Joint Action Needed to Secure the Recovery

By Kristalina Georgieva

G20 should lead in sharing vaccine doses, helping developing countries financially, and committing to reaching net-zero carbon emissions by mid-century.

When G20 leaders gather in Rome this weekend, they can take inspiration from the bold design of the meeting venue, known as La Nuvola.

Just as the architect created a striking new space, global leaders must take bold action now to end the pandemic and create space for a more sustainable and inclusive economy.

The good news is that the foundations for recovery remain strong, because of the combined effect of vaccines and the extraordinary, synchronized policy measures led by the G20. Yet our progress is held back especially by the new virus variants and their economic impact, as well as supply-chain disruptions.

G20 leaders have a once-in-a-generation opportunity to move the carbon needle.

The IMF recently reduced its global growth forecast to 5.9 percent for this year. The outlook is highly uncertain, and downside risks dominate. Inflation and debt levels are rising in many economies. The divergence in economic fortunes is becoming more persistent, as too many developing countries are desperately short of both vaccines and resources to support their recoveries.

So, what should be done?

Our new report to the G20 calls for decisive actions within each economy. For example, monetary policy should see through transitory increases in inflation, but be prepared to act quickly if risks of rising inflation expectations become tangible. Here, clear communication of policy plans is more important than ever to avoid adverse spillovers across borders.

Carefully calibrating monetary and fiscal policies, combined with strong medium-term frameworks, can create more room for spending on healthcare and vulnerable people. These calibrations can deliver quick benefits through 2022.

After that, growth-enhancing structural reforms provide the bulk of added gains—think of labor market policies that support job search and retraining, and reforming product market regulations to create opportunities for new firms by reducing barriers to entry. Such a package of short-to-medium-term policies could boost aggregate real GDP in the G20 by about $4.9 trillion through 2026.

First, end the pandemic by closing financing gaps and sharing vaccine doses.

The pandemic remains the biggest risk to economic health, and its impact is made worse by unequal access to vaccines and large disparities in fiscal firepower. That’s why we need to reach the targets put forward by the IMF, with the World Bank, WHO, and WTO—to vaccinate at least 40 percent of people in every country by end-2021, and 70 percent by mid-2022.

But we are still behind: some 75 nations, mostly in Africa, are not on track to meet the 2021 target.

To get these countries on track, the G20 should provide about $20 billion more in grant funding for testing, treatment, medical supplies, and vaccines. This additional funding would close a vital financing gap.

We also need immediate action to boost vaccine supply in the developing world. While G20 countries have promised more than 1.3 billion doses to COVAX, fewer than 170 million have been delivered. Thus, it is critical that countries deliver on their pledges immediately.

Equally important is swapping delivery schedules for doses already under contract, allowing the buyer with more urgent needs to go first. Countries with high vaccination coverage should swap delivery schedules with COVAX and AVAT to speed up deliveries to vulnerable countries.

We must take these and other measures to save lives and strengthen the recovery. If COVID-19 were to have a prolonged impact, it could reduce global GDP by a cumulative $5.3 trillion over the next five years, relative to the current projection. We must do better than that!

Second, help developing countries cope financially.

Even as the global recovery continues, too many countries are still hurting badly. Think of how the pandemic caused a spike in poverty and hunger, lifting to more than 800 million the number of people who were undernourished in 2020.

In this precarious situation, vulnerable nations must not be asked to choose between paying creditors and providing health care and pandemic lifelines.

Indeed, some of the world’s poorest countries have benefited from the temporary suspension of sovereign debt payments to official creditors, initiated by the G20. Now we must speed up the implementation of the G20’s Common Framework for debt resolution. The keys are to provide more clarity on how to use the framework and offer incentives to debtors to seek Framework treatment as soon as there are clear signs of deepening debt distress. Early engagement with all creditors, including the private sector, and faster timelines for debt resolution will make a difference in the role and attractiveness of the Common Framework.

Providing help to deal with debt is important, but it’s not enough. Given their massive financing needs, many developing nations will need more support with raising revenue, as well as more grants, concessional financing, and liquidity support. Here the IMF has stepped up in unprecedented ways, including through new financing for 87 countries and a historic allocation of Special Drawing Rights of $650 billion.

Countries have already benefitted from holding the new SDRs as part of their official reserves. And some are using part of their SDRs for priority needs, such as vaccine imports, boosting vaccine production capacity, and supporting the most vulnerable households.

We are now calling on countries with strong external positions to voluntarily provide part of their allocated SDRs to our Poverty Reduction and Growth Trust, increasing our ability to provide zero-interest loans to low-income countries.

