Navigating A More Fragile World

IMF News, October 6, 2022

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Authors: Kristalina Georgieva
Published: October 6, 2022

Introduction

Speaker: Kristalina Georgieva, IMF Managing Director.
Event and date: Georgetown University, Washington, D.C., October 6, 2022.
Framing metaphor: World economy compared to a ship in choppy waters; urgency for wisdom and collective navigation.
Recent shocks cited:
- Covid.
- Russia’s invasion of Ukraine.
- Climate disasters on all continents.
Central diagnosis: Shift from a world of relative predictability to a world with more fragility—greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters.
Immediate dual agenda:
- Stabilize the global economy by addressing immediate challenges.
- Revitalize global cooperation and transform the economy to build future resilience.
Annual Meetings focus: Call for early and joint action and a more proactive, precautionary mindset among IMF’s 190 member countries.

A Darkening Outlook

Findings and projections:

Global growth reached 6.1 percent in 2021.
IMF growth projections downgraded three times, now to:
- 3.2 percent for 2022.
- 2.9 percent for 2023.
Expectation: Updated World Economic Outlook will downgrade growth for next year (2023).
Recession risk highlighted: Countries accounting for about one-third of the world economy will experience at least two consecutive quarters of contraction this or next year.
Real-income effect: Even when growth is positive, shrinking real incomes and rising prices will make conditions “feel like a recession.”
Global output loss estimate: about $4 trillion between now and 2026 (described as the size of the German economy).
Financial stability risks: Rapid and disorderly repricing of assets could be amplified by pre-existing vulnerabilities, including high sovereign debt and concerns over liquidity in key segments of the financial market.
Uncertainty context: War and pandemic increase likelihood of additional shocks.

Drivers of the slowdown:

High energy and food prices.
Tighter financial conditions.
Lingering supply constraints.
Specific country/region sources of weakness:
- Euro Area: severe impact from reduction of gas supplies from Russia.
- China: pandemic-related disruptions and a deepening downturn in its property market.
- United States: momentum slowing as inflation reduces disposable income and consumer demand; higher interest rates drag on investment.
Spillovers to emerging and developing countries: reduced demand for exports; severe strains from high food and energy prices.

Stabilize

Three immediate policy priorities: 1. Bring down inflation

Risk of policy misstep: Not tightening enough versus tightening too much and too fast.
Current assessment: Central banks must continue to respond; acting decisively even as economies slow is the right approach despite near-term pain.
Observed effect: Higher interest rates are taking some heat out of domestic demand, including housing markets.

2. Responsible fiscal policy

Principle: Protect the vulnerable without adding fuel to inflation.
Recommended design:
Fiscal measures should be temporary and targeted, with a laser-sharp focus on lower-income households.
Where high energy prices persist, provide direct help to low- and middle-income families and minimize use of price controls.
Avoid prolonged price controls: not affordable nor effective.
Avoid indiscriminate broad-based fiscal support that would boost demand and complicate inflation control.
Analogy: While monetary policy is hitting the brakes, fiscal policy should not be stepping on the accelerator.

3. Joint efforts to support emerging market and developing economies

Current pressures: Stronger dollar, high borrowing costs, and capital outflows create a triple blow.
Probability metric: The probability of portfolio outflows from emerging markets over the next three quarters has risen to 40 percent.
Policy recommendations:
Maintain exchange rate flexibility.
Adopt proactive and precautionary steps before crises emerge.
Use the IMF’s Integrated Policy Framework to calibrate policy mixes.
Utilize IMF precautionary lending tools to support countries.
Debt distress concerns:
More than a quarter of emerging economies have either defaulted or had bonds trading at distressed levels.
Over 60 percent of low-income-countries are in—or at high risk of—debt distress.
Risk: A widening debt crisis harming people, global growth, and financial stability.
Call to action: Large creditors such as China and the private sector have a responsibility to act; the G-20 Common Framework exists to support debt resolution for low-income countries but must become faster and more predictable.

Revitalize and Transform

Transformational reforms and IMF support:

Public finances:
- Use medium-term fiscal frameworks to make finances more sustainable and create fiscal space.
- Reinvest fiscal space in people and productivity: health, education, and stronger safety nets.
Digital and labor transformation:
- Invest in digital infrastructure to enable innovation and efficient digital government services.
- Implement policies to train and enable a digital-ready workforce, especially to help women and young people join and stay in the workforce.
International cooperation priorities:
- Food insecurity:
- Current scale: 345 million people affected by acute food insecurity.
- IMF response: new “food shock window” as part of emergency financing targeted to countries most affected by terms of trade shocks.
- Climate change:
- Described as an existential threat that requires decisive action (COP27 referenced as an imminent forum).
- IMF instrument: Resilience and Sustainability Trust (first-ever long-term lending tool).
- Pledges already received: $40 billion.
- Objective: leverage a multiple of that in private investment to provide the trillions of dollars needed for adaptation and mitigation.
IMF operational achievements and support statistics:
- Capacity development: Supported 174 countries over the past three years in areas including domestic revenue mobilization, debt sustainability, and public investment management.
- Financial support since the pandemic began:
- $258 billion provided to 93 countries.
- Financial support since Russia’s invasion of Ukraine:
- Supported 16 countries with close to $90 billion.
- Additional historical action: Last year’s historic $650 billion SDR allocation referenced.
Institutional commitment: IMF has been stepping up its support and will continue to do so in a more shock-prone world.

Conclusion

Closing metaphor: Athena, patroness of weaving—call to “weave a new economic and social fabric” that is stronger and more resilient.
Collective message: By working together—as done during the Covid crisis—countries can build a brighter and more prosperous future for all.

Speech: "Navigating A More Fragile World" by Kristalina Georgieva, Georgetown University, Washington, D.C., October 6, 2022.