Transcript of Asia - Pacific Regional Economic Outlook - Tokyo Launch October 2024
November 1, 2024
Participants:
Krishna Srinivasan, Director, Asia and Pacific Department (APD), IMF
Thomas Helbling, Deputy Director, APD, IMF
Akihiko Yoshida, Director, Regional Office for Asia and the Pacific, IMF
Moderator:
Randa Elnagar, Senior Communications Officer, IMF
* * * * *
MS. ELNAGAR: Good morning, everyone in the room and those who are watching us online and around the world. Welcome to the press briefing on the release of the regional economic outlook for the Asia and Pacific.
I am Randa Elnagar of the IMF communications department. Joining me today is Krishna Srinivasan, Director of the IMF’s Asia and Pacific Department; Thomas Helbling, Deputy Director for the IMF’s Asia and Pacific Department; and Akihiko Yoshida, Director for the International Monetary Fund's Regional Office for the Asia and the Pacific.
The title of the regional economic outlook is resilient growth but higher risks. By now you should have received the report and the related material, including the blog and the video.
To kickstart our briefing today, Krishna is going to start us with some opening remarks and then we will take your questions in the room online and from Webex. So with that, Krishna, the floor is yours. Thank you.
MR. SRINIVASAN: Good morning, everyone. Thank you, Randa. Let me make some opening remarks before we take your questions and again in answering your questions, Thomas and Akihiko will be taking turns answering some of your question. Let me start with the presentation. It's a very brief presentation.
I start with economic growth. The news is positive. In the first half of this year, most Asian economies exceeded the growth forecast we had made at the time of the April 2024 regional economic outlook. You can see that on the left-hand side chart. All the red dots above the line will tell you that.
The entire region benefited from strong global demand for Asian exports. For domestic demand, the picture was more nuanced. Some advanced economies outside Japan experienced soft patch in household consumption which may reflect the impact of early monetary tightening.
On inflation, the news is also positive. Asia has brought inflation down to low and stable rates faster than other regions. In emerging Asia, the disinflation process was essentially complete already at the end of 2023. For this year we expect the lowest inflation rate in almost 25 years.
In advanced Asia, progress has been slower. As through mid-2024, wage pressures kept services inflation elevated. Often these reflected efforts by workers to recuperate real income losses suffered in 2021 to 2023. However, in recent months, service inflation has started to retreat and most advanced economies are now also back to policy targets.
So, we can speak briefly about China. China is of critical importance for the region. The Chinese economy continues to suffer from adjustment in the real estate sector, which is also shown on the left-hand side. You look at any measure of housing sector activity, whether it's starts, sales, or investment, it's been continuously declining. The drag is weighing on private demand with sluggish retail sales and slower loan growth.
At the same time, industrial production has held up better supported by exports of equipment and manufactured products. So, domestic demand remains weak in China, but they are getting some support from the external demand side through higher exports.
A few words on Japan, in Japan, growth suffered from supply disruptions in the auto industry in the first half of 2024. These factors have since dissipated. Forward-looking indicators are encouraging. Real wages are recovering on the heels of the shinto wage agreement that boosted nominal wages by 3.5 percent and total compensation by more than 5 percent. Headline and core inflation both remain above the Bank of Japan's target of 2 percent.
So this, in some sense, summarizes our growth outlook here, this slide. Asia remains the world's engine of growth. It generates 60 percent of global economic growth, far more than its share in global GDP of about 40 percent.
For China, we now forecast growth at 4.8 percent for 2024. This is somewhat higher than our April forecast but lower than our interim update in July, which had been at 5 percent. The key reason for this downgrade is a continued weakening of domestic demand.
At the same time, the authorities have announced housing and fiscal measures recently that are not yet incorporated in the forecast and that could support growth, especially in 2025.
In Japan, we have downgraded this year's growth forecast in response to the supply disruptions I mentioned earlier, but we expect a recovery in 2025.
India remains the world's fastest growing major economy. This year it benefits from a good agriculture season which is boosting rural consumption.
Korea benefits from strong global demand for technology products, even though domestic demand was soft in the first half of this year.
