Urgent Action Needed to Address a Worsening ‘Two-Track’ Recovery

IMF Blog, July 7, 2021

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Global recovery is progressing broadly in line with the IMF’s April projections of 6 percent growth this year.
United States projected growth: 7 percent this year, the highest since 1984.
Recovery is gaining momentum in China, the euro area, and a handful of other advanced and emerging economies.
Incoming data confirm a deepening divergence in economic fortunes — a “worsening two-track recovery” driven by differences in vaccine availability, infection rates, and policy support.

Faster access to vaccinations for high-risk populations could potentially save more than half a million lives in the next six months alone.
Low vaccination rates leave poorer nations more exposed; in sub-Saharan Africa, less than 1 adult in a hundred is fully vaccinated, compared to an average of over 30 percent in more advanced economies.
Unvaccinated populations raise the risk of deadlier variants emerging, undermining global progress.
Immediate needs in regions with surges include oxygen, testing material, personal protective equipment, and therapeutics.

Recent pickup in inflation, particularly in the U.S., is being closely watched; inflation expectations have been stable so far but could rise.
Risk: a more sustained rise in inflation or inflation expectations could require earlier-than-expected tightening of US monetary policy.
Higher interest rates in the US could lead to sharp tightening of global financial conditions and significant capital outflows from emerging and developing economies.
Countries with large external financing needs or elevated debt levels would face major challenges.
Policymaker guidance: continue monetary accommodation in most countries while closely monitoring inflation and financial stability risks; major central banks should carefully communicate policy plans to keep inflation expectations well anchored and prevent excess financial volatility.

About $16 trillion in fiscal action has been taken globally, led by G-20 economies.
In countries with rapidly rising infections: continue targeted support for healthcare, vulnerable households, and firms within credible medium-term frameworks.
As health metrics improve: gradually scale back general support programs while scaling up social spending and training programs to cushion workers, especially young people, women, and the low-skilled.
Continued international cooperation is essential to end the pandemic; the economic benefits are cited as “extraordinary” and the costs “relatively small.”

IMF staff outlined a $50 billion plan intended to deliver trillions of dollars gained from faster vaccine rollout and accelerated recovery.
IMF, World Bank, WHO, and WTO have formed a “war room” to track, coordinate, and advance delivery of health tools to developing countries and mobilize policymakers to remove roadblocks.
Vaccination targets endorsed for support: at least 40 percent of the population in every country by the end of 2021, and at least 60 percent by the first half of 2022.
Critical actions to reach targets: more dose sharing; support grant and concessional financing to increase and diversify vaccine production and bolster in-country delivery, diagnostics, and therapeutics; remove barriers to exports of inputs and finished vaccines and other barriers to supply chain operations.
Swift provision of emergency packages to affected regions is essential, including oxygen, testing material, personal protective equipment, and therapeutics.

Estimated needs for low-income countries: $200 billion over five years to fight the pandemic, plus another $250 billion to have fiscal space for transformative reforms.
Wealthier nations are urged to redouble efforts on concessional financing and dealing with debt.
G20 Debt Service Suspension Initiative provided breathing space; need to make the new Common Framework fully operational.
Example cases: Chad received financing assurances from its G20 bilateral creditors and needs speedy commitments by private creditors on comparable terms; timely formation of the creditor committee is encouraged to enable delivery of the debt operation Ethiopia is requesting.
Countries with unsustainable debt burdens or protracted financing needs should seek early action for debt resolution or reprofiling.

IMF provided $114 billion in new financing to 85 countries and debt service relief for poorest members.
Support received to increase access limits to scale up zero-interest lending capacity.
Exploring a new “vaccine window” under emergency financing facilities to support countries in financing vaccination programs if needed.
Membership backs a new allocation of Special Drawing Rights of $650 billion, the largest issuance in IMF history; expected allocation process to be completed by the end of August.
IMF working to magnify impact of SDR allocation by encouraging voluntary channeling of some SDRs, together with budget loans, to reach a total global ambition of $100 billion for the poorest and most vulnerable countries.
Exploring channels including the Poverty Reduction and Growth Trust (PRGT) and possibly a new Resilience and Sustainability Trust (RST).
This week’s G20 meeting is an opportunity to advance the plan for a new RST to support low-income nations and poorer and vulnerable middle-income countries with structural transformation and climate-related challenges.
IMF staff recently proposed an international carbon price floor to accelerate the transition to low-carbon growth over the course of this decade.

Strong welcome for the historic agreement reached by 130 countries in the context of the OECD/G20 Inclusive Framework: a minimum corporate tax rate to help ensure highly profitable companies pay their fair share everywhere.
IMF research indicates minimum tax regimes can help preserve corporate tax bases and mobilize revenue, important for investing in health, education, infrastructure, and social policies.

Step up international cooperation to end the pandemic: endorse vaccination targets (40 percent by end-2021; 60 percent by first half of 2022), accelerate dose sharing, expand production and delivery financing, remove trade barriers for vaccines and inputs, and provide emergency supplies to crisis regions.
Step up efforts to secure the recovery: tailor fiscal measures to pandemic exposure and policy space; protect healthcare and vulnerable groups where infections are rising; scale back broad support when warranted while increasing social spending and training; maintain monetary accommodation where appropriate and communicate policy plans clearly.
Step up support to vulnerable economies: provide concessional financing and debt relief, operationalize the Common Framework, facilitate creditor committees and comparable terms from private creditors, and mobilize international finance for pandemic response and transformative reforms.

By Kristalina Georgieva, July 7, 2021