Global Imbalances and the COVID-19 Crisis

IMF Blog, August 4, 2020

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Publication: August 4, 2020; Authors: Martin Kaufman, Daniel Leigh.
The External Sector Report finds overall current account deficits and surpluses in 2019 were "just below 3 percent of world GDP".
Latest forecasts for 2020 imply only a further narrowing by "some 0.3 percent of world GDP", a more modest decline than after the global financial crisis 10 years ago.
About "40 percent" of global current account deficits and surpluses were estimated to be excessive in 2019, concentrated in advanced economies.
The report provides individual economy assessments for the "30 largest economies".
China’s assessed external position in 2019 remained "broadly in line with fundamentals and desirable policies" due to offsetting policy gaps and structural distortions.
Stocks of external assets and liabilities are at historic highs, implying elevated risks for both debtor and creditor countries.

External deficits and surpluses are not inherently problematic; context and timing matter.
Risks from excessive deficits:
- Vulnerability to sudden stops in capital flows when economies borrow too much and too quickly from abroad.
Risks from excessive surpluses:
- Overinvestment of savings abroad, potentially at the expense of domestic investment needs.
The IMF approach focuses on overall current account balances rather than bilateral trade balances, asserting bilateral balances mainly reflect the international division of labor rather than macroeconomic factors.
Pre-existing imbalances and perceptions of an uneven playing field have contributed to rising protectionist sentiments and trade tensions, notably between the US and China.

The pandemic caused a sharp reduction in trade and significant exchange rate movements but produced only limited reduction in global current account deficits and surpluses.
Economies dependent on severely affected sectors (e.g., oil, tourism) or remittances could see falls in their current account balances "exceeding 2 percent of GDP".
Early crisis phase:
- Tighter external financing conditions triggered sudden capital outflows and sharp currency depreciations in numerous emerging market and developing economies.
- Strong fiscal and monetary policy responses, especially in advanced economies, helped restore global investor sentiment and partially unwind initial currency movements.
Ongoing risks:
- New waves of contagion, capital flow reversals, renewed trade tensions, economic scarring, dislocation of global trade and supply chains, reduced investment, and hindered recovery.
- Economies with preexisting vulnerabilities—large current account deficits, high share of foreign currency debt, limited international reserves—face raised external crisis risk.

Priorities:
- Provide lifelines and promote economic recovery.
Exchange rate and financial measures:
- Countries with flexible exchange rates should allow them to adjust where feasible.
- Foreign exchange intervention, where needed and where reserves are adequate, can alleviate disorderly market conditions.
- Official financing and swap lines can help economies facing disruptive balance of payments pressures and lacking access to private external financing, to preserve critical health care spending.
Trade measures:
- Avoid tariff and nontariff barriers to trade, especially on medical equipment and supplies.
- Roll back recent new restrictions on trade.
- Using tariffs to target bilateral trade balances is costly for trade and growth, tends to trigger offsetting currency movements, and is generally ineffective at reducing excess external imbalances and currency misalignments.
Multilateral trade system:
- Modernize the multilateral rules-based trading system and strengthen rules on subsidies and technology transfer.
- Expand the rule book on services and e-commerce and ensure a well-functioning WTO dispute settlement system.

Rebalancing requires collective reform efforts by both excess surplus and deficit countries; country-specific reforms will be needed.
For economies with excess current account deficits driven by larger-than-desirable fiscal deficits (example cited: the United States):
- Fiscal consolidation over the medium term to promote debt sustainability, reduce the excess current account gap, and facilitate raising international reserves where needed (example cited: Argentina).
For economies with export competitiveness challenges:
- Implement productivity-raising reforms.
For economies with persistent excess current account surpluses:
- Prioritize reforms that encourage investment and discourage excessive private saving.
- Where fiscal space exists, growth-oriented fiscal policy can strengthen resilience and narrow excess surpluses.
- Reforms to discourage excessive precautionary saving may be warranted (examples cited: Thailand and Malaysia), including expanding the social safety net.

Source: Global Imbalances and the COVID-19 Crisis — External Sector Report overview (August 4, 2020).