The Path to Growth: Three Priorities for Action

April 6, 2023

1. Introduction

Good morning—and thank you, Ambassador Holliday, for your warm welcome. Many thanks also to Politico for co-hosting today’s event, in the spirit of what our organizations stand for: bringing people together and fostering a better understanding of the global challenges we face.

Being here in Meridian House—a beautiful ‘house on a hill’—reminds me of what Nelson Mandela once said: “I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb.”

This feels like the story of the past three years—climbing one “great hill” after another, only to discover there are many more to come. First was Covid, then Russia’s invasion of Ukraine, inflation and a cost-of-living crisis that hit everyone.

So far, we have proven to be resilient climbers. But the path ahead—and especially the path back to robust growth—is rough and foggy, and the ropes that hold us together may be weaker now than they were just a few years ago.

Today, I want to talk about how we can navigate this difficult climb by focusing on the fundamental issue of growth: how we can secure a robust recovery in the short term, and lay the foundations for stronger, more sustainable, and more inclusive growth.

2. Global Outlook: The Elusive Recovery

Let me start with the economic landscape. After a strong recovery in 2021 came the severe shock of Russia’s war in Ukraine and its wide-ranging consequences—global growth in 2022 dropped by almost half, from 6.1 to 3.4 percent.

The slowdown has continued this year. Despite surprisingly resilient labor markets and consumer spending in most advanced economies, and the uplift from China’s reopening, we expect the world economy to grow less than 3 percent in 2023.

As you will see in our World Economic Outlook next week, growth remains weak by historical comparison—both in the near and medium term. There are also stark differences between country groups.

Some momentum comes from emerging economies—Asia especially is a bright spot. India and China are expected to account for half of global growth in 2023.

But others face a steeper climb. Economic activity is slowing in the United States and the Euro Area, where higher interest rates weigh on demand. About 90 percent of advanced economies are projected to see a decline in their growth rate this year.

For low-income countries, higher borrowing costs come at a time of weakening demand for their exports. And we see their per-capita income growth staying below that of emerging economies. That is a severe blow, making it even harder for low-income nations to catch up.

Poverty and hunger could further increase, a dangerous trend that was started by the Covid crisis.

Strong and coordinated monetary and fiscal policy actions over the past years prevented a much worse outcome. But with rising geopolitical tensions and still-high inflation, a robust recovery remains elusive. This harms the prospects of everyone, especially for the most vulnerable people and countries.

3. Three Priorities for Action

What would it take to brighten growth prospects over the short and medium term? I see three big hills we will have to climb.

The first hill is fighting inflation and safeguarding financial stability.

There cannot be robust growth without price stability—nor without financial stability. And these days, both need the attention of policymakers.

Even as central banks have lifted interest rates at the fastest and most synchronized pace in decades, core inflation has remained stubbornly high—partly because of tight labor markets in many countries.

At the same time, fighting inflation has become more complex with the recent banking sector pressures in the United States and Switzerland—serving as a reminder of how difficult it is to transition rapidly from a prolonged period of low interest rates and ample liquidity to much higher rates and scarcer liquidity.

They exposed risk management failures at specific banks, as well as supervisory lapses. But they have shown that the banking sector has come a long way since the 2008 global financial crisis.

Today, banks are generally stronger and more resilient, and policymakers have been remarkably swift and comprehensive in their actions in recent weeks. That said, concerns remain about vulnerabilities that may be hidden, not just at banks but also non-banks—now is not the time for complacency.

So, what does it mean for monetary policy? So long as financial pressures remain limited, we expect central banks to stay the course in the fight against inflation—holding a tight stance to prevent a de-anchoring of inflation expectations.

At the same time, they should address financial stability risks when they emerge—through appropriate provision of liquidity. The key is to carefully monitor risks in banks and non-bank financial institutions, as well as weaknesses in sectors such as commercial real estate.

In other words, central banks should continue to use interest rates to fight inflation, while using financial policies to ensure financial stability. This is the right course of action so long as financial pressures remain limited. If that were to change, policymakers would face an even more complicated task, with difficult trade-offs between their inflation and financial stability objectives, and the use of their respective tools. That’s why they need to be more vigilant and more agile than ever.

On the fiscal side, further efforts to reduce budget deficits are critical to support the fight against inflation and create fiscal space to deal with future crises. But these efforts must be coupled with support for the most vulnerable, especially those still struggling with the cost-of-living crisis.