And in Australia, it is coping with the residual services inflation and a tight monetary stance. As a result, we have marked down this year's growth projection.
In the ASEAN economies, growth is overall robust and balanced, even though there are important differences between individual economies.
Finally, the Pacific island countries are benefiting from a recovery in tourism, even though its impact on growth will fade in 2025.
Now, how do we see risks? A couple of risks are the environment in which Asian policymakers operate has become tougher. For example, there are tentative signs that global demand could weaken, including the United states, which would be bad news for an export-dependent region like Asia.
Moreover, countries across the globe continue to implement trade restrictions at a rapid pace. We see already how trade flows are adjusting. China, for example, exports relatively more to emerging markets and less to advanced economies than five years earlier.
ASEAN countries export more to both China and the U.S. as trade targeted by U.S. and Chinese tariffs get channeled through third countries. In economic terms this is a costly detour.
As we have stressed before, no one really wins from trade fragmentation. We all pay for this with slower global growth and Asia has more to lose than others given its tight integration into global supply chains.
How should Asian policymakers navigate this environment? On macroeconomic policies there is a strong case for rebalancing the fiscal and the monetary stance. In many countries the fiscal stance is too loose. Public debt increased sharply during the pandemic.
In Pacific island countries, for example, debt ratios almost doubled but debt has hardly come down since then. This drives up debt service cost and leaves governments with little room for maneuver.
In some economies, weak private demand may justify somewhat larger fiscal deficits in the near term, but for most countries it is time to consolidate budget in earnest, both to build buffers against risks and to preserve spending power for addressing longer term challenges such as climate change and population aging.
By contrast, with inflation somewhat defeated, most Asian central banks now have room to cut interest rates. Earlier in the year some central banks may have been reluctant to ease before the Federal Reserve fearing that this could put Asian currencies under pressure. But as the Fed has now started its own rate cutting cycle, such concern should have dissipated.
There are, of course, exceptions from this rule. One is Japan which is on a different monetary cycle and where the BOJ is in the process of increasing policy rates gradually.
But Asian policymakers also need to address longer term structural issues if they want to preserve Asia's role as an engine of global growth. I'll make a couple of remarks about the analytical work that we're publishing alongside REO that looks at long-term growth and structural transformation in the region.
Asia's traditional development model, first developed by Japan in the late 19th century, has been based on moving workers from agriculture into manufacturing and on selling the manufactured goods in the global market. The success has been spectacular. It unleashed maybe the greatest development success story in human history. The figure on the left-hand side shows how this transformation has been instrumental in boosting productivity and raising living standards.
Recently, some Asian economies have shifted more into services rather than manufacturing. This trend is likely to continue as many Asian economies have reached income levels where the demand for manufactured goods typically declines and the demand for services tend to increase.
The shift into services has been good for growth as modern services are often more productive than manufacturing. Moreover, digital technology is making some services, such as business and finance, more tradable in global markets.
The emerging global market of services hold large growth opportunities but achieving them will require reforms. Education and training, for example, will need to equip workers with the skills to provide modern services and Asia should open its services sector to trade and investment. They remain relatively closed in contrast to manufacturing.
With this, we are happy to take your questions. Thank you.
MS. ELNAGAR: Thank you, Krishna.
Please raise your hand and identify yourself. Questions?
QUESTIONER: Hello, hi. I'm Leika Kihara from Reuters. I have two questions. One is about the impact of trade. U.S. Republican president candidate Trump has vowed to impose tariffs of 10 percent on global imports to the U.S. and 60 percent on goods from China. How would you assess the hit from any such measures to the broader Asian economies? That's my first question. Should I go to the next one?
MS. ELNAGAR: Yeah.
QUESTIONER: Okay.
MS. ELNAGAR: We can take two.
MS. ELNAGAR: Okay. My second question is about Asian capital flows. How would the diverging policy paths between Japan and other advanced economy central banks, like the Fed, ECB, affect money flows including in Asian markets? And how big is the risk of another market disruption like the one we've seen in August, early August, and how should Asian policymakers prepare for any such repeat of market turbulence? Thank you.
