Debt is central to the functioning of a modern economy. Firms can use it to finance investments in future productivity. Households can use it to finance lumpy purchases, such as big consumer durables, or a home. Sometimes, however, firms’ investments do not pan out or a household’s main earner loses his or her job. Countries’ legal systems generally recognize that in these cases, debtors and creditors alike—along with society at large—may be better off if there is an orderly procedure for reorganizing debts. Continue reading “Dealing with Sovereign Debt—The IMF Perspective” »
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Tax officials and experts grappled with the issue of tax treaties several weeks ago at the IMF-World Bank Annual Meetings. This arcane subject has now emerged as a new lightning rod in the debate on fairness in international taxation. As citizens demand that corporations pay their fair share of taxes and some governments struggle to raise enough revenues for basic services, tax treaties present difficult issues.
By Vivek Arora
IMF lending increased to unprecedented levels in the aftermath of the global financial crisis. As difficulties emerged, we extended financial support to countries across the world—in the euro area, Africa, Asia, the Middle East, and emerging economies in Europe.
The IMF tried to draw lessons in real time as the crisis evolved in order to adapt our operations. We reviewed individual programs and, from time to time, paused and took stock of our experience across countries.
In recent years, citizens’ concerns about allegations of corruption in the public sector have become more visible and widespread. From São Paulo to Johannesburg, citizens have taken to the streets against graft. In countries like Chile, Guatemala, India, Iraq, Malaysia and Ukraine, they are sending a clear and loud message to their leaders: Address corruption!
Policymakers are paying attention too. Discussing corruption has long been a sensitive topic at inter-governmental organizations like the International Monetary Fund. But earlier this month at its Annual Meetings in Lima, Peru, the IMF hosted a refreshingly frank discussion on the subject. The panel session provided a stimulating debate on definitions of corruption, its direct and indirect consequences, and strategies for addressing it, including the role that individuals and institutions such as the IMF can play. This blog gives a flavor of the discussion.
By José Viñals
The three main messages from this Global Financial Stability Report are:
- Risks to the global financial system have risen since October and have rotated to parts of the financial system where they are harder to assess and harder to address.
- Advanced economies need to enhance the traction of monetary policies to achieve their goals, while managing undesirable financial side effects of low interest rates.
- To withstand the global crosscurrents of lower oil prices, rising U.S. policy rates, and a stronger dollar, emerging markets must increase the resilience of their financial systems by addressing domestic vulnerabilities.
Let me now discuss these findings in detail.
In our April 2015 World Economic Outlook, we forecast global growth to be roughly the same this year than last year, 3.5% versus 3.4%. This global number reflects an increase in growth in advanced economies, 2.4% versus 1.8%, offset by a decrease in growth in emerging market and developing economies, 4.3% versus 4.6% last year. In short, to repeat the words used by the IMF Managing Director last week, we see growth as “moderate and uneven”.
Behind these numbers lies an unusually complex set of forces shaping the world economy. Some, such as the decline in the price of oil and the evolution of exchange rates, are highly visible. Some, from crisis legacies to lower potential growth, play more of a role behind the scene but are important nevertheless. Let me briefly review them.
Jochen Andritzky is an economist in the IMF’s Strategy, Policy, and Review Department. He has previously worked on the Ireland program and in the IMF’s Fiscal as well as Monetary and Capital Markets Departments. During 2008-10 he served as resident adviser in Ukraine. His research focuses on sovereign debt, macro-financial linkages, and crisis resolution.
The remarkable collapse in the price of oil—a key global price that has virtually halved in the space of just a few months—has received a lot of attention lately.
Meanwhile, another significant shift has taken place in recent months that is just as surprising and has wide-reaching global implications—the dramatic drop in long-term U.S. Treasury bond yields. The last time we saw 10-year Treasury bond yields this low was in early May 2013. As many will remember, this didn’t last long and when it corrected, it set off a burst of volatility across emerging markets.
Chris Jarvis is the mission chief for Egypt and an Advisor at the International Monetary Fund’s Middle East and Central Asia Department. He was previously in the IMF’s European Department where he led missions to Belarus and then Ukraine; and before that he was a speechwriter for Rodrigo de Rato and Dominique Strauss-Kahn, former Managing Directors at the IMF. Mr. Jarvis has over twenty years experience as an IMF economist, working mostly on emerging economies. He is a U.K. national and before joining the IMF, he was at the U.K. Treasury. Mr. Jarvis was educated at Keble College, Oxford, Nuffield College, Oxford, and Yale University.
Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers. Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.
- We find both supply and demand factors have played a role in the sharp price decline since June. Futures markets suggest that oil prices will rebound but remain below the level of recent years. There is however substantial uncertainty about the evolution of supply and demand factors as the story unfolds.
- While no two countries will experience the drop in the same way, they share some common traits: oil importers among advanced economies, and even more so emerging markets, stand to benefit from higher household income, lower input costs, and improved external positions. Oil exporters will take in less revenue, and their budgets and external balances will be under pressure.
- Risks to financial stability have increased, but remain limited. Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela. Given global financial linkages, these developments demand increased vigilance all around.
- Oil exporters will want to smooth out the adjustment by not curtailing fiscal spending abruptly. For those without savings funds and strong fiscal rules, budgetary and exchange rate pressures may, however, be significant. Without the right monetary policies, this could lead to higher inflation and further depreciation.
- The fall in oil prices provides an opportunity for many countries to decrease energy subsidies and use the savings toward more targeted transfers, and for some to increase energy taxes and lower other taxes.
- In the euro area and Japan, where demand is weak and conventional monetary policy has done most of what it can, central banks forward guidance is crucial to anchor medium term inflation expectations in the face of falling oil prices.
Again, our simulations of the impact of the oil price drop do not represent a forecast for the state of the world economy in 2015 and beyond. This we will do in the IMF’s next World Economic Outlook in January, where we will also look at many other cross-currents driving growth, inflation, global imbalances and financial stability.
What follows is our attempt to answer seven key questions about the oil price decline:
- What are the respective roles of demand and supply factors?
- How persistent is this supply shift likely to be?
- What are the effects likely to be on the global economy?
- What are likely to be the effects on oil importers?
- What are likely to be the effects on oil exporters?
- What are the financial implications?
- What should be the policy response of oil importers and exporters?