Debt overhang and financial vulnerabilities endanger recovery – About Your Online Magazine


LONDON – Policymakers and central banks need to be “very selective” with stimulus measures to avoid jeopardizing global economic growth in the medium term, according to a senior International Monetary Fund official, with outstanding debt and vulnerabilities. financial risks identified as possible risks.

The warning comes at a time when the IMF appears to be trying to orchestrate a delicate balancing act at its spring meetings this week.

The Washington D.C.-based institute chose the US for praise for enacting extraordinary stimuli amid the ongoing coronavirus crisis to accelerate a global economic recovery, in addition to warning about the potential of these measures to cause long-term structural damage to world economies.

“There is no doubt that the stimulus in the United States presents a very favorable scenario for the growth projections we have made,” Geoffrey Okamoto, the IMF’s first deputy managing director, told CNBC’s Joumanna Bercetche on Wednesday.

“I would not characterize this as a crutch. This is a breeze in favor, sure, that countries should be able to use or capitalize to try to pass the remaining time until they can get all their citizens and their economies to reopen,” he added.

The IMF said in its World Economic Outlook on Tuesday, the global economy was on track to grow 6% this year, updating its forecast for the second time in three months. It comes after an estimated 3.3% contraction in 2020 and the worst global recession since World War II.

Kristalina Georgieva, managing director of the IMF said the more positive outlook was supported by the launch of coronavirus vaccines and economic stimulus measures, “especially in the United States”.

In a move that is expected to boost the US economic recovery, President Joe Biden’s $ 1.9 trillion stimulus package passed last month. Since then, the White House has sought to make a $ 2 trillion infrastructure plan the government’s next legislative priority.

When asked whether policymakers and central banks are at risk of overeating economies as a result of ultra-accommodative measures, Okamoto replied: “Both in fiscal and monetary policy stance, maintaining accommodation for a long time invites risks “.

‘Risks for growth’

“On the monetary policy side, maintaining monetary policy accommodation for a long time invites certain vulnerabilities to enter the financial sector,” said Okamoto, adding that the institute had said in its Global Financial Stability Report that regulators would need to contain these risks.

The IMF GFSR report, published Tuesday, said that while there is an urgent need to avoid a legacy of vulnerabilities, actions taken during the coronavirus pandemic “may have unintended consequences, such as stretched assessments and growing financial vulnerabilities”.

It also highlights a wide divergence between a small number of advanced economies and emerging market economies, with low-income countries being seen at risk of falling behind during a multi-speed recovery.

A worker works on a production line to produce electrical products for the domestic and Southeast Asian markets in Hai ‘an city, Jiangsu province, eastern China, March 29, 2021.

Costfoto | Barcroft Media | Getty Images

“On the fiscal side, just because rates remain low and your borrowing capacity exists, it does not mean that you can borrow unlimited amounts of money for any purpose,” continued Okamoto.

“We want people to spend resources wisely to overcome the pandemic and make the appropriate investments to put themselves on a growth path out of the crisis. But that requires being very selective and making sure that you are financing projects at the highest rates. economic return. “

Okamoto said that a failure to be selective with these projects would lead to outstanding debt, “and both outstanding debt and financial vulnerabilities could pose risks to growth in the medium term”.

Paula Fonseca