MS. ELNAGAR: Thank you.
MR. SRINIVASAN: Thank you. You know, one indicator which, one fact that we put in our reports, is that if you look at 2019, the amount of trade restrictive measures were around 1,000 globally. In 2023 it's 3,000. It's gone over three times in four years, and if you look at 2024 it's going to be another record year in terms of trade restrictions.
Now, it's clearly tariffs, non-tariff barriers, and domestic content provisions are not the right solutions since they distort trade and investment flows and risk undermining the multilateral trading system. So our analysis also finds that any kind of trade restriction is met by retaliation, 74 percent probability that it will be -- that there will be retaliation. So these beggar thy neighbor policies is going to be more pervasive.
So at the end of the day, these kind of measures will lead to higher prices being paid by consumers and investors. And so we, the IMF, we believe in an open, rules-based trading system which has been critical for global economic growth and stability over the past decades. And so we encourage countries to address the underlying concerns that are exacerbating these trade tensions. And underpinning these efforts is a need to strengthen and modernize the trading system, including strengthening rules in areas like agriculture and industrial subsidies and ensuring effective dispute settlement.
The point we're making here is, you know, that you do see a world which where fragmentation has been on the rise, so we all need to work together to unwind, to kind of unwind these kind of fragmentation measures. And all the work we have done in the Asia-Pacific Department on fragmentation tells you whether it is friendshoring or reshoring or reshoring that everyone hurts in the long run.
There could be some countries which benefit because of trade diversion in the short run, for example, countries like Vietnam and Mexico have been called connecter countries because, you know, trade groups are there. But as I mentioned in my opening remarks, this is a costly economic detour.
So in the short run, some countries may benefit but in the long run everybody hurts. So that's why it's important to work against these, kind of, fragmentation measures.
Now, your second part was on capital flows.
To a large extent what we see is capital movements and also movements in
currencies reflect differences in monetary policy stance across countries.
So now you're at a point where the Fed is beginning to cut rates and so
market expectation also is that, you know, Asian central banks will also
cut interest rates and so forth, so that, kind of, movement, how each
central bank moves will determine how capital flows across countries.
And our view is that, you know, at the end of the day central banks need to focus on domestic conditions and focus on inflation and see through these capital flows and the impact on exchange rate so that, you know, they focus -- center on what's happening to inflation, rather than trying to, you know, address these capital flows in any other way.
MS. ELNAGAR: Thank you, Krishna.
Other questions from the room?
QUESTIONER: Anthony Rowley, South China Morning Post. Two questions if I may? One, the increase in debt, you know, there tends to be an assumption, at least I think so, that China being a state economy is in a much better position to absorb this debt than market economies. Is that the case or not?
And, you know, related to that, if there is an increase in debt distress which requires intervention how will it be absorbed essentially by central banks, by special purpose vehicles, or what? Basically, that's my questions.
MR. SRINIVASAN: Okay, thank you for the question. You know, if you look at debt levels in the region they have been rising since the global financial crisis. And now, you know, you've had multiple shocks over the last 20 years or so since the global financial crisis, and part of the increase in debt reflects, of course, slower growth and part of it reflects measures that have been taken to address these shocks.
That said, we have not seen a decline since the pandemic and, you know, across the globe in Asian countries debt levels have risen very sharply. I think Asia's share of global debt, total global debt, I'm not just talking on the public debt here, I'm talking about all debt, has increased from something like 25 percent to 38 percent over the years.
And in particular, if you look at public debt, it has risen to very high levels in China where it's almost doubled since the GFC. In Japan it's about 250 percent. So, this is a trend across many parts of Asia.
So this is why in our policy recommendation we clearly state that it's time that, you know, fiscal consolidation begins in earnest across many countries of the world.
Now, you talked about China in particular. What we say for China is China has some fiscal space and it has to be used in a way which is impactful for the economy. So, when we talk about the big elephant in the room in terms of the property sector, what we find in an analysis or what we recommend is that China has the space to, and we call upon the central government to spend about 5.5 percent of GDP over four years, to rehabilitate the property sector to finish pre-sold housing and so on and so forth so that that sector can be rehabilitated, confidence comes back, domestic demand picks up.
