Global Economic Situation Remains Uncertain, IMF Says

File Photo of Cash, Coins, Line Graph

TOKYO. Oct 15 (Interfax) – The ongoing uncertainty in the economic policies of developed nations is restraining investment in these countries and slowing global growth, while a decline in activity in emerging markets is making it more difficult to achieve balance in the global economy, the IMF said in a communique following a meeting of its International Monetary and Finance Committee (IMFC) in Tokyo.

“Global growth has decelerated and substantial uncertainties and downside risks remain. Key policy steps have been announced, but effective and timely implementation is critical to rebuild confidence. We need to act decisively to break negative feedback loops and restore the global economy to a path of strong, sustainable and balanced growth,” the IMF said in the communique.

“Advanced economies should deliver the necessary structural reforms and implement credible fiscal plans. Emerging market economies should preserve or use policy flexibility as appropriate to facilitate a response to adverse shocks and support growth,” the IMF said.

“We welcome the directions set forth in the Managing Director’s Global Policy Agenda and share its emphasis on the need to address the current crisis and build a strong foundation for future growth. Policies for jobs and growth, debt sustainability, repair of financial systems, and reducing global imbalances are key priorities. We will review progress on implementing these measures at our next meeting,” it said.

Russian Finance Minister Anton Siluanov said after the IMFC meeting: “There are no grounds for complacency, the IMF’s forecast for the world economy has been lowered, in Europe the adopted decisions should take effect only next year. Therefore the general state of uncertainty and strain was noted.”

Developed countries urged to consolidate

“There is a need to secure a sustained recovery from the crisis. Further monetary easing has created more accommodative financial conditions. The implementation of credible medium-term fiscal consolidation plans remains critical in many advanced economies. Fiscal policy should be appropriately calibrated to be as growth-friendly as possible. In the euro area, significant progress has been made. The ECB’s decision on Outright Monetary Transactions and the launch of the European Stability Mechanism are welcome. But further steps are necessary. We look forward to timely implementation of an effective banking and a stronger fiscal union to strengthen the monetary union’s resilience, and structural reforms to boost growth and employment at the national level. In the United States, resolving the fiscal cliff, raising the debt ceiling, and making progress toward a comprehensive plan to ensure fiscal sustainability are essential. In Japan, securing funding for this year’s budget and further progress in medium-term fiscal consolidation are needed,” the IMF said in the communique.

Siluanov said that the absence of decisions on debt restructuring and consolidation in the United States are due to the presidential election campaign, which will end in November. Key decisions are therefore expected to be made after the elections. Japan has taken some steps – “some taxes have been raised, but nonetheless it was noted that a great deal of uncertainty remains,” the minister said.

“Russia’s position is that in conditions of high debt budget consolidation measures are unavoidable. Yes, in the short-term consolidation could lead to a negative impact on the rate of economic growth,” Siluanov said.

He said developed countries are worried that if they cut budget spending the economy will slump even further. This could happen in the short-term, but in the long-term this “is an absolutely correct recovery measure, without which it is impossible to recover investor confidence,” Siluanov said.

He said fiscal consolidation would bring greater certainty to economic policy and give investors a better idea of what is in store. “This is the most important thing,” Siluanov said.

Uncertain liquidity

One of the main reasons for the ongoing strains in the global economy, the Russian minister said, is the continued high debt levels in developed countries.

“In these conditions, investment activity in both the financial and real sector also winds down,” Siluanov said.

He said investors are afraid to make investments due to uncertain forecasts concerning potential tax increases in such countries, and the unclear situation with liquidity.

“We see that now a range of countries have begun to actively use this resource to plug holes, but liquidity is not going into the real sector, but as a source for financing the budget deficit, we are seeing a decline in lending in the real sector, so there aren’t really any positive elements that could be noted,” Siluanov said.

The additional liquidity has not yet fueled inflation and an increase in interest rates, but “all this is being done gropingly, blindly, without a general understanding of what will happen next, what amounts of liquidity are needed, what consequences this might have,” Siluanov said.

