The IMF's path to a resilient recovery - Comment & Profiles -

The IMF is facing the biggest challenge in its history — keeping the world economy afloat in the midst of a global pandemic. Leading the response is Kristalina Georgieva, the first IMF head to hail from an emerging market, who wants to ensure the outcome is a more equitable and sustainable world. 

Kristalina Georieva

Kristalina Georgieva has certainly been through a baptism of fire during her first year as managing director of the International Monetary Fund (IMF). Only a few months after taking the helm in October 2019, the world was plunged into a global health crisis that quickly turned into a widespread economic crisis, as countries scrambled to contain the Covid-19 pandemic by closing borders and shutting down swathes of their economies.

It is estimated that 90% of countries will have smaller economies by the end of 2020, compared to the start of the year. “Our assessment is a $12tn loss in gross domestic product (GDP) in 2020 and 2021. This is the same as Japan, Germany, Spain and Italy not producing for a whole year,” says Ms Georgieva.

In the face of such an immense challenge, she feels privileged to be in charge of such an “agile and forward-leaning” institution. “It has been a very meaningful first year, as we have tremendously stepped up support for our members during this time of crisis. Never in our history have we helped them so much, so fast. This is as a result of the fund’s incredible talent and the trust of our membership in what we can do for them,” she says.

As of September, the IMF has provided $30bn in emergency financing to 75 countries — 47 of which are low-income countries — and also provided assistance through traditional support to countries with strong fundamentals, such as Peru and Chile, and countries that are in a more difficult place, like Ukraine and Egypt. Ms Georgieva is proud of the decisiveness with which the IMF demonstrated that it is “the world’s first responder in a time of crisis”.

Economic turmoil

In early March, there was fear of a world economic collapse, with massive bankruptcies and high unemployment. However, a full-blown meltdown was averted, thanks to the action taken by central banks and finance authorities to put a solid floor under the world economy. This leads Ms Georgieva to believe that the worst is over. “By pouring in liquidity, they have provided the grounds for the partial and uneven recovery that we project for next year,” she says.

“It is a partial recovery because, by the end of 2021, the world will still not be back to 2019’s level. More importantly, it will be an uneven recovery because parts of the economy that are not dependent on contact activities, such as the digital sector, are moving well, while other parts are stagnating,” she says, adding that this applies across countries, not only within them.

Ms Georgieva warns of the risk of “a tale of two cities”, and counsels on the need to concentrate on preventing inequalities from increasing and helping those who are falling behind to catch up.

Trade disputes

In addition to the Covid-19 pandemic, the spectre of trade wars also looms over the global economy, with the US/China tit-for-tat dominating the headlines. Such disputes are also fostering a rise in protectionism and nationalism. Ms Georgieva says that trade tensions were top of mind before the pandemic and the situation has not improved.

“The contraction in trade is more than two times bigger than the contraction in GDP. In June we projected a 12% drop in trade for this year, as countries retreat behind their borders, putting restrictions on medical supplies and, in some cases, even food items,” she says. “Some have the idea that it is better to drop from global supply chains and do everything at home. But I believe that we are going to pull the rug out from under our feet in terms of recovery unless we overcome these tendencies towards more protectionism.”

Ms Georgieva points to data demonstrating that trade is good for growth, jobs and poverty reduction. But she is also cognisant that the world has been “somewhat negligent” over the past decade to some of the problems in global trade. “For example, the fact that not everyone benefits and those who lose from globalisation might be left behind — that has to be fixed,” she says. “Unless these shortcomings are fixed, then this retreat behind national borders risks turning into a major obstacle to the revival of the world economy.”

She also counters the argument that deglobalisation is a dominant trend. “We are seeing a massive increase of connectivity and a leap forward in the digital economy that is borderless,” she says. “Being able to connect from wherever we are has become more the norm than before, and I believe that it is this positive trend of inclusion — from education to commerce to production — that is going to help us to overcome this tendency to break from each other and instead stay together for the benefit of all.”

Equitable and sustainable

Despite all eyes being on the crisis response, the IMF remains committed to the 17 UN Sustainable Development Goals (SDGs). “It is becoming even more important for us to concentrate on how we can live in a world that is more inclusive, more sustainable and more capable to withstand the shocks to come,” says Ms Georgieva. “What this pandemic has taught us is that we are interconnected. We depend on each other and are only as strong as our weakest link.”

The IMF has been engaged in defining the economics of transitioning towards sustainable and inclusive economies. During the crisis, it has been working with its members to outline what they can do, as they put in place massive stimuli, to bring the world closer to achieving these goals.

There is a high risk of reversing gains already made, warns Ms Georgieva. “This is particularly true when we look at how this crisis manifests itself,” she says. “The advanced economies that have stronger fundamentals and more capacity to invest in protecting their businesses and people are doing exactly that. However, poor countries don’t have that capacity. We are seeing a partial recovery in advanced economies, but a massive drop in economic activity in many emerging market and developing countries.”

