IMF Recommends Austerity Measures As 2023 Looks Gloomy

The International Monetary Fund (IMF), a financial agency of the United Nations, has advised policymakers to adopt austerity measures warning that 2023 will “feel like a recession.”IMF’s World Economic Outlook seen by Pindula News reads in part:

For most economies, they considered that tighter monetary and fiscal policies are necessary to durably reduce inflation. At the same time, they emphasized that these policies should be accompanied by structural reforms that improve productivity, expand economic capacity, and ease supply-side constraints. Directors recognized that many emerging market and developing economies (EMDEs) face tougher policy choices, as higher food and fuel prices, the need to support the recovery and vulnerable populations, and rising costs of market financing from tighter global financial conditions and US dollar appreciation can pull in different directions, necessitating a difficult balancing act.

Directors stressed that monetary authorities should act decisively and continue to normalize policy to prevent inflationary pressures from becoming entrenched and avoid an unmooring of inflation expectations. They agreed that central banks in most advanced economies and EMDEs would need to continue tightening the monetary policy stance to bring inflation credibly back to target and to anchor inflation expectations.

Directors stressed that maintaining central bank independence and policy credibility will be essential to secure price stability. They also emphasized the importance of continuing to assess the impact of the simultaneous monetary tightening by central banks and, in particular, its implications for EMDEs. Directors stressed that clear communication of both policy functions and the unwavering commitment to achieve price objectives is crucial to preserve credibility and avoid unwarranted market volatility. They considered that, should global financial conditions tighten in a disorderly manner, EMDEs could face capital outflows and should be ready to use all available tools, including foreign exchange interventions and capital flow management measures, guided when appropriate by the Integrated Policy Framework and in line with the Institutional View on the Liberalization and Management of Capital Flows and without substituting for exchange rate flexibility and warranted macroeconomic adjustments.

Directors concurred that fiscal policy is operating in a highly uncertain environment of elevated inflation, slowdown in growth, high debt, and tightening borrowing conditions. They stressed that, where inflation is elevated, a tighter fiscal stance would send a power powerful signal that policymakers are aligned in their fight against inflation. Such a signal would, in turn, reduce the size of required interest rate increases to keep inflation expectations anchored and would help keep borrowing costs lower. Directors emphasized that fiscal support to address the surge in cost of living from high food and energy prices should primarily focus on targeted support to the most vulnerable segments, given the criticality of preserving price incentives to promote energy conservation. Some Directors considered that additional but temporary energy policies may be needed in countries that face exceptionally high and volatile energy prices owing to Russia’s war in Ukraine.

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Directors broadly agreed that fiscal policy has a role in protecting people against loss in real incomes in moments of large adverse shocks, but that requires healthy public finances. Building on the experience of the pandemic, they considered that governments should invest in social safety nets and develop policy strategies and tools that can be readily deployed under various scenarios. Directors concurred that a sound and credible medium-term fiscal framework, including spending prioritization and efforts to raise revenues, can help manage urgent needs from high food and energy prices, rebuild fiscal buffers to cope with future crises, and make progress in long-term development needs, such as investment in renewable energy and health care, which can also foster economic resilience.

Directors noted that, although no material systemic event has materialized so far, financial stability risks have risen along many dimensions, which highlights the importance of containing a further buildup of financial vulnerabilities. Being mindful of country-specific circumstances and near-term economic challenges, they agreed that selected macroprudential tools may need to be adjusted to tackle pockets of elevated vulnerabilities. Directors noted, however, that striking a balance between containing the buildup of vulnerabilities and avoiding procyclicality and a disorderly tightening of financial conditions is important given heightened economic uncertainty and the ongoing policy normalization process.

Directors reiterated their urgent call for global cooperation and dialogue, which are essential to defuse geopolitical tensions, avoid further economic and trade fragmentation, and respond to challenges in an interconnected world. They agreed on the criticality of multilateral actions to respond to existing and unfolding humanitarian crises, end Russia’s war in Ukraine, safeguard global liquidity, manage debt distress, mitigate and adapt to climate change, and end the pandemic. Noting that many countries are contending with tighter financial conditions, high debt levels, and pressures to protect the most vulnerable from surging inflation, Directors called on the multilateral institutions to stand ready to provide emergency liquidity to safeguard essential spending and contain financing crises. They also called for greater debt transparency and better mechanisms to produce orderly debt restructurings—including a more effective Common Framework—in those cases where insolvency issues prevail. Acknowledging that recent energy and food price shocks may have undermined the green transition, Directors stressed that achieving energy security and addressing the climate agenda go hand-in-hand, including by addressing the significant climate financing needs of EMDEs and investing in renewable energy and energy efficiency. Even though the COVID-19 pandemic is starting to fade, Directors called for decisive actions to address the continued inequity in access to health care and vaccinations worldwide and reduce the threat of future pandemics.

Pindula News