Third, commit to a comprehensive package to reach net-zero carbon emissions by mid-century.

New IMF staff analysis projects that increasing energy efficiency and transitioning to renewables could be a net job creator, because renewable technologies tend to be more labor-intensive than fossil fuels. In fact, a comprehensive investment plan with a combination of green supply policies could lift global GDP by about 2 percent this decade—and create 30 million new jobs.

In other words, as we strive to reach net-zero emissions, we can boost prosperity—but only if we act together and help ensure a transition that benefits all. The most vulnerable within societies and among countries will need more help making the structural transformation to a low-carbon economy.

One thing is clear: putting a robust price on carbon lies at the heart of any comprehensive policy package. Here G20 leadership will be critical, particularly when it comes to building support for an international carbon price floor. Moving together could also help overcome political constraints.

Under a proposal put forward by the IMF, a price floor for large carbon emitters would take into account a country’s level of development. It would also allow for equivalent regulations in lieu of an explicit price mechanism like emissions trading. This could jump-start cuts in greenhouse gases at a critical moment for the world.

At COP26 in Glasgow, G20 leaders will have a once-in-a-generation opportunity to move the carbon needle in the right direction and support developing economies. These countries have the fastest growth in population and in demand for energy. But they have the least fiscal firepower to ramp up investment in climate adaptation and emissions reduction—and often lack the technology needed.

At a minimum, this requires richer countries to deliver on their longstanding promise to provide $100 billion per year for green investment in the developing world.

For our part, we are extending a call to channel SDRs to establish the new Resilience and Sustainability Trust that our members strongly endorsed at our Annual Meetings. This will serve the needs of low-income and vulnerable middle‑income countries, including in their transition to a greener economy.

Completing and further strengthening the historic agreement on global minimum corporate tax will also help mobilize revenue for transformative investments.

These and other priorities will be top of mind for global leaders as they gather in La Nuvola.

This futuristic, versatile structure was built through a combination of vision, cooperation, and hard work—exactly what we need from the G20 at this pivotal moment. To secure the recovery and build a better future for all, we must take strong joint action now.



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Needed—A Global Approach to Data in the Digital Age

By Vikram Haksar, Yan Carrière-SwallowKathleen Kao, and Gabriel Quirós-Romero

Global principles on data policy can help level the playing field while addressing financial stability and inclusion, competition, and privacy.

Companies around the world are engaged in a digital data gold rush, panning the digital economy for our personal data, sifting flecks of it in online pools and streams of our preferences, choices, and locations. Data is the ultimate portable good, but moving it across borders requires countries to have coherent policies that build trust. Without global principles for managing data, we could face deepening digital fault lines between nations, as massive data pools become increasingly isolated. This would be especially costly for smaller and lower-income countries.

Policies to protect privacy can help lessen the unauthorized use of personal data.

Our data power artificial intelligence (AI) that can make societies more productive, driving growth, employment, and finance. Think of more efficient supply chains, vaccine breakthroughs, and lending to previously unbanked small businesses around the world. But there are also dark sides. More and more data can be captured without our effective consent by large platforms, such as Alibaba, Facebook, Google and MercadoLibre, whose valuations have grown exponentially in recent years.

Cross-cutting issues

A new IMF staff paper discusses these challenges for growth, stability, and the international system, which are at the core of the IMFs mandate and makes the case for global cooperation to address them. Policymakers will need to start by recognizing they face several key challenges spanning financial stability and inclusion, competition, and privacy.

Fostering competition and stability in the digital economy: The concentration of data in large platforms reduces competition and increases the risks of hacking and single points of failure in modern economic and financial networks (seen in recent widespread service disruptions). Indeed, cyberattacks have been a key challenge in the data economy.

Promoting inclusive digitalization: Data can support greater efficiency and inclusion, including in the provision of financial services, as we have seen with the boom in fintech credit in many emerging and developing countries. But it can also be used by monopolists for price discrimination, raising profits at the expense of customers. Data-driven analytics could also be used to exclude some people from economic and financial services based on socioeconomic or other personal characteristics (what is known as “algorithmic bias”). This can disadvantage or exclude some individuals from important services that society views as essential, such as AI-driven credit scoring that worsens racial bias in mortgage lending, or facial recognition technology that fails to recognize darker skin tones.

