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International Monetary Fund
The COVID-19 pandemic has created severe disruption in the global financial system, with many emerging market and developing countries (EMDCs) facing liquidity shortages. In the context of intensified demand for liquidity and heightened global uncertainty, staff has revisited the 2017 proposal for a new facility to provide liquidity support to the Fund’s membership. This paper proposes the establishment of a new Short-term Liquidity Line (SLL) as a special facility in the General Resources Account (GRA), based on the key features of the 2017 blueprint.
International Monetary Fund. European Dept.
Iceland is experiencing an economic slowdown that has reduced overheating concerns. Tourism growth has decelerated and the króna has stopped appreciating. Demand management has become easier, allowing the authorities to focus on medium-term priorities, including infrastructure, healthcare, education, and the environment. Risks, however, have become more evident. High fuel prices and other factors are challenging the airline business; world trade tensions are escalating; and the United Kingdom—a vital trading partner—is not yet assured of a smooth EU exit. Icelandic policies thus need to focus on further increasing resilience to shocks.
Mr. Eugenio M Cerutti and Mr. Gee Hee Hong
Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows (both by types of instrument and borrower) shows interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities not only in the case of corporate and sovereign borrowers in advanced countries, but also sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging markets, the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries associated with the global financial cycle, but rather by country-specific factors.
International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights Iceland’s continued real GDP growth, driven by tourism. Growth reached 7.2 percent in 2016 and is projected at almost 6 percent in 2017 before tapering to about 2.5 percent over the medium term. Bank credit to the nonfinancial private sector remains muted, growing only 4.3 percent in 2016, but it is expected to pick up. Thus far, growth has been driven not by leverage but by exports, private consumption, and investment. Iceland’s current account surplus is projected to shrink modestly over time, with some export sectors suffering while others thrive.
International Monetary Fund. European Dept.
This paper examines Iceland’s expenditure policy, especially five expenditure pressure points, as well as capital flows and monetary policy effectiveness in small open economies. The postcrisis fiscal adjustment demanded painful choices, with spending on healthcare, education, and investment suffering cuts in real terms. While expenditures in these areas have rebounded more recently, there is a room for further decompression. Using quarterly panel data for 18 advanced and emerging small open economies during 2002–15, it finds that monetary policy is focused on inflation developments, but also that domestic interest rates affect capital flows, raising concerns about a reinforcing loop between monetary policy and capital flows.
International Monetary Fund
Scope and strategy: This paper reviews access limits and surcharge policies in the Fund’s General Resources Account (GRA). It builds on the preliminary Executive Board discussion that took place in May 2014, against the backdrop of the 14th Review quotas expected to become effective early in 2016, which will on average double individual members’ quotas. At the meeting in 2014, most Directors considered that a moderate increase in normal access limits in SDR terms would broadly restore the normal Fund access to levels considered acceptable in 2009, and saw merit in adjusting the surcharge threshold to allow for a moderate increase in the SDR value of credit not subject to the charge.
Mr. Anton Korinek and Mr. Damiano Sandri
International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.
International Monetary Fund. European Dept.
This paper discusses the recommendations of the Sixth Post-program Monitoring Discussions with Iceland. Iceland recently updated its capital account liberalization strategy. The strategy takes a staged approach, starting with steps to address the balance-of-payments overhang of the old bank estates—prioritizing a cooperative approach with incentives—in a manner consistent with maintaining stability. Growth is accelerating in 2015 and is expected to reach 4.1 percent, backed by significant investment, wage- and debt relief-fueled consumption, and booming tourism. The general government is projected to record a surplus of 0.8 percent of GDP in 2015, helped by large one-offs. Small deficits are also expected over 2016–20.