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IMF Staff Completes 2025 Article IV Mission to Mali
June 13, 2025
Honduras: Third Reviews Under the Extended Fund Facility and the Extended Credit Facility Arrangements, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Honduras
June 13, 2025
Economic resilience continues, and the recalibration of monetary and
exchange rate policies initiated in 2024 is bearing fruit, with the economy rebalancing,
inflation contained, international reserves strengthening, and foreign exchange market
conditions improving. Progress under the Fund-supported program is catalyzing
external financing, including from the private sector. The authorities remain strongly
committed to the program, a key anchor for Honduras in the context of heightened
external risks and domestic uncertainty as the November 2025 elections approach.
Forging Strength: Exploring the Dynamic Interplay between Institutions and State Capacity
June 13, 2025
This paper examines the distinct and interactive effects of state capacity (SC) and institutional quality (IN) on real GDP per capita growth across up to 130 countries over the period 1970–2022. Using a novel identification strategy that isolates large, exogenous governance shocks via both residual-based and percentile-based approaches, we estimate dynamic responses using local projections. We find that SC and IN shocks yield positive and persistent growth effects, particularly in emerging and developing economies, where governance gaps are most binding. Institutional reforms generate the strongest gains. In contrast, SC shocks show weaker effects on average, though they become highly effective when implemented alongside institutional improvements, highlighting a strong complementarity. Results are robust to alternative shock definitions and endogeneity concerns. A two-stage least squares (2SLS) approach using income-group-based democratization waves and natural disasters as instruments confirms the validity of our shocks, with IV estimates closely tracking the baseline, except for government effectiveness (GEE) shocks, where the IV point estimate is significantly larger. These findings suggest that endogeneity is not a major concern, and underscore that targeted institutional reforms, particularly when supported by capable state structures, can deliver substantial economic dividends.
What is Needed for Convergence? The Role of Capital and Finance
June 13, 2025
What is needed for poor countries to catch up with rich ones? This paper first documents the role of human capital, physical capital, and financial development in convergence in manufacturing labor productivity across countries, and then examines the influence of economic structure and financial development at the aggregate level. Using industry-level data from manufacturing industries in a large set of countries over the period 1980-2022, we show that manufacturing industries exhibit strong unconditional convergence over time, but there is variation in the pace of convergence: Greater reliance on human capital in an industry is linked to faster convergence, whereas dependence on physical capital has no bearing. Instead, industries with a greater dependence on physical capital see convergence only if there is sufficient financial development. At the country level, we find that convergence tends to be faster as countries shift away from agriculture (which typically requires less human capital), and towards industrial production or services. Furthermore, poorer countries that initially have a higher share of agriculture in their GDP have been shifting away from agriculture at a faster rate, which may have contributed to the observed aggregate convergence. Greater financial development is also linked to faster convergence at the country level.
Global Cross-Border Payments: A $1 Quadrillion Evolving Market?
June 13, 2025
Cross-border payments are essential to the global financial system, facilitating trade and investment. The global cross-border traditional and crypto payment market approached a value of about one quadrillion dollars in 2024, with crypto payments representing only a small fraction despite their recent surge. Focusing on data from Swift—the largest traditional cross-border financial messaging network—we study the characteristics and evolving patterns of these payments over 2021-24. Notably, payments are predominantly concentrated in advanced economies, and are driven by financial institutions and large transactions. While currency usage remains stable—with the U.S. dollar maintaining the largest share—the Chinese renminbi demonstrates signs of increasing global integration, albeit from a low base. Gravity model estimates confirm that traditional economic linkages, via trade, portfolio investment, and FDI, shape cross-border payments. However, aggregate dynamics mask substantial heterogeneity across message types (customer vs. financial related payments), currencies, and transaction sizes, with information asymmetries playing a diminished role in larger payments.
Natural Bank Reliance
June 13, 2025
The higher aggregate prevalence of loan over bond funding in Europe is not only driven by the well-documented differences in financial market settings but also strongly shaped by different firm characteristics. The European economy is more fragmented than the U.S. economy, and thus features a different firm distribution in terms of size and collateral availability. I estimate that if all European firms had access to a financial market like the U.S. market, their aggregate bond funding share would remain significantly smaller. This counterfactual suggests a limited potential for European corporate bond markets in the short and medium term.
Testing the Purchasing Power Parity (PPP) in West and Central Africa
June 13, 2025
This paper employs various empirical methods to test the Purchasing Power Parity (PPP) hypothesis in West and Central Africa, considering countries within the WAEMU, CEMAC, CFA, and ECOWAS currency zones and four possible numeraire currencies—U.S. dollar, euro, renminbi, and the CFA franc. Using panel and single-country unit-root, cointegration, error-correction techniques, our findings indicate that the numeraire currency matters for evidence in favor of PPP. Results show slightly stronger evidence when the euro is used as the reference compared to other numeraire currencies, although results vary across different methods. Evidence for PPP is also stronger across the currency zones after the 1994 devaluation of the CFA franc, when evidence for PPP using the renminbi as reference is also stronger, suggesting an increasing importance of the renminbi for the economies in West and Central Africa. The paper documents significant differences in price dynamics for the CEMAC and the WAEMU, the two components of the CFA zone, with stronger evidence for PPP found for the WAEMU and reversal speed to PPP faster than the 2-3 years found in the literature. Results also indicate that real exchange rates of the currency zones revert to PPP mainly through adjustments of foreign prices expressed in domestic currencies—which may result from changes in nominal exchange rates of the reference currencies or foreign prices—and less so via adjustments in domestic prices.
Growth Strategies and Diversification in the Pacific Islands Countries
June 13, 2025
We examine growth strategies for the Pacific Island Countries (PICs) focusing on the role of tourism and diversification. First, we quantify the contribution of tourism to growth using panel regressions and we compute how much additional tourism would be needed for PICs to sustain comparators’ growth rates. Given the sizable scaling ups in tourism required, we consider the benefits of an alternative growth strategy based on diversification. We identify diversification episodes in the PICs and quantify their benefits using the synthetic control method. Such episodes have had mixed results for PICs. Finally, we outline a framework for designing growth strategies in the PICs, based on diagnosing the binding constraints to their economic expansion and working around these limitations.
Should Tax Be King? The Debate over Tax Priority in Insolvency
June 13, 2025
Countries differ in their approaches to the treatment of tax claims in insolvency. Historically, most countries have granted priority to tax claims. In the late 20th century, however, some countries abolished or reduced tax priorities at the same time that sweeping insolvency reforms were introduced. Since then, the debate over whether tax claims should be afforded priority in insolvency has continued. This paper reviews the various legal techniques used to protect tax claims in a wide range of countries, the arguments in favor and against tax priorities, and advocates for an empirical approach to analyzing this complex problem.