But going beyond the two years, so you have some space in the near term, but even China needs to start consolidating two years out. And again, in Asia, the kind of fiscal frameworks you have differs. Some countries have well-fleshed out medium term fiscal frameworks; others don't. I mean, for instance, Japan does not have a well-fleshed out fiscal framework, meaning the fiscal framework which can be an anchor for building confidence in the fiscal stance in these countries.
So, I think this is an issue. That's why we talk about rotation policies. Monetary policy has more room to ease now given where we are with inflation, but on debt at this time that countries move more in earnest and start doing consolidation both through expenditure measures and revenue measures and in the context of a well-fleshed out medium-term fiscal framework.
MS. ELNAGAR: Other questions in the room? Yes. Yes.
QUESTIONER: I have a question about -- could you elaborate external demand, weaker external demand? So, is there any specific area or specific country in your mind and what -- so, United States or Europe or somewhere.
MR. SRINIVASAN: Thanks for the question. So again, and if you look at our numbers here, we do show that the U.S. is going to slow. China is going to slow. We have China growing at 4.8 percent to 4.5 percent next year. The question, of course, is we have these countries -- look, we have the Euro area picking up. The question is when you have slowing growth in these countries can it be or will it be more than what we expect?
For instance, the impact of monetary tightening, I mean, in the past has that -- the lag effects would that be stronger than what we expect right now? So that could be a case in the -- for advanced economies.
In the case of China, we have growth at 4.5 percent. The question, of course, is if the property sector downturn continues unaddressed, could growth be weaker than we expect? Ao anything -- anytime when we have weaker growth in, say, the U.S. and China and so forth that has a bearing on how Asia responds.
For instance, I make this point that about 55 percent of trade in Asia is intra-regional, so countries trading within with each other. So, if China slows more than we expect then it could have a significant bearing on Asia's exports or intra-regional trade.
Similarly, if U.S. slows more than we expect it will have a bearing on exports from the region. So, that's why we talk about the, you know, a rougher -- when we talk about a rough external environment and, you know, weaker external demand, that's one risk which we identified quite clearly in our report.
MS. ELNAGAR: Other questions in the room? If not, we're going to go online. We received a number of questions so we're going to stay on the regional topics. We have a question from Dow Jones from Fabiana. Let me read her question. I think she's on Webex, but we're trying to see.
Will the outcome of the U.S. elections have a significant impact on the economic forecasts for Asia? And which scenario stands to be most detrimental to growth? What are the implications of an escalation on tariff wars between China and the West for other economies in Asia? So, this seems to be on the U.S. elections and tariffs.
There is a similar question from Julian Giroux, AFP. With the U.S.-China trade tensions set to intensify, what could be the medium term impact for Southeast Asian countries which might benefit from companies relocating their manufacturing facilities but could also be targeted by higher U.S. tariffs? So, these are two regional and on trade.
MR. SRINIVASAN: Thank you. I don't know whether Thomas wants to add to whatever I say, but let me just start off by saying that, again, we won't comment on the politics, okay? We won't comment on the election outcome and so on and so forth.
But what we can say is I can -- I want to pivot off what we said is one of the underlying risks for global economy and for the region, which is the rising geoeconomic fragmentation. And all the analysis we have done, both in this report and previous reports, tells you that any kind of geoeconomic fragmentation, whether it takes the form of friendshoring or reshoring or just in terms of the number of trade restrictions we see, the impact is larger on Asia. And that's because Asian economies are much more integrated in global supply chains. So, anytime there's fragmentation pressures, fragmentation happens, that affects Asian countries much more.
Now going beyond that, there was a question about how do Asian countries have -- you've seen a shift in trade pattern. As I mentioned, now what you see is that China is exporting a lot more to emerging markets in Asia and elsewhere, whereas emerging markets in Asia are exporting a lot more to U.S. and other advanced economies. So, there is a shift in trade patterns.
And if you go beyond that and you look at what's happening to goods which were targeted by U.S.-China trade tensions, in those targeted sectors, countries in ASEAN, have done well. In other words, their exports of those targeted sectors is higher than of the non-targeted sectors.