Balancing privacy trade-offs: Policies to protect privacy—an important objective in most countries—can help lessen the unauthorized use of personal data. Privacy of financial and medical data, for example, is a key underpinning of trust in these systems. However, solely focusing on protecting privacy may prevent other uses of data that generate economic and social value—for example from sharing anonymized data on vaccine trials across borders—and may make it hard for start-ups to obtain the data they need to compete against data-rich incumbents. Clear rules are needed to tackle these trade-offs, including giving people effective control over their data while balancing public policy needs for certain types of data disclosure.

Moving toward global principles

Addressing these challenges should start at home. A number of new policy tools and approaches are being considered to provide solutions to these challenges at a domestic level. Policymakers will need to continue their focus on developing the updated laws, systems, and procedures for regulating data collection and use. At the same time, they will also need to consider mandates for making networks compatible with each other and allowing users to move and store their data on different networks.

Furthermore, policymakers could consider whether and how agencies could be created to manage consent and protect privacy, as well as provide data as a public good. Setting up “data fiduciaries”—where third-party companies collect and share data on behalf of individuals (as being explored in India)—or the data equivalent of credit bureaus (for broader classes of data beyond finance) are ideas to think about here. Balancing all the trade-offs will require unprecedented cooperation among regulators and government agencies responsible for competition, financial stability, integrity, consumer protection, and privacy.

But these issues are global. The mobility of data across borders is the basis for a rapidly growing portion of international trade in services, whose value reached about 6 trillion dollars in 2018. So, given the risk of further policy divergencies, cooperation among countries will be critical to help prevent fragmentation from taking hold in the global digital economy.

Needed—a common approach on data

Countries’ treatment of privacy, competition, and stability reflects their national priorities. And the resulting fragmentation could be damaging to smaller countries with smaller data pools and those more dependent on multinational digital firms. For example, strong privacy protections in some advanced countries may work as trade barriers for exporters of services from developing nations whose businesses have to incur exceptional costs to comply with protections.

Therefore, a strong case exists for common global principles for the data economy. For example, a common understanding of definitions in government rules to protect personal privacy, as well as to what kinds of firms and business activities they should apply, could help reduce some of the policy divergences among countries.

Many of the other domestic policy approaches being proposed for managing the data economy—for example, requirements that data be more easily shared across platforms to promote competition or on how to manage an individual’s consent—could also benefit from common principles on their international application. Provided privacy concerns can be adequately addressed, there is scope for international coordination on compilation and sharing of data sources from private digital companies for regulatory and public policy purposes.

As domestic and international efforts advance, the tensions between data privacy, security, competition, and stability will continue to play out in the global digital economy.



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Chart of the WeekLonger Delivery Times Reflect Supply Chain Disruptions

By Parisa Kamali and Alex (Shiyao) Wang

Supply chain disruptions have become a major challenge for the global economy since the start of the pandemic. Shutdowns of factories in China in early 2020, lockdowns in several countries across the world, labor shortages, robust demand for tradable goods, disruptions to logistics networks, and capacity constraints have resulted in big increases in freight costs and delivery times.

Our chart of the week shows suppliers’ delivery times in the United States and the European Union have hit record highs since late 2020 (the data goes back to 2007). IHS Markit’s suppliers’ delivery times index is constructed from Purchasing Managers Index business surveys and reflects the extent of supply chain delays.

To calculate the index, purchasing managers are asked if their suppliers’ delivery times are, on average, slower, faster, or unchanged compared to the previous month. Readings above 50 indicate faster delivery times, readings at 50 signal no change, and readings below 50 indicate slower delivery times compared with those of the prior month.

The recent sharp drop in the delivery times index reflects surging demand, widespread supply constraints, or a combination of both. During such times, suppliers usually have greater pricing power, causing a rise in prices. Moreover, these supply chain delays can reduce the availability of intermediate goods which, combined with labor shortages, can slow down production and output growth.

Once the number of new COVID-19 cases starts to decline, capacity constraints and labor shortages should ease, taking some of the pressure off supply chains and delivery times. However, some experts believe that there’s unlikely to be swift relief from supply chain disruptions. Elevated demand during the holiday season in some of the world’s largest economies, another wave of new COVID-19 cases, and extreme weather events, if they materialize, could cause supply chain disruptions.


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Surging Energy Prices May Not Ease Until Next Year

By Andrea Pescatori, Martin Stuermer, and Nico Valckx

Soaring natural gas prices are rippling through global energy markets—and other economic sectors from factories to utilities.

An unprecedented combination of factors is roiling world energy markets, rekindling the memories of the 1970s energy crisis and complicating an already uncertain outlook for inflation and the global economy.

Energy futures indicate that prices are likely to moderate in the coming months.