Gender equality is one area that she is focused on and the IMF has done much research on how crises disproportionately impact women. “The same way we should be concerned about developing countries falling behind and poverty increasing, we ought to be very concerned about a reversal in the trend towards gender equality,” she says. “This crisis is awful for women because they are more often in the contact sectors, such as healthcare, social services, tourism and hospitality, and are also more likely to be participating in the informal economy. Women do most of the work at home, which has gone up with children staying home, and they also tend to fall victim to gender-based violence, especially at times of stress. So on all counts, women are the most severely impacted.”

The IMF is promoting the critical reasons for promoting gender equality among its membership. “Beyond the ethical side of it, it is purely great economics,” she says. “Helping women to help their families and countries is absolutely paramount to the recovery.” The fund has also been conducting research on what it would mean if the world backslides on gender equality, as well as providing advice on how governments and policy-makers can prevent this from happening.

Climate emergency

Action on climate change is another area that the managing director champions. Again, many climate experts have warned that the pandemic could set the world back in terms of efforts on protecting the environment and preventing climate change. Making sure this does not happen has been made all the more challenging as the IMF’s biggest and most powerful member, the US, has retreated from international co-operation on climate and the current administration continues to roll back domestic environmental regulations.

One of the few positive effects of the Covid-19 pandemic is that as global production has decreased, so has the level of greenhouse gas emissions. Beyond the immediate impact, this crisis presents an opportunity to shift gear towards a low-carbon, climate-resilient future, says Ms Georgieva. “Governments are pouring billions into stimulus and how they use this money is going to be absolutely critical for where we end up on the other side of this crisis. If we are to use money wisely to support low-carbon investments — and climate-resilient investments — we are also actually likely to do well in economic terms.

“Why? Because a great deal of climate action is in job-rich activities and dealing with unemployment is a top-of-mind concern in this crisis — public opinion tells us that. If we invest in reforestation, land restoration and building renovation to reduce carbon emissions, these are job-rich activities that are also great from a climate standpoint.”

After enduring the crisis, governments will be facing higher debt and deficits, leading them to look for ways to balance their books. According to Ms Georgieva, a carbon tax, which the IMF has persistently advocated for, could help address this gap. “We don’t price carbon adequately globally to create the incentive to reach our future state,” she says. “Today, the average global carbon price is around $2 a tonne; it has to go to $75 a tonne if we are to achieve the Paris Agreement climate goals. And we have to achieve these objectives because if we don’t, the future would be so bleak, with climate disasters severely hitting us.”

Ms Georgieva also argues that the international community needs to create incentives for the finance system to be green by helping banks and financial institutions to assess to what extent what their finance is subject to climate risks. Importantly, the IMF is working on stress tests for climate risks. “The IMF invented stress testing for the financial system, which is a great benefit for the world because we now can assess whether our banks can handle risks,” she says. “Now is the time to take that next step in stress testing for climate risks, so finance can do the right thing for us, our children, and our grandchildren.”

Protecting the vulnerable

This crisis is hitting weakest economies the hardest, in the same way the coronavirus is hitting people with pre-existing conditions the hardest. To address this disparity, the IMF is concentrating on three objectives, according to Ms Georgieva. First, it is helping countries that cannot muster the financial capacity on their own through the expansion of the fund’s concessional financing capabilities.

“Our members have stepped up significantly, which has allowed us to triple our concessional lending capabilities. Now we are calling on our members again — something we will discuss during our annual meetings — to shift some of the special drawing rights from advanced economies, that don’t need them for their financial stability, towards funding support for countries that would benefit,” she says. “We are asking for help to deliver even more concessional capability to support the most vulnerable members.”

Second, the IMF recognises that it is paramount for countries that came into the crisis with pre-existing high levels of debt to be able to get through without collapsing under their debt burden. For this reason, in April the IMF, together with the World Bank, called for debt service suspension for low-income countries, which the G20 endorsed until the end of 2020.

“We would like to see the Debt Service Suspension Initiative (DSSI) extended until the end of 2021, because a big change in prospects for low-income countries is not likely on the horizon. Many are highly dependent on severely hit sectors, such as tourism, and also hit by a collapse in remittances from migrant workers. So we want to give them a break for one more year, and are calling on the private sector to also participate,” says Ms Georgieva. She also acknowledges that some countries may need debt restructuring, where the DSSI is not enough.

Third, the IMF is working with countries to use this crisis to improve their policy capacity, their institutions, the transparency of their governments and their ability to increase resource mobilisation domestically. “In addition to universal access to vaccines, which matters tremendously if we are to help low-income countries, I want policy-makers to also think about providing universal access to the internet,” she says. “By getting visibility into how governments are using their funds, we can put the control back in the hands of the citizens.”

Following on from the main discussions at the spring meetings around international co-operation and responding to the pandemic, Ms Georgieva believes that the annual meetings will look at how to underpin a sustainable recovery. “The October meetings will be about how we can support members to take a recovery path. We need to identify the problems that are going to wait for us on the other side — higher debt, higher deficits, higher unemployment, and the risk of increased poverty and inequality — and then figure out how we take this opportunity to build forward a global economy that is smarter, greener and fairer.”

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