This is not to say that overall trade growth has gotten better. If you look at overall export growth some countries have clearly done better, like Vietnam has done well, but others like Thailand have not done well.
So, in aggregate terms export growth is the picture is mixed, but in the targeted sectors the ASEAN countries have, kind of, occupied more market share, kind of, calling them into more, like, connected countries.
But the bottom line is in the long run, in the long run, any kind of fragmentation everybody loses. All countries lose, irrespective of whether it's Vietnam or Mexico. So that's the point we're trying to make that in the short term you could have some trade diversion and some countries may benefit. In the long run everyone hurts.
Maybe, Thomas, you want to add to that? No? Okay.
MS. ELNAGAR: Okay. We're still going to remain online. We have a question from Karishma Asoodani, Business Today TV India. Do you foresee economic challenges in the Asia-Pacific region in the coming months due to the geopolitical tensions in the Middle East?
MR. SRINIVASAN: So, in terms of what's happening in the Middle East it's very unfortunate. Our heart goes out for the lives lost there. In terms of how it impacts countries in the Asia-Pacific, let me identify maybe a couple of ways through which it could happen.
One, it could be through oil and commodity prices and others to disruptions in trade. And so far we've seen that the disruptions in trade are not at the same level as what we saw in 2022, but also oil prices have been hovering around $70, so it's not been that much of an impediment to growth in Asia.
However, if things get worse and oil prices rise, then that could have a significant impact on countries in the region. Some of the work we have done shows that a 10 percent increase in oil prices leads to a 0.15 percent decline in global output the next year and inflation rising by 0.4 percentage points. Now, that's at the global level.
For countries which in Asia which are oil importers like India, that impact would be that much more significant.
MS. ELNAGAR: Okay. We have another one online from Korea and then we're going to go on Webex. So, Ahn Taeho from Hankyoreh, with South Korea's Q3 GDP growth rate falling short of expectations is there a possibility that the IMF's October forecast for South Korea's annual growth might be revised downward? I would like to understand if this recent data could potentially lead to any adjustment in the IMF's outlook?
And the second question, additionally, South Korea's export growth has also shown a sharper than expected slowdown leading to concerns that exports may have reached their peak. Could you share the IMF's perspective on the future trajectory of South Korean exports, particularly considering the global economic environment?
MR. SRINIVASAN: Thank you, Randa. I'll pass the question on to Thomas, please.
MR. HELBLING: Thank you. On Korea the quick answer is the change order should shortfall in Q3 GDP growth relative to expectations is not in itself a sufficient condition for the revision of the forecast and let me elaborate.
So, Q3 growth we had an increase 0.1 percent Q on Q, 1.5 percent annual growth. That was a bit -- fell short of expectations. Within that broad picture we will note that domestic demand has recovered after the contraction in the second quarter as expected. So, we still see the Korean economy recovery from the little downturn in 2023 in domestic demand and the Korea team will go -- will look at the economy in the context of the Article 4 consultation in November.
As for exports, they contracted unexpectedly in Q3. Some indication is that there were special factors at work. On the one hand there was a strike in the automotive industry so automotive exports fell short of expectations. They were -- exports fell short in some segment of the electronics sector, but overall we still seen in our baseline continued strong demand for electronics and chips from artificial intelligence. And the team will look whether there are downside risk or whether the changes in the baseline are necessary, but overall it is not clear at this point that we will revise the growth forecast for Korea. We'll do that in the end for the REO update in January. And there we don't only look at recent data of developments but also changes in the global environment, possible changes in policy and then on that basis make the revisions in the forecast.
MS. ELNAGAR: Thank you, Thomas.
We're going to take from Webex, but 21st Century Business Herald, she cannot open her mic so we will just take it and read it. So, there is a lot of discussion on whether China will follow the path of Japan into economic stagnation. What is your take on that? What is the biggest gray rhino in China's economy at the moment?
One thing receiving attention in China is the future of market-oriented reform. What is your view? What should be done to lift the confidence of private firms and consumers? Thank you.