Spot prices for natural gas have more than quadrupled to record levels in Europe and Asia, and the persistence and global dimension of these price spikes are unprecedented. Typically, such moves are seasonal and localized. Asian prices, for example, saw a similar jump last year but those didn’t spill over with an associated similar rise in Europe.

Our expectation is that these prices will revert to more normal levels early next year when heating demand ebbs and supplies adjust. However, if prices stay high as they have been, this could begin to be a drag on global growth.

Meanwhile, ripple effects are being felt in coal and oil markets. Brent crude oil prices, the global benchmark, recently reached a seven-year high above $85 per barrel, as more buyers sought alternatives for heating and power generation amid already tight supplies. Coal, the nearest substitute, is in high demand as power plants turn to it more. This has pushed prices to the highest level since 2001, driving a rise in European carbon emission permit costs.

Bust, boom, and inadequate supply

Given this backdrop, it helps to look back to the start of the pandemic, when restrictions halted many activities across the global economy. This caused a collapse of energy consumption, leading energy companies to slash investment. However, consumption of natural gas rebounded fast—driven by industrial production, which accounts for about 20 percent of final natural gas consumption—boosting demand at a time when supplies were relatively low.

Energy supply, in fact, has reacted slowly to price signals due to labor shortages, maintenance backlogs, longer lead times for new projects, and lackluster interest from investors in fossil fuel energy companies. Natural gas production in the United States, for example, remains below precrisis levels. Production in the Netherlands and Norway is also down. And Europe’s biggest supplier, Russia, has recently slowed its shipments to the continent.

Weather has also exacerbated gas market imbalances. The Northern Hemisphere’s severe winter cold and summer heat boosted heating and cooling demand. Meanwhile, renewable power generation has been reduced in the United States and Brazil by droughts, which curbed hydropower output as reservoirs ran low, and in Northern Europe by below-average wind generation this summer and fall.

Coal supplies and inventories

While coal can help offset natural gas shortages, some of those supplies are also disrupted. Logistical and weather-related factors have crippled production from Australia to South Africa, while coal output in China, the world’s largest producer and consumer, has fallen amid emissions goals that disincentivize coal use and production in favor of renewables or gas.

In fact, Chinese coal stockpiles are at record lows, which increases the threat of winter fuel supply shortfalls for power plants. And in Europe, natural gas storage is below average ahead of winter, adding risk of more price increases as utilities compete for scarce resources before the arrival of cold weather.

Energy prices and inflation

Coal and natural gas prices tend to have less of an effect on consumer prices than oil because household electricity and natural gas bills are often regulated, and prices are more rigid. Even so, in the industrial sector, higher natural gas prices are confronting producers that rely on the fuel to make chemicals or fertilizers. These dynamics are particularly concerning as they are affecting already uncertain inflation prospects amid supply chain disruptions, rising food prices, and firming demand.

Should energy prices remain at current levels, the value of global fossil fuel production as a share of gross domestic product this year would rise from 4.1 percent (estimated in our July projection) to 4.7 percent. Next year, the share could be as high as 4.8 percent, up from a projected 3.75 percent in July. Assuming half of this increase in costs for oil, gas, and coal is due to reduced supply, this would represent a 0.3 percentage point reduction in global economic growth this year and about 0.5 percentage point next year.

Energy prices to normalize next year

While supply disruptions and price pressures pose unprecedented challenges for a world already grappling with an uneven pandemic recovery, the silver lining for policymakers is that the situation doesn’t compare to the early 1970s energy shock.

Back then, oil prices quadrupled, directly hitting household and business purchasing power and, eventually, causing a global recession. Nearly a half century later, given the less dominant role that coal and natural gas plays in the world’s economy, energy prices would need to rise much more significantly to cause such a dramatic shock.

Moreover, we expect natural gas prices to normalize by the second quarter as the end of winter in Europe and Asia eases seasonal pressures, as futures markets also indicate. Coal and crude oil prices are also likely to decline. However, uncertainty remains high and small demand shocks could trigger fresh price spikes.

Tough policy choices

That means central banks should look through price pressures from transitory energy supply shocks, but also be ready to act sooner—especially those with weaker monetary frameworks—if concrete risks of inflation expectations de-anchoring do materialize.

Governments should act to prevent power outages in the face of utilities curtailing generation if it becomes unprofitable. Blackouts, particularly in China, could dent chemical, steel, and manufacturing activity, adding to global supply-chain disruptions during a peak season for sales of consumer goods. Finally, as higher utility bills are regressive, support to low-income households can help mitigate the impact of the energy shock to the most vulnerable populations.



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