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Bridges Weekly | IMF Meetings Highlight Improved Prospects for Global Economy

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Improved trade and global growth estimates are cause for cautious optimism, officials at the International Monetary Fund (IMF) Spring Meetings said last weekend, while urging countries to adopt structural reforms to boost growth and reduce unemployment. The Washington gathering - which focused primarily on how to transition from recession-era policies to those of a more normal period - also reviewed the ongoing efforts to enact reforms to the lending institution, giving the US Congress until year’s end to ratify the measures.

The IMF-World Bank Spring Meetings are the first of two major gatherings that the Bretton Woods institutions hold annually, bringing together the International Monetary and Financial Committee (IMFC) - the policy-setting body of the IMF, representing the institution’s 188 member countries - and the joint World Bank/IMF Development Committee.

Members are typically represented by their finance ministers and central bank governors. Various groups of members, such as the Group of 20 major developed and emerging economies, also hold their own meetings on the event sidelines. The second of these major gatherings - the IMF-World Bank Annual Meetings - is slated for October of this year.

Growth

The global economy is set to grow by 3.6 percent this year and 3.9 percent in 2015, the IMF said in its latest World Economic Outlook, released just ahead of the Spring Meetings.

“The recovery which was starting to take hold in October is becoming not only stronger, but also broader,” said Olivier Blanchard, who heads the IMF’s Research Department. “Although we are far short of a full recovery, the normalisation of monetary policy - both conventional and unconventional - is now on the agenda.”

Just a year ago, the international finance institution had warned that the global recovery was still moving at three speeds - with some countries doing well, others improving, and the rest with much room for improvement. (See Bridges Weekly, 25 April 2013)

This year’s prospects, while more upbeat, still come with downside risks, such as too low inflation, “stubbornly high” unemployment, geopolitical tensions, and high public debt levels, finance officials warned.

How to continue boosting global growth is also expected to feature prominently at this year’s G-20 summit in Australia this November, with the group aiming to present national plans for increasing global GDP by 2 percent - or approximately US$2 trillion - over their current trajectories in the next five years. (See Bridges Weekly, 27 February 2014)

“All G-20 members remain mindful of the impacts their policies have on the global economy,” said Australian trade minister Joe Hockey after a meeting of the group’s finance chiefs. “This is where our comprehensive growth strategies are so critical.”

Monetary policy

Notably, the IMFC recommendations - which took into account differing country positions in the economic cycle - focus on how to transition from those policies aimed at tackling the Great Recession to ones that are more appropriate for normal conditions, without causing a drop in growth.

Finance officials this weekend therefore urged major economies to ensure that their monetary policies remain “carefully calibrated and clearly communicated” in the months to come, in order to manage any potential spillovers that could hurt other markets.

“Monetary policy in advanced economies should provide the necessary accommodation, with the eventual normalisation being conditional on the outlook for price stability and economic growth,” IMFC officials said.

The move by developed economies such as the US and Japan to adopt quantitative easing programmes - in Washington’s case to combat unemployment, and in Tokyo’s case to tackle a long history of deflation - have been controversial in recent years, with emerging economies particularly concerned about increased volatility in capital flows, and the potential impacts of exchange rates on trade.

However, the prospect of these same policies being removed too quickly or without sufficient warning has prompted its own set of concerns, with many emerging economies worried that more volatility might ensue as a result.

Volatility has also been cited as a potential risk for global merchandise trade flows, according to the WTO’s own recent estimates for the coming years. (See related story, this issue)

Along with recommending that the US Federal Reserve continue its recent tapering of asset purchases, the IMFC also urged the European Central Bank to consider further accommodative monetary easing, should unduly low inflation become persistent. Some analysts have warned that low inflation in Europe could actually lead to deflation, and in turn increase borrowing costs and worsen debt burdens.

US Congress given year-end deadline on IMF reforms

One of the questions looming over the IMF is how to proceed with the reforms agreed in 2010 to the organisation’s quotas and voting power. The reforms are aimed at shifting more power to developing and emerging market countries, in reflection of their growing weight on the world stage. Increasing the quotas would also give the Fund additional resources to deal with future crises.

The planned changes would double the IMF’s quota overall to over US$700 billion - a goal that has developed additional urgency as the international finance institution prepares a bail-out package for Ukraine.

Efforts to enact these reforms have been held up by the US Congress’ failure to ratify these changes earlier this year, first in its deal on the federal budget, and later in Washington’s own Ukraine assistance package. With the US the most powerful player in the IMF, its sign-off is essential for the reforms to go forward.

“We are deeply disappointed with the continued delay in progressing the IMF quota and governance reforms agreed to in 2010 and the 15th General Review of Quotas, including a new quota formula,” the IMFC said on Saturday.

Calling the implementation of these reforms its highest priority, the IMFC warned that it would be pushing for the IMF to “build on its existing work and develop options for next steps” should the US legislative branch fail to ratify these reforms by year’s end.

Failure to pass reforms, warned Singaporean finance minister Tharman Shanmugaratnam - who chairs the IMFC - could lead to “disruptive change.”

Should this occur, “we are more likely over time to see a weakening of multilateralism, the emergence of regionalism, bilateralism, and other ways of dealing with global problems, and that will not be a better world for all of us, for the US, for members of the IMF,” Tharman told reporters.

In his statement to the IMFC, US Treasury Secretary Jack Lew said that the Obama Administration was also disappointed that Congress has not passed the reforms yet, while pledging that the White House “remains fully committed to securing legislation to back the IMF and update the Fund’s governance to reflect the global economy.”

The proposed legislation is included in the US President’s budget request for the 2015 fiscal year, he said, adding that the administration will continue to work with Congress in enacting the reforms by the end of 2014.

ICTSD reporting.

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