Opening Remarks by the Deputy Managing Director, Kenji Okamura
IMF News, November 17, 2022
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- Published: November 17, 2022
Event and context
- Remarks delivered at the conference on Managing Financial Risks in a Shock Prone World - Lessons from the past and challenges ahead
- Location: Tokyo
- Date: November 17, 2022
- Hosted with the University of Tokyo’s Center for Advanced Research in Finance; Regional Office for Asia and the Pacific provided organizational leadership
Outlook
- The global economy is facing a riskier and more shock-prone environment.
- Three powerful forces holding back the global economy:
- i) the Russian invasion of Ukraine;
- ii) the need to tighten monetary policy, amid a cost-of-living crisis and persistent and broadening inflation pressures; and,
- iii) the slowdown in China.
- IMF growth projections referenced:
- Global growth slowed from 6.0 percent last year to 3.2 percent this year (projection given during the IMF Annual Meetings one month prior).
- For 2023, the IMF lowered its forecast to 2.7 percent.
- Financial stability and vulnerability observations:
- Financial stability risks have increased with rising interest rates.
- Vulnerabilities are elevated in the sovereign and nonbank financial institutions sectors.
- Banks in advanced economies appear to be in a stronger position due to regulatory reform efforts following the Global Financial Crisis.
- Pressures on emerging markets and developing countries:
- Subject to capital outflows, dollar strength, and volatile commodity prices.
- Many are dealing with elevated debt levels pushed up by the pandemic.
- Rising global interest rates increase difficulty of sustaining debt burdens.
- More than 60 percent of low-income countries and over 25 percent of emerging markets are in or at risk of debt distress.
- Other systemic risks:
- Natural disasters are causing human suffering and economic losses; climate change is making these events more severe and frequent.
- Geoeconomic fragmentation risks damaging global production and trade networks with adverse consequences for growth and inflation.
- Climate and cyber-related vulnerabilities identified as potential sources of major shocks.
Policy priorities
- Bring inflation back to central bank targets:
- Stay the course on monetary policy despite near-term costs in terms of lower growth and higher unemployment.
- Emphasis that failing to control inflation now would lead to much greater and longer-lasting pain later.
- Recognizes challenge of getting monetary policy settings just right amid heightened uncertainty.
- Fiscal policy guidance:
- Broad fiscal support was appropriate during the pandemic but is unsustainable over the longer run and would add fuel to inflation.
- Fiscal support should be targeted to protect the most vulnerable from rising prices.
- Broad energy subsidies should be avoided as they are generally regressive and ineffective.
- Fiscal buffers should be rebuilt, and debt reduced.
- Timely, effective, and well-coordinated debt resolution mechanisms are needed, building on progress under the G20 Common Framework.
- Policy responses for countries facing capital outflows:
- Recommendations are country specific.
- Exchange rate flexibility helps, especially when foreign currency debt is low.
- For some emerging market economies, a mix of tools could be helpful: interest rate policy, macroprudential actions, foreign exchange intervention, and capital flow management measures to mitigate monetary policy tradeoffs and reduce financial stability risks.
- Building resilience to new shocks:
- Prioritize strengthening resilience to climate risks and cyber-related vulnerabilities.
Conclusion
- The world economy and financial systems are grappling with the legacy of the pandemic and Russia’s invasion of Ukraine.
- Shocks are likely to be more frequent in the future; preparation requires building buffers and strengthening resilience.
- Conferences provide a platform to exchange experiences, learn from one another, and develop novel ideas; the speaker looks forward to insightful and open discussions.
Opening Remarks by the Deputy Managing Director, Kenji Okamura, Tokyo, November 17, 2022 (International Monetary Fund).