October 16, 2020/IMF
AS PREPARED FOR DELIVERY
Thank you, it is a pleasure to be back at the Development Committee.
It is always important to assemble the development committee to debate and chart our actions, but even more so in these tremendously difficult times.
I will cover three themes today: (i) the global economic outlook, (ii) the policies we need to tackle the challenges ahead, and (iii) what we at the IMF do to support our membership—in partnership with the World Bank—including the poorest and more vulnerable countries.
Let me first present the global outlook.
- The Covid-19 pandemic and the measures to contain it triggered a sharp downturn in the first half of this year.
- Activity has begun to recover, supported by large-scale easing of fiscal and monetary policies in many advanced and emerging economies and the widespread adoption of health measures, allowing restart with economic activities while the pandemic is still with us. Manufacturing drives the recovery, while contract dependent services are lagging.
- But we are not out of the woods. The virus continues to spread in many parts of the world. As a result, several countries have slowed reopening, and some are even reinstating partial lockdowns.
- Overall, we expect global activity to contract by 4.4 percent in 2020–the sharpest decline since the Great Depression. A recovery of 5.2 percent is expected in 2021—but even with this, the world economy would remain well below its pre-crisis growth path.
- Inflation is expected to remain subdued, as weak demand outweighs the impact of supply chain disruptions on prices.
- There is an exceptional degree of uncertainty around this outlook. It relates to the spread and infectiousness of the virus, the public health response, the extent of global spillovers, financial market sentiment, and the persistence of supply chain disruptions. All this means that we have to be prepared for setbacks.
- We are experiencing a tale of two cities. Parts of the economy and those employed in it are doing well – especially the digital economy and tech sector—while others face grim reality of protracted, and even permanent decline.
Let me turn to emerging market and developing economies (EMDEs).
- Many EMDEs continue to battle the virus, while reeling from weak external demand, tourism, remittances and capital inflows. Low oil prices hurt oil exporters
- For EMDEs as a group, GDP is forecast to contract by 3.3 percent this year. China and some other East Asian economies are expected to perform better, reflecting resilient exports, strong policy support, and a measure of success with controlling the virus. But the near-term outlook is grim in other parts of the world, including much of Latin America, the Middle East, Sub Saharan Africa, and South Asia.
Low-income developing countries (LIDCs) are especially vulnerable.
- Weak healthcare capacity often leaves their populations highly exposed to the pandemic.
- At the same time, many governments in LIDCs can mobilize only limited fiscal resources to support their economies.
- This constellation creates a severe threat to the development gains achieved over the past two decades. Millions could be pushed back into poverty, children could lose access to education—with girls likely to be most severely affected—and LIDCs would accumulate high levels of public debt.
Against this backdrop, what priorities should policymakers set?
- First, avoid premature withdrawal of support for the economy, as this could inflict tremendous damage. In terms of fiscal space and capacity to provide support, advanced economies have so far deployed 20 percent of GDP, emerging market economies 6 percent, and low-income countries 2 percent.
- To help developing countries maintain support, our institutions will have to lean forward.
- Second, gradually redirect public support to underpin structural change and the post-pandemic economy that should be more equitable and focused on knowledge, digital and green sectors. Job-rich investments can support this, like infrastructure rehabilitation in advanced economies, or new infrastructure in emerging markets and developing countries. This will help ensure a just transition, together with training and skills.
- In other words, we need to build forward to the economy of tomorrow.
- Third, deal with pre-existing conditions. Those countries that enter the crisis with strong fundamentals – like fiscal buffers, effective institutions, transparent governance and high quality of spending – are doing better. Those with pre-existing difficulties have been more severely affected.
- My predecessor Christine Lagarde used to say, “fix the roof while the sun is shining”. Today, for some countries the roof is leaking, and the rain is pouring in. There is an urgent need to make the repairs and we embrace the need to work together to help.
- We fully support efforts to enhance the international architecture for resolving sovereign debt problems, and we welcome the G20 debt service suspension initiative and the Common Framework for Sovereign Debt Resolution. And we will continue to work with the World Bank on a case-by-case basis to support debt restructuring where this is necessary.
- We will give attention to issues of governance, domestic revenues, quality of spending, transparency and accountability.
- Finally, it will be essential to guarantee access to essential health supplies. Borders need to remain open for trade. Vaccines and treatments need to be available to all when they are discovered. We welcome the World Bank’s announcement of $12 billion to help developing countries to finance the purchase and distribution of vaccines, tests, and treatments for their citizens.
At the IMF, we are working hard to meet the needs of our membership.
Let me cite a few key points:
- As of October 2, 2020, 81 countries have received support from IMF lending facilities totaling over $100 billion. 42 of these countries are LIDCs.
- We have temporarily doubled the limits on access to our emergency facilities, while also increasing annual access to both our regular and our concessional financing facilities. We have received welcome assistance from our members to boost the loan resources of the Poverty Reduction and Growth Trust Fund (PRGT). This allowed us to sharply expand concessional lending since the start of the pandemic. But we will need additional resources to strengthen support to our low-income countries in the period ahead.
- Moreover, we have provided debt service relief to our poorest member countries through the Catastrophe Containment and Relief Trust. I would like to acknowledge the grant support received from several members that enables us to finance this effort. More generally, we are advancing the work on our extensive debt agenda. This includes reviewing the international architecture for resolving debt to private creditors and assessing the role of state-contingent instruments in sovereign debt restructurings.
- We are resuming targeted bilateral surveillance through Article IV consultations—a core activity that we suspended for several months as we redeployed staff to lending operations. Looking ahead, we are assessing how to best improve the IMF’s surveillance of national economies and financial sectors. Issues such as inequality and gender equity, corruption, and tackling climate change are becoming integral parts of Article IV consultations.
- We are also attaching great importance to capacity development in member countries. We are moving ahead with a new COVID-19 Crisis Capacity Development Initiative to deliver concrete technical advice that enables members to overcome the crisis faster. My gratitude goes to those who have so generously contributed, including Japan, Germany, and Switzerland.
- As you know only too well, these are exceptionally difficult times. But as we rebuild our economies, we also have a unique chance to make them stronger, more resilient and more inclusive. We at the IMF will provide our full support to these efforts, and we will continue to work closely with the World Bank—because the Bretton Woods institutions were designed for a moments like these, and we will deliver for you, our members.