to remove obstacles and bottlenecks to completing the global reform agenda.
  - (ii) Continue to monitor, with the Financial Stability Board (FSB), unintended consequences of regulatory reforms on emerging market and developing countries and highlight emerging inconsistencies across national initiatives.
  - (iii) Analyze and monitor closely emerging financial stability risks given continued monetary easing in key advanced economies.
  - (iv) Undertake analysis of structural constraints on banks.
  - (v) Continue to support implementation of the G20 Data Gaps Initiative with FSB.
- High deficit and debt — issues and actions:
  - Lingering concerns over public and private debt trajectories underscore need for durable fiscal adjustment and institutional reform.
  - Many advanced economies have steadily lowered fiscal deficits; some are close to achieving primary surpluses that stabilize debt ratios, but large deficits and high public and private debt still reduce potential growth and leave economies vulnerable.
  - Many emerging markets and LICs are running primary deficits and need to restore policy buffers to pre-crisis levels.
- Membership actions (debt and fiscal):
  - (i) Ambitious medium-term fiscal consolidation plans remain critical in many countries, involving subsidy and tax subsidy reforms, broadening the tax base, and, in some advanced countries, entitlement reforms.
  - (ii) Reduce overhang of private debt to complement bank balance sheet clean-up.
  - (iii) Where debt is unsustainable, consider ways to reduce the debt burden.
- Fund actions (debt and fiscal):
  - (i) Assist countries to identify risks to fiscal sustainability, including contingent liabilities, using revamped tools for debt sustainability in emerging and advanced economies.
  - (ii) Assist countries to manage debt portfolios by supporting design of effective medium-term debt management strategies and strengthening debt management institutions.
  - (iii) Draw and apply lessons from previous episodes of unsustainable debt.
  - (iv) Analyze links between financial sector characteristics and public debt accumulation.
  - (v) Strengthen design of debt limits policy in Fund-supported programs.
  - (vi) Strengthen tools to assess fiscal transparency and improve fiscal institutions.
  - (vii) Continue to advise on employment-friendly fiscal policies.
- Jobs and growth — priorities:
  - Job creation and inclusive growth are imperatives across membership; priorities differ by country:
    - Advanced economies: active labor market policies to prevent disengagement; euro area periphery needs to rebuild competitiveness via productivity growth and job-friendly wage setting to gain export market shares.
    - Emerging markets: identify and address most binding constraints to growth; use labor market policies that protect workers without impeding resource reallocation.
    - LICs: generate employment growth to absorb labor released from subsistence agriculture.
    - MENA in transition: implement economic transformation agendas to foster inclusive growth and create jobs.
- Fund actions (jobs and growth):
  - (i) Provide more systematic and tailored analysis of growth and employment challenges; help countries identify most binding constraints on growth.
  - (ii) Enhance advice on tax and expenditure reforms to encourage labor force participation, robust job creation, and equity in income distribution.
  - (iii) Enhance advice on labor market policies based on current empirical evidence and greater collaboration with institutions such as the World Bank, OECD, and ILO to assess impacts on growth, productivity, job creation, and inclusion.

*Source: IMF content unit _042013 - 1.      Last GPA. At the time of the last IMFC meeting, the global recovery had suffered*

### 14.      Global external imbalances have continued to narrow, but policy action needs to

### 14.      Global external imbalances have continued to narrow, but policy action needs to 

### Narrowing of global imbalances and drivers
- Most of the adjustment took place during the Great Recession of 2008–09, reflecting negative global growth and the correction of past financial excesses.
- The adjustment in real exchange rates since 2007 also facilitated some narrowing of global imbalances.
- Additional fiscal and structural policy actions are needed to ensure that the imbalances continue to narrow.

### Risks from currency valuations and unconventional monetary policy
- Exceptionally accommodative monetary policy in key advanced economies can have side effects through exchange rates and capital flows, including high asset prices in recipient countries and associated misallocation of resources that should be monitored.
- Over time, unconventional monetary policies are likely to have their largest impact through their effects on underlying market conditions.
- If unconventional monetary policies help lower tail risks, they can reduce underlying volatility; if they delay more fundamental reforms, they are likely to prolong financial uncertainty and ultimately put pressure on other economies.

### Policy recommendations for the membership
- Membership:
  - (i) large surplus economies should continue to raise consumption (China) and investment (Germany), and major deficit countries should boost national savings through fiscal and structural reforms, including entitlement reforms (U.S.);
  - (ii) major economies need to factor in cross-border implications of their policies when weighing alternative policy options.

### Fund actions and analytic work
- Fund:
  - (i) to highlight the interconnectedness of policy measures, the upcoming Spillover Report will examine the impact of unconventional monetary policy, highlight risks of negative spillovers, and analyze cross-border impacts of policies being undertaken to restore growth;
  - (ii) a revamped External Sector Report will focus more on capital flows and enhance the methodology of External Balance Assessment, incorporating feedback on last year’s pilot report;
  - (iii) the ISD, in effect since January, will strengthen analysis of interconnectedness and spillovers in bilateral Article IV consultations. These discussions are supported by global risk assessment matrices (G-RAMs), which are now produced regularly as a tool to inform risk analysis and spillovers across countries and regions.
- Cluster-based surveillance in Article IV reports and regional reports should improve assessment of risks from common shocks and allow for consistent examination of policy responses.

### Adapting institutional governance and resources
- It is imperative that the 2010 reform package be adopted by the membership without delay. The package marks an important milestone in the quota and governance reform that started in 2006.
- Two of the three conditions needed for the 2010 reform to take effect have been fulfilled; the remaining condition is to secure the 85 percent of the total voting power needed for the Board Reform Amendment to enter into force.
- Election of a new Executive Board was completed in October 2012, resulting in further progress in consolidating advanced European constituencies.
- Continued reform of quota and governance structure is key to the Fund’s legitimacy and effectiveness. The 15th General Review of Quotas will offer an opportunity to review the adequacy and composition of Fund’s resources over the medium term, as well as the distribution of quota shares.
- The quota formula review was completed at end-January 2013 and the membership agreed that work on a new quota formula should be integrated with work of the 15th General Review of Quotas.
- The membership will need to coalesce around a reform package that can garner the broadest possible support.
- The Fund should also make further progress promoting the diversity of staff, a key component of the Fund’s legitimacy.

### Independent Evaluation Office and follow-up
- The second external evaluation of the Independent Evaluation Office (IEO) was discussed at the Board in March 2013.
- There was wide acknowledgement that the IEO has played an important role in supporting the Fund’s governance and transparency, and enhancing its learning culture.
- Many of the external evaluators’ recommendations to further enhance the effectiveness of the IEO—including on evaluation topics and the process of following up on recommendations—were strongly endorsed.
- Specific follow up actions on implementing these recommendations are being prepared for discussion by the Evaluation Committee and the Board.

### Long-term trends and strategic implications
- The growing clout of emerging market economies is setting the stage for an increasingly multi-polar world.
- Debt overhangs in advanced economies and continued rapid growth of financial sectors in emerging market economies and developing countries are likely to raise the risk and cost of future crises.
- Growing output and populations in some countries will put pressure on the environment; low-income countries are the most vulnerable to climate change.
- These trends should be explored for their consequences for the Fund and incorporated into strategic planning.

*Source: IMF content unit titled "14.      Global external imbalances have continued to narrow, but policy action needs to" (provided content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_042013.pdf_