The Path to Growth: Three Priorities for Action

IMF News, April 6, 2023

Source details

Canonical URL

The Path to Growth: Three Priorities for Action

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Kristalina Georgieva
• Published: April 6, 2023

Introduction and framing

• Speech by Kristalina Georgieva, IMF Managing Director, Washington, DC, April 6, 2023, prepared for delivery ahead of the 2023 World Bank Group - IMF Spring Meetings.
• Central aim: secure a robust short-term recovery and lay foundations for stronger, more sustainable, and more inclusive medium-term growth.
• Context: successive shocks—Covid, Russia’s invasion of Ukraine, inflation and a cost-of-living crisis—have weakened the global ascent back to robust growth.

Global outlook: the elusive recovery

• Global growth trends and recent shocks:
  • After a strong recovery in 2021 came the severe shock of Russia’s war in Ukraine; global growth in 2022 dropped by almost half, from 6.1 to 3.4 percent.
  • The slowdown has continued into 2023; IMF expects the world economy to grow less than 3 percent in 2023.
  • We project global growth to remain around 3 percent over the next five years—our lowest medium-term growth forecast since 1990, and well below the average of 3.8 percent from the past two decades.
• Distributional differences and risks:
  • Emerging economies, especially Asia, provide momentum; India and China are expected to account for half of global growth in 2023.
  • About 90 percent of advanced economies are projected to see a decline in their growth rate this year.
  • Low-income countries face higher borrowing costs, weakening export demand, and per-capita income growth staying below that of emerging economies.
  • Poverty and hunger could further increase—a trend started by the Covid crisis.
• Policy trade-offs and previous response:
  • Strong and coordinated monetary and fiscal policy actions prevented a much worse outcome.
  • Rising geopolitical tensions and still-high inflation continue to make a robust recovery elusive.

Priority 1 — Fight inflation and safeguard financial stability

• Key findings and judgments:
  • There cannot be robust growth without price stability nor without financial stability.
  • Central banks have lifted interest rates at the fastest and most synchronized pace in decades, yet core inflation has remained stubbornly high—partly because of tight labor markets.
  • Recent banking sector pressures in the United States and Switzerland complicate the transition from low rates/liquidity to higher rates/scarcer liquidity; they exposed risk management failures and supervisory lapses but banks are generally stronger than in 2008.
  • Vulnerabilities may be hidden in banks and non-banks; sectors such as commercial real estate require monitoring.
• Policy recommendations:
  • Central banks should:
  • Stay the course in fighting inflation—holding a tight stance to prevent a de-anchoring of inflation expectations so long as financial pressures remain limited.
  • Use financial policies and appropriate liquidity provision to address financial stability risks when they emerge.
  • Carefully monitor risks in banks and non-bank financial institutions.
  • Fiscal authorities should:
  • Continue efforts to reduce budget deficits to support the fight against inflation and create fiscal space for future crises.
  • Couple deficit reduction with support for the most vulnerable affected by the cost-of-living crisis.
• Trade-offs:
  • If financial pressures intensify, policymakers would face harder trade-offs between inflation and financial stability objectives, requiring greater vigilance and agility.

Priority 2 — Improve medium-term prospects for growth (major step changes)

• Core projections and challenge:
  • We project global growth to remain around 3 percent over the next five years—our lowest medium-term growth forecast since 1990, and well below the average of 3.8 percent from the past two decades.
  • This weak medium-term outlook makes it harder to reduce poverty, heal Covid scars, and expand opportunities.
• Required step changes and policy actions:
  • Boost productivity and growth potential through:
  • Structural reforms.
  • Accelerating the digital revolution.
  • Improving the business environment.
  • Boosting human capital and inclusion.
  • Inclusion-specific impact:
  • Just closing the gap in women’s labor force participation could increase economic output by an average of 35 percent in countries with greater gender inequality.
  • Green transition:
  • A ‘green step change’ is needed to meet the Paris Agreement and build resilience—redirecting trillions of dollars toward green projects.
  • An estimated $1 trillion a year is needed for renewable energy alone.
  • International cooperation and fragmentation risks:
  • The long-term cost of trade fragmentation could be as high as 7 percent of global GDP—roughly equivalent to the combined annual output of Germany and Japan.
  • If technological decoupling is added, some countries could see losses of up to 12 percent of GDP.
  • Fragmentation of capital flows, including foreign direct investment, would further harm global growth.
  • Diversifying supply chains can cut in half potential economic losses from supply disruptions (IMF research).
• Implication:
  • These step changes (productivity, inclusion, green transition, cooperation) are critical but may require extra help for vulnerable countries.

Priority 3 — Foster solidarity to reduce global disparities

• IMF actions since Covid:
  • Provided nearly $300 billion in new financing for 96 countries since the start of the Covid pandemic.
  • Historic SDR allocation of $650 billion boosted member countries’ reserves.
  • Innovations in the IMF toolkit: Food Shock Window; Resilience and Sustainability Trust.
  • Precautionary facilities provide an additional buffer for countries with strong fundamentals (example cited: Morocco).
  • Temporary increase in the amount members can borrow to support vulnerable middle-income countries; new financing provided to countries such as Sri Lanka and Ukraine.
• Remaining needs and requests:
  • Call on wealthier countries to:
  • Help weaker members handle the burden of debt made harder by recent shocks.
  • Help ensure that the IMF can continue to support poorest members—address fundraising shortfalls in the Poverty Reduction and Growth Trust (PRGT).
  • IMF internal measures under way:
  • Increased interest-free lending more than four-fold to $24 billion since the beginning of the pandemic.
  • Working to successfully complete the review of quotas in the current year.
• Debt vulnerabilities and restructuring:
  • About 15 percent of low-income countries are already in debt distress and another 45 percent face high debt vulnerabilities.
  • About a quarter of emerging economies are at high risk and facing “default-like” borrowing spreads.
  • Concerns over a potential wave of debt restructuring requests and costly delays in current restructuring cases (Zambia cited).
  • Initiative: Global Sovereign Debt Roundtable (IMF, World Bank, and India as G20 Chair) bringing together public and private creditors and borrowers to reach consensus on standards and processes to speed restructuring, including under the G20’s Common Framework.

Conclusion: collective action and the path forward

• Analogy to Nelson Mandela’s words: many more hills to climb but a “glorious vista” of stronger, more inclusive growth should remain the focus.
• Key collective tasks:
  • Fight inflation while safeguarding financial stability and social cohesion.
  • Deliver major step changes in productivity, inclusion, green investment, and international cooperation.
  • Bolster solidarity—debt resolution, financing for poorest members, and IMF capacity through PRGT fundraising and quota review.
• Final imperative: step up cooperation to strengthen the ropes that tie the global community together so countries can climb these hills together.

Source: Kristalina Georgieva, "The Path to Growth: Three Priorities for Action," prepared for delivery, Washington, DC, April 6, 2023.

References

• https://www.imf.org/en/about/senior-officials/bios/kristalina-georgieva
• Ukraine and the IMF
• People's Republic of China and the IMF
• India and the IMF
• United States and the IMF
• Speeches
• PRESS CENTER
• non-bank financial institutions
• fragmentation of capital flows
• foreign direct investment
• IMF research
• https://www.imf.org/en/home