MR. SRINIVASAN: So, in China the way we see it we have a problem -- the big problem, the big elephant in the room, as I have mentioned, is the problem of the property sector. And, of course, there are a few local governments which are feeling the stress because of what's happening in the property sector.
So, in many ways the problem is a lot more localized than what we saw in Japan. So in that sense, I would not jump to any kind of conclusion that, you know, China is an -- no. The problem right now is localized and with the right kind of policy reforms and policy measures, this problem can be addressed.
As I mentioned, the property sector is still -- the problems are still there. It continues. You can see all the indicators whether it's sales, starts, or investments coming down, so it's very important that that's -- the problems they are addressed head-on. And we have provided a recommendation where we said that over four years 5.5 percent of central government support will be needed to rehabilitate the housing sector to do, for instance, to finish the pre-sold housing, which will also help resolve the problem with the developers.
So, if that's undertaken and if domestic demand picks up and so on and so forth and also they're putting in place measures to help the local governments, I think you put those measures in place then you will see this problem, you know, subsiding soon.
But what was the second part of the question?
MS. ELNAGAR: One thing receiving the attention in China is the future of market-oriented reforms. What's your view? What should be done to lift the confidence of private firms and consumers?
MR. SRINIVASAN: Yeah. I think in terms of lifting confidence of consumers and investors, I think addressing the problem and the big problem in the property sector will be very key. And also going beyond that, I think it's important for China to reorient its economy away from export and investment-led growth to more consumption-led growth.
And again, that's where I talked about the fact that China needs to invest more in improving its social safety nets, improving pension reforms, and so on and so forth so that there is a rotation in demand away from export and investment-led growth towards consumption. So that would be important.
I think beyond that, you know, it's important that, you know, over the long run or even over the medium term we have growth in China at 3.3 percent. I think it's important to ensure that over the medium term there's more structural reforms in terms of getting more competitive neutrality between the private sector and SOEs so that we put them on the same level playing field. Those are, kind of, reforms should be really opening up the economy more to competition and so on. I think that'll be important.
Maybe on this one, Thomas, you came back from the Article 4, do you have more to comment?
MR. HELBLING: I think, as Krishna mentioned, we see two basic direction. One is consumption rebalancing and their social -- we see several elements, in particular reform of the social safety net and the need for high precautionary savings by households, which would free up resources to strengthen consumption.
And the second point is a level playing field between state-owned entities in particular and the private sector. These have been two longstanding recommendations and there was scenario analysis about two years ago in the Article 4 consultation which highlighted the potential significant benefits from such a reform package.
MS. ELNAGAR: Thank you, Thomas.
We're going to go, again still online, we have the Bhutan -- Sangay Rabten for Business Bhutan. He has two questions. The ruling government of Bhutan has begun implementing the economic stimulus plan, ESP, loan program for the public at an interest rate of 4 percent backed by NU 15 billion from the Government of India. What is the IMF's assessment of this program and how effective is it likely to be in revitalizing the economy?
The second question is what fiscal measures or adjustment does Bhutan need to establish a solid fiscal buffer and effectively rebuild its economy?
MR. SRINIVASAN: Thank you, Randa. I'll pass this question to Aki, please.
MR. YOSHIDA: Thank you. On the question of this economic stimulus plan, the economic recovery is expected to strengthen the increase in capital spending under the starting five-year grant. And with the slowdown in immigration pull factors that have reduced the labor force, particularly skilled workers, the ESP loan program is expected to provide subsidized loan to specific sectors. This should contribute to stronger growth in such sectors that financial institutions need to ensure strong underwriting standards as they will be holding the risk.
On the fiscal measures or adjustments, authorities’ revenue mobilization strategy, along with some restraint in current spending, will help Bhutan in rebuilding fiscal buffers and creating fiscal space for priority spending, including for infrastructure and key sectors like health and education.
The pillar of the revenue mobilization efforts is the implementation of the goods and service tax, which is expected by July 2025.
MS. ELNAGAR: Thank you very much.
