IMF Survey : Countries Should Take Action to Reduce External Imbalances

IMF News, July 28, 2015

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Canonical URL: IMF Survey : Countries Should Take Action to Reduce External Imbalances

Publication: IMF Survey
Date: July 28, 2015
Core message: If the world’s largest economies took steps to reduce excess external imbalances, they could improve prospects for sustained global growth and financial stability.
Basis: 2015 External Sector Report (ESR), which analyzes current account balances, real exchange rates, external balance sheets, capital flows, and international reserves.

The ESR covers 28 of the world’s largest economies plus the euro area.
The ESR comprises two papers:
- An overview paper emphasizing multilateral issues and the need for policies to reduce global imbalances.
- A set of individual external assessments, one for each economy.

Compared with around 2006-08, imbalances today are much reduced, but imbalances overall are still too large.
In many economies, current account surpluses and deficits continue to exceed staff-assessed norms; little progress overall in reducing excess imbalances in recent years.
Observed pattern: rotation of deficits—some countries’ deficits narrow while others widen—does not reduce global excess imbalances.
The broad cross-country pattern of current accounts in the current year is projected to be similar to last year’s because underlying drivers remain in place.

Much of the sizable currency movements since recent shocks are natural responses to:
- shifts in commodity prices, especially the plunge in the price of oil;
- divergences among economies in growth, inflation, and monetary policy.
The pattern of real effective exchange rate movements generally will help adjustment to the commodity price shock.
Among major advanced economies, divergence in monetary policies and exchange rates is likely to be beneficial for the global economy under current circumstances, including by easing global financial conditions at a time of global slack.
Caveat: recent currency movements also reflect an incomplete and uneven global recovery; more pro-growth policy action is needed beyond accommodative monetary policy.
Current accounts will be affected by real effective exchange rate movements, the drop in the price of oil and other commodities, and differences in countries’ domestic demand growth.

For some of the 28 economies plus the euro area, current accounts and exchange rates are about right; for many others, there are “gaps” of varying sizes.
Larger economies contribute more to the global pattern of imbalances, but multiple economies matter:
- Surplus-side examples highlighted: China, Germany, Korea.
- Deficit-side examples highlighted: United States, United Kingdom, Brazil, France.
The ESR also identifies economies where current account adjustment would be desirable for a country’s own welfare even if not systemically important.
Major challenge: multilateral—requires steady, appropriate action by both excess surplus and excess deficit economies; action on both sides would be reinforcing and best for global growth and stability.

General policy direction:
- Boost domestic demand in excess surplus economies.
- Support growth of domestic demand in excess deficit economies.
- Use fiscal policy where appropriate as part of demand adjustment.
- Apply structural policies to affect private sector saving and investment rates.
- Facilitate, not obstruct, adjustment of real exchange rates (recognizing real exchange rate adjustment alone is insufficient).
Risks of inaction or unbalanced action:
- Inaction: lost opportunity and a mediocre global outcome in terms of growth and stability.
- Insufficient action to reduce excess deficits: additional risks to financial stability.
- Action only by excess deficit economies (without surplus-side action): a global reduction in demand and a globally contractionary outcome when more demand is needed.

The ESR has become a key part of IMF surveillance, integrating multilateral and country-specific perspectives.
The ESR’s two papers are backed by an ongoing staff interaction process to ensure evenhanded assessments and a coherent, multilaterally consistent picture.
The ESR process supports—but does not replace—the IMF’s regular country assessments.
The 2015 ESR is the fourth year of the External Sector Report series.

Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol072815a