So, this is a difficult climb: tackle inflation, protect financial stability, and safeguard social cohesion. Getting it right brings the benefit of major advanced economies staying on the narrow path to a soft landing, and protecting the more vulnerable emerging and developing economies against harmful spillovers.

Let me move to the second hill: improving medium-term prospects for growth.

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 makes it even harder to reduce poverty, heal the economic scars of the Covid crisis, and provide new and better opportunities for all.

Getting up this hill requires major step changes.

One is to boost productivity and growth potential through structural reforms and by accelerating the digital revolution, improving the business environment, and boosting human capital and inclusion. 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.

We also need a ‘green step change’ to protect our planet and create new economic opportunities. Our collective goal of delivering on the Paris Agreement and boosting resilience will require redirecting trillions of dollars towards green projects. An estimated $1 trillion a year is needed for renewable energy alone. That will pay dividends in terms of growth and jobs.

Of course, we also need a step change in international cooperation to reduce the impact of economic fragmentation and geopolitical tension, especially over Russia’s invasion of Ukraine. This calamity not only kills innocent people; it also worsens the cost-of-living crisis and brings more hunger around the world. It risks wiping out the peace dividend we have enjoyed for the past three decades, adding also to frictions in trade and finance.

Our research shows that 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. And the fragmentation of capital flows, including foreign direct investment, would be another hit to the prospects for global growth. The combined losses from all channels may be hard to quantify, but it is clear they all head in the wrong direction.

It need not be this way. Countries can protect their economic and national security by continuing to trade and being pragmatic about strengthening supply chains. IMF research demonstrates that diversifying supply chains can cut in half potential economic losses from supply disruptions.

These step changes will be critical to make the global economy more vibrant, to create better opportunities for all. But for many vulnerable countries, they may not be achievable without extra help.

This brings me to the third major ‘hill’ to climb—fostering solidarity to reduce global disparities.

Drawing on the strength of our collective, the IMF has provided nearly $300 billion in new financing for 96 countries since the start of the Covid pandemic. The historic SDR allocation of $650 billion helped to boost our member countries’ reserves.

Our precautionary facilities provide an additional buffer to countries with strong economic fundamentals—most recently, we provided one for Morocco.

Through innovations in our toolkit—including the Food Shock Window, and the Resilience and Sustainability Trust—we are helping our members meet new challenges.

We have also stepped up support for vulnerable middle-income countries—including through a temporary increase in the amount members can borrow from the IMF. And we have provided new financing to countries such as Sri Lanka and Ukraine.

This is precisely what the Fund is here to do: be a source of stability in turbulent times.

Yet, for the weakest members of our global family, additional support from wealthier countries is essential.

I would like to make a double plea on their behalf: help them handle the burden of debt, which was made so much harder by the shocks of the past years; and secondly, help ensure that the IMF continues to be in a position to support them in the years ahead.

Start with debt. About 15 percent of low-income countries are already in debt distress and another 45 percent face high debt vulnerabilities. And about a quarter of emerging economies are at high risk and facing “default-like” borrowing spreads.

This has raised concerns over a potential wave of debt restructuring requests—and how to handle them at a time when current restructuring cases are facing costly delays, Zambia being the most recent example.

To help resolve this issue, the IMF, the World Bank, and India as G20 Chair, recently put in place a Global Sovereign Debt Roundtable. It brings together public and private creditors, as well as borrowers, to help reach consensus on standards and processes—so we can speed up restructuring cases, including those under the G20’s Common Framework.

But even as we call for progress on dealing with debt, we also need to bolster the IMF’s capacity to help our poorest member countries. To support them, we have increased our interest-free lending more than four-fold to $24 billion since the beginning of the pandemic. Now, we are urgently calling on our wealthier members to help address fundraising shortfalls in our Poverty Reduction and Growth Trust.

This is critical to ensure that the IMF can continue to provide vital support and help catalyze financing from others. So, too, is making sure that we can support all our members—so we are working this year to successfully complete the review of quotas, the building blocks of the IMF’s financial structure.

It is now more important than ever to step up cooperation—to strengthen the ropes that tie us together—on this issue and the full range of economic challenges we face. Only then can we climb these hills together.

4. Conclusion

This brings me back to the words of Nelson Mandela. On realizing that there are many more hills to climb, he said: “I have taken a moment here to rest, to steal a view of the glorious vista that surrounds me, to look back on the distance I have come. But...I dare not linger, for my long walk is not ended.”

The global community may also have a long walk ahead of us. But, as the Fund’s member countries gather for our Spring Meetings next week, we should stay laser-focused on the glorious vista of a future with stronger and more inclusive growth.

Thank you.