We're going to go to Webex now, so please turn on your camera if you're going to ask on Webex. Zoeflick
QUESTIONER: Hi, good morning. Good morning, Randa and good morning, Mr. Krishna. Thank you for your presentation.
My question is related to Sri Lanka. Recently, the Sri Lankan government mentioned that taxation was one of the key points that they discussed with the IMF in Washington during general meetings and the government has emphasized that they plan on reducing the tax burden on Sri Lankans. Could you also to comment on that position, how the IMF is looking forward to accommodate this request?
And at the same time, what about the next review? Is Sri Lanka's next review going to take place and when is it or it will be further delayed? Thank you.
MS. ELNAGAR: Thank you. Shall we stay on Sri Lanka? I have a few from online. Indika Sakalasooriya, Neon Media. Sri Lanka's new president has yet to demonstrate a clear commitment to restructuring certain loss-making state-owned enterprises. Is the IMF concerned about this stance and could it become a point of contention in the coming program review?
And then what's the IMF's view on Sri Lanka's continuing with vehicle import suspension? Will it be taken up the discussion in the next review?
The third one is Adna Derana (phonetic). Some opposition politicians in Sri Lanka have claimed that the IMF's fourth tranche for the country will be delayed until next year. Could you please clarify?
And the last one is from Hirou TV In Sri Lanka, what will be the economic progress forecast with the current policy framework? Is it healthy enough for the economy to make salary increments, tax amendments, and even medical (phonetic) imports, staying on the medical imports?
And then the last one, what's the IMF's stand on the tax proposals?
MR. SRINIVASAN: Thank you, Randa. Again, a bunch of questions here but my answer is going to be very short. So, right after the new government came into office we had a mission there to Sri Lanka. We had good discussions with the president and his team, and it was clear recognition that Sri Lanka had made significant progress under the program and that these gains had to be safeguarded and had to -- we had -- and measures had to be taken to build on the success achieved so far.
So, in terms of the commitment, it's clear that the new government is fully committed to the program, to the IMP-supported program, both in terms of the fiscal targets, in terms of debt targets, and so on. And good progress has been made.
A team from Sri Lanka was in Washington to continue discussions on the next review and discussions are ongoing, I don't want to get to the details of the negotiations, but good progress is being made. And a mission will return to Sri Lanka to continue with these negotiations for the third review soon.
MS. ELNAGAR: Thank you.
We stay on Webex. Please turn on your camera. I think you wanted to ask a question?
QUESTIONER: Good morning. I'm from Nepal. I have a couple of questions on there. The monetary policy transmission in Nepal commences in a week. It has a big exchange rate with the Indian currency. That means Nepal largely imports inflation and interest rates from India.
However, Nepal has not benefited similarly from India's impressive economic growth. How do you assess this situation, first? And second one is what does this mean of Nepal's properties on the reforms permitted under the ECF program? There appears to be a delay in disbursement of the fifth installment. Who -- could this be related to the problems of the ECF commitments? Thank you.
MR. SRINIVASAN: Thank you, Randa. I think Thomas will get that question.
MR. HELBLING: On Nepal, as you know, Nepal has an ECF program since 2022. It has three main goals. The first goal was to manage the pandemic impact on the economy. That's largely over and we are now left with the other two goals. One is to preserve macroeconomic stability.
So we think in Nepal's context, the exchange rate regime has helped to preserve macroeconomic stability. The Nepal team is working closely with the government to maintain, foster macroeconomic stability which will help the country.
On the fifth review, negotiations are ongoing. There are indeed some delays on structural policies. These are being discussed. There was a mission in September that had the first contact with the new government elected in July and these discussions will continue. Thank you.
MS. ELNAGAR: Thank you. Thank you, Thomas.
We're going to pick another one from Webex now. Doyosha from Singapore?
Okay. I can read the question then. If in the long run all countries are ultimately losers from trade tensions, including ASEAN nations that are currently benefiting from industry shifts, what advice do you give to ASEAN countries at this stage?
MR. SRINIVASAN: Maybe Akihiko will do that?
MR. SRINIVASAN: It's okay. Just repeat the question.