“At some point this (inflation growth – ed.) might happen and then growth of interest rates, growth in the cost of loans will follow and the situation will be serious,” Siluanov said, adding that this applies more to the United States and Japan than to eurozone countries.
Europe – supertanker

In the eurozone, the IMFC sees some improvement thanks to the adoption of fiscal consolidation measures in a number of countries, the creation of mechanisms to coordinate action in the area of oversight over financial institutions, creation of a deposit insurance system and a “firewall.”

“Europe has adopted all the actions that were discussed at the last G20 meetings, at the IMF and the World Bank,” Siluanov said.

However, the management of the European economy was compared to a supertanker. “This is when if you intend to turn in some direction, this is done very slowly,” Siluanov said.

He said Europe also has problems because there are “17 captains, and sometimes decisions on setting the course have to be discussed and debated.” This creates additional constraints for rapid responses to the situation.

The measures adopted by European countries will start to work only next year, the minister said.

Emerging markets to help global balance

The IMFC noted the slowdown in economic activity in emerging markets due to weak external and domestic demand and, in some cases, tighter policy to cub inflation.

These countries should ensure flexibility in policy implementation to support growth in order to ultimately facilitate global balance, the communique said.

Siluanov said that at the meeting it was suggested that, with growth slowing in western economies, other countries, particularly in Asia, should stimulate global demand by increasing spending and government consumption.

Thus, countries with budget and balance of payments surpluses could offset the imbalance in the global economy due to countries with budget and balance of payments surpluses. Such countries include Asian nations and Russia, Siluanov said.

It was proposed that a differentiated approach should be taken to government stimulus measures in different countries. Fiscal consolidation is needed in countries with high deficits and debt, while countries with low debt and budget surpluses should not be afraid to pursue a more aggressive policy in the area of government consumption, Siluanov said, adding that this was supposed to address imbalances in the global economy.

Russia, however, despite its low debt level, is still pursuing fiscal consolidation because it is necessary to reduce the country’s dependence on oil revenues, he said.

The Russian authorities believe that stimulating economic growth through budget spending is not appropriate for Russia, Siluanov said. Russia needs to carry out structural reforms that would create a more attractive climate for investors, he said.

Quotas

On the issue of IMF quota reform, the communique said that a comprehensive review of formulas is well underway.

“We have made considerable progress in ratifying the 2010 quota and governance reforms. Most of the conditions required for the entry into force of the reforms have been achieved. We reaffirm the urgency of making these important reforms effective and call on members who have yet to complete the necessary steps to do so. The comprehensive review of the quota formula is well underway. The key issues and differences have been clearly identified. We call on the membership to develop the consensus needed through further engagement of the IMF Executive Board, with input from the IMFC Deputies after their meeting in December, to complete the review by January 2013. We reaffirm our commitment to conclude the Fifteenth General Review of Quotas by January 2014,” the IMF said in the communique.

Siluanov, however, expressed doubts that a consensus on the quota reform proposals would be reached by January 2013.

“Countries spoke out in regard to the necessity of changing the formula of this quota, proposals are supposed to be prepared by January 2013. We probably, I feel, will not manage to reach an agreement by then, and Russia will have to tackle this issue during its chairmanship” of the G20 in 2013, Siluanov said.

He said Russia is ready for this. “I personally had bilateral meetings with colleagues from other countries where we are finding understanding on our proposals to improve the formula,” Siluanov said.

He said that there is a “general understanding in BRICS countries, there is an understanding in a number of other countries about how the formula should be transformed, and there is the position of European countries.”

Countries, of course, do not want to reduce their share in the Fund, so “everyone is trying to grasp on to certain indicators, such as openness, variability, which in our view less reflect the essence and significance of given countries in the global configuration,” Siluanov said.

The current formula for calculating quotas includes four indicators: average GDP (50% in the formula), openness (30%), economic variability (15%) and size of international reserves (5%). GDP in this formula is measured on the basis of market exchange rates (60% in determining GDP) and on the basis of exchange rates according to purchasing power parity (40%).

The disagreements in the IMF concern virtually every indicator.

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