Support or Restructure High-Debt Firms

(PHOTO: IMF PHOTO)

To stave off risks to recovery, countries should focus support on firms that can survive and prepare to restructure or liquidate those that cannot, the IMF’s Ceyla Pazarbasioglu and Rhoda Weeks-Brown said in a new blog on Wednesday.

Companies entered the COVID-19 crisis with record debts they racked up after the global financial crisis when interest rates were low. Now that central banks are raising rates to check inflation, firms’ debt servicing costs will increase. 

–Corporate Vulnerabilities: Corporate debt stood at $83 trillion, or 98 percent of the world’s gross domestic product, at the end of 2020. Corporate vulnerabilities will be exposed as governments scale back the fiscal support that they extended to stricken firms at the height of the crisis, the authors said.

A new IMF staff paper takes stock of corporate vulnerabilities and assesses countries’ preparedness to handle large-scale restructuring. It proposes principles to guide the design of policy support for firms that can recover and to facilitate the restructuring of those that cannot.

📺 Watch José Garrido, Senior Counsel, Financial and Fiscal Law Unit of the IMF’s Legal Department, discuss the findings of the paper at an event on Thursday hosted by the Peterson Institute of International Economics.

Should Monetary Finance Remain Taboo?

(PHOTO: SORBETTO/ISTOCK BY GETTY IMAGES)

In exceptional times, monetary finance may provide helpful policy support but there are risks, the IMF’s Itai Agur, Damien Capelle, Giovanni Dell’Ariccia, and Damiano Sandri said in a blog on Tuesday.

Proponents of monetary finance argue that it has a stronger effect on aggregate demand than a debt-financed fiscal stimulus. Because there is no increase in public debt, monetary finance does not need to be paid for with future tax hikes, making consumers more likely to spend.

–Serious Risks: But even advocates of monetary finance will point out that there are very serious risks. The primary concern is that it may pave the way to fiscal dominance whereby monetary policy decisions are made subordinate to the fiscal needs of the government. The resulting loss of confidence in the central bank could lead to hyperinflation, as happened for example in the well-known case of Zimbabwe in 2007-08.

In a recent staff paper, the authors review the arguments for and against monetary finance and provide some suggestive empirical evidence about the effects on inflation.

Economy Rebounds Amid Growing Inflation

(PHOTO: IMF PHOTO/JEFF MOORE)

Thanks to a rapid vaccination campaign and highly accommodative policies, the United Kingdom’s economic recovery has proceeded faster than expected and the near-term growth outlook remains strong, says the IMF European Department’s UK Team in a new Country Focus article.

However, the authors say that inflationary pressures are strong, too, and monetary policy will need to tighten steadily to anchor inflation expectations and bring inflation back to target. “Careful communication to counter expectations of a long cycle of rate hikes and high borrowing costs would help reduce the drag on growth in 2023. Fiscal policy could support this tightening cycle if planned consolidation was brought forward slightly.”

–Structural Challenges: Despite the recovery, the pandemic and Brexit have magnified structural challenges and will leave some scars. The government has made significant progress in spelling out a comprehensive Plan for Growth, but structural issues such as regional inequality will require additional investment in transport infrastructure and digital connectivity.

Read the Article IV report, and the Financial System Stability Assessment, which says that governance of financial globalization in one of the largest and most complex financial centers in the world will become a bigger challenge post-Brexit.

Coming Next Week: F&D March Issue

(PHOTO: IMF)

Our upcoming issue of Finance & Development, “Rethinking Fiscal: Public Finance and Fairness in a Changed World,” leads with an overview by Vitor Gaspar and a trio of perspectives on debt from Olivier Blanchard, Ceyla Pazarbasioglu and Carmen Reinhart, and Brazil’s Arminio Fraga.

We also feature a piece by LSE’s Ricardo Reis on debt in the context of rising inflation; an article by Felipe Larrain on Chile’s experience with fiscal institutions; an essay on the social state by Berkeley’s Emmanuel Saez, and an op-ed on the costs of tax injustice by Alex Cobham of the Tax Justice Network.

Also in this issue, Georgetown’s Ken Opalo writes on the need for African countries to democratize management of public finances; Yamini Aiyar of India’s Center for Policy Research writes on the education pandemic taking place in parallel to the COVID crisis; and Cina Lawson—Togo’s minister of digital economy and transformation—discusses how technology is driving her country’s development.

Take a look back at our December Issue of Finance & Development.

Want to get a print copy delivered to your home or office? Click here to subscribe.

(PHOTO: GROBLERDUPREEZ/iSTOCK BY GETTY IMAGES)

South Africa

In a new Country focus article, the IMF’s Haonan Qu explores how South Africa can raise growth, reduce inequality and unemployment, and bolster the economy’s green credentials and climate resilience. South Africa’s ambition of achieving carbon-neutrality by midcentury requires a profound economic transformation, he says.

(PHOTO: ROCK STAR/UNSPLASH)

Jamaica

After shrinking by 10 percent in 2020, Jamaica’s economy is expected to expand by 4.3 percent this year. Fiscal reform will reduce interest payments, creating scope to boost spending on education, infrastructure, poverty reduction, and  improve resilience to natural disasters, as we explain in this Country Focus article.

(PHOTO: IMF PHOTO/JAKE LYELL)

Essential Reading: Inclusive Growth

Check out our eLibrary section on issues related to inclusive growth. You can find IMF research on everything from gender and inequality to technological progress and artificial intelligence.

The Ukraine crisis and rising geopolitical tension add significant risk for the global economy in a year that started off with signs of slowing growth momentum for many G20 members, as shown in our latest Chart of the Week by the IMF’s Tryggvi Gudmundsson. Composite gauges of manufacturing and service sector activity in many major economies highlight the recent slowdown. 

WEEKLY ROUND-UP

01. Ukraine Concern

In a tweet on Thursday, IMF Managing Director Kristalina Georgieva said she was deeply concerned by what is happening in Ukraine and the impact on innocent people. “This adds significant economic risk for the region & the world,” she wrote. “We are assessing the implications & stand ready to support our members as needed.”

02. Stepping Up With and For Africa

As the world emerges from an unprecedented crisis, all countries are struggling with challenges, but this is particularly true for Africa, IMF Managing Director Kristalina Georgieva said in remarks at the EU-AU Summit on Feb. 18. The IMF has taken unprecedented action to support our member countries, especially on the African continent, Georgieva said. “We are stepping up with and for Africa.”

03. Preventing Pandemics

IMF Managing Director Kristalina Georgieva joined other speakers at the Munich Security Conference on Feb. 18 to discuss measures to combat the current pandemic and prevent future ones. “It is paramount that we act to reduce this dangerous divergence that has emerged, because if we don’t we all will pay a price,” Georgieva said. Watch a video of the event here.

04. Women’s Empowerment

A wide range of legal impediments in countries’ domestic laws have prevented women from achieving full economic empowerment. A new IMF staff paper draws on case studies from six countries (Iceland, Peru, Rwanda, The Philippines, Tunisia, and the United States) to show how legal reforms have been implemented in differing contexts to help women achieve economic empowerment.