MS. ELNAGAR: Okay. In the long run, all countries are ultimately losers from trade tensions, including ASEAN nations that are currently benefiting from industry shifts. What advice would you offer ASEAN countries at this stage?
MR. SRINIVASAN: Okay. Maybe I'll answer and then Aki can come in. So, we talked about the fact that, you know, in the short run you've seen some of the ASEAN countries benefiting from or taking advantage of these trade tensions. So, again, that provides an opportunity for these ASEAN countries. They have shown that despite fragmentation pressures they have integrated themselves in global supply chains and so on and so forth.
So, I think I would pivot from there to say what does it mean? If you look at the work around structural transformation, again, there many of the countries have really matured from moving from agriculture to manufacturing and some of them are also moving towards services. I think going forward, I think greater emphasis on services like growth improving productivity in the services sector and using them as a platform for higher growth down the road would be an important advice for many countries in the ASEAN.
In addition to being key players in manufacturing and as part of global supply chains trying to, you know, also pivot towards greater services-led growth. And here, the point we would, which I made my opening remarks, is that countries in Asia, including ASEAN countries, are not that open to trade and services. So, if they have a big benefit, if they want to, you know, reap the benefits of greater services-led growth, they have to open up their economies more. They have to invest in education and reskilling their labor force so that that labor force is well-placed to take advantage of the opportunities provided by greater services sector growth.
Aki?
MR. YOSHIDA: And maybe just the one, I'll add one thing. ASEAN has some regional integration initiative and they also have separate briefings of regional financial safety net, so maybe they can strengthen those regional positives and against proceedings against possible shocks. Thank you.
MS. ELNAGAR: Thank you. I think we have, like, THREE minutes left so I'm going to go to the last couple of questions on Bangladesh because we have a couple on Webex and some received online. So if you have THE Webex ready at this point? I think they cannot open the camera. There's something --
MR. SRINIVASAN: Can you review the question?
MS. ELNAGAR: Yes. So, it's from Tauhid from Jumana TV. I'd like to get your perspective on Bangladesh's ongoing economic challenges despite the government's efforts to control inflation by raising the repo rate, inflation remains close to 10 percent. Do you believe the government is on the right track?
I think I have another one on Bangladesh from Saiful, The Financial Express. The interim government of Bangladesh is taking budget support loans in increased volume from development partners instead of project loans. Is this the right decision? What impact it may have on the country's economy?
And the last one is from Zakir Hossain, Daily Samakal. Is monetary tightening enough to contain high inflation in Bangladesh? If not, what to do? So we --
MR. SRINIVASAN: So, thanks. I'll pass it on to Thomas.
MR. HELBLING: Thank you. Let me perhaps look at the underlying common element to all questions. Bangladesh has experienced unrest and also major floods. That has on the economic side meant economic disruptions in particular on the supply side. That is the major reason for upward revision in inflation in our forecast.
But inflation has been high for some time. It was ratcheted up in 2022 and has stayed relatively high. So there in terms of monetary policy, yes, monetary policy tightening helps and is needed, so the recent increase in the repo rate was a step in the right direction.
Given even though much of the recent increase in inflation was supply-related given earlier increases in inflation, we think it's important for the central bank to prevent second round effect from the earlier inflation increases, that is these increases feeding into inflation expectations.
We also think that with the economic unrest and the disruption there have also been disruptions on the balance of payments side and particularly for external financing. So, the budget loans provide some breathing space. Also provide the interim government with an opportunity to formulate the policy reforms and gain some time.
In particular, on the one hand, fiscal policy should support monetary policy and support external stability by tightening overall, at the same time they need to rebalance fiscal policy to maintain space to support poor and support development. Thank you.
MS. ELNAGAR: Thank you, Thomas.,
I think we this will come exactly to the end of our press conference as announced, the last one was Bangladesh.
I would like to thank Krishna, Thomas, and Aki for taking the questions.
Thank you all for attending in-person, joining online, regardless of the technical issues, and through Webex. We look forward to seeing you again.
And if you have any further questions, please send this to media@imf.org. Thank you.
IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Randa ElNagar
Phone: +1 202 623-7100Email: MEDIA@IMF.org