IMF chief warns against complacency on global economy

The global financial system is resilient enough to withstand the impact of the coronavirus crisis but policymakers must act quickly to deliver a return to economic growth and avoid widespread financial distress, Kristalina Georgieva, managing director of the IMF, has told the Financial Times.

“We are in a resilient place but we cannot take financial stability for granted,” she told Martin Wolf, chief economics commentator, during an FT online global banking summit on Wednesday.

Policymakers must take urgent, co-ordinated steps to deliver investment in digital technology, infrastructure and the environment, she added.

“We are desperate for that because productivity has to go up, investment has to go up. We have to be decisive and we have to act together,” she said.

In the decade since the global financial crisis, many countries had built substantial financial buffers in the form of foreign exchange reserves, reputable central banks and independent regulators. Even without the early development of vaccines and the prospect of a faster than expected economic recovery next year, the challenges facing the global financial system would be manageable, she said.

But she warned against complacency and said the impact of the crisis would be severe, with a loss to global output of $28tn between 2020 and 2025 and 120m jobs wiped out in the tourism industry alone.

She said the expansion over the past decade of the non-banking financial sector was an issue of particular concern.

“Non-banking financial intermediaries were the unfinished business after the global financial crisis,” she said. “They are not sufficiently regulated, policies applied to them are not strong enough. We saw in March that they are not in the best of shape. Central banks stepped up but without this we would have been in trouble.”

Another concern was the very high level of debt in low income and emerging economies, where as much as 40 per cent of bank assets were in danger of becoming distressed. The problem of corporate debt in the developing world was becoming severe, while several governments also faced high and in some cases unsustainable debts.

Finally the G20, China included, have agreed to act together

“Our advice is to confront it,” she said. “Act decisively on debt restructuring and, when it happens, have the resolution mechanisms in place.”

She praised steps taken by the G20 group of the world’s largest economies to develop a common framework on debt treatment for poor countries, unveiled last month, under which the IMF will conduct debt sustainability analyses on a country-by-country basis and develop programmes to return distressed countries to sustainability.

“Finally the G20, China included, have agreed to act together,” she said, suggesting some debts would have to be cancelled.

“We know we must act fast. What applies to countries also applies to corporates: don’t hesitate to go into restructuring and in some cases to go beyond.”

​Letter in response to this article:

Ukraine’s debt plans make bold assumptions / From Serhiy Verlanov, Former Head of the State Tax Service of Ukraine, Lviv, Ukraine