Abstract
The Executive Summary is also available in: Arabic , Chinese, French, Japanese, Russian, and Spanish. The membership is facing a rapidly changing and uncertain world. The United States is poised to raise interest rates amid ongoing recovery, China’s expected slowdown as it rebalances growth is creating larger-than-anticipated spillovers, and commodity producers are facing the end of a long cycle of high commodity prices. These necessary transitions pose challenges, particularly for emerging and low-income developing countries, where prospects have dwindled the most. Policymakers are increasingly grappling with difficult policy trade-offs. Faced with limited room to maneuver and the need to adapt to new realities, what relative weight should be placed on supporting demand and current activity, on reducing financial risks as financial conditions tighten, and on implementing urgently needed structural reforms to revive future growth? Policies need to reflect country circumstances and coalesce into a new multilateralism. Mutually reinforcing policies are needed to support growth today, invest in resilience and safeguard financial stability, and implement the structural reforms needed for a sustainable and inclusive future. Policies should reflect member circumstances and also add up to a coherent whole—to ensure that demand is created not substituted, market resilience is enhanced not circumvented, and that structural reforms are enacted not delayed. Cooperation is vital in areas such as the global financial safety net, trade, climate change, international taxation, sustainable development goals (SDGs), and demographic transitions and migration. The Fund will support the membership at this juncture. The Fund has both the universal membership and mandate to address growth and economic stability issues at the national and global levels. To support the membership most effectively, the Fund will focus on three priorities that best reflect this new AIM: • Agility. Advice will focus on policies to support members cope with evolving transitions—respond to tighter and more volatile financial conditions and implement effective macro-structural reforms. The lending framework will deliver financial assistance quickly where needed. Delivery of technical assistance and training will be enhanced by greater use of online tools. • Integration. In the face of growing policy trade-offs, the Fund will support its members by better integrating policy advice across sectors, embracing evolving priorities, promoting integration of global, regional, and bilateral safety nets, and better leveraging synergies between surveillance and capacity building. • Member-Focused. With policy concerns evolving rapidly and advice becoming more dependent on country-specifics, the Fund will deepen its engagement with members, better deliver its knowledge, and ensure faster feedback to policymakers. The Fund continues to refine its core work—surveillance, lending, and capacity building—and to attain greater intellectual and cultural diversity to respond to this changing global environment and its corresponding policy challenges. To further improve services to the membership, Fund activities need to be fully supported by adequate financial, human, budgetary, and technological resources.
Current Conjuncture
The membership is facing an increasingly uncertain global environment
The global economy is changing…
With recovery in the United States broadly on track, an increase in interest rates is approaching, signaling further tightening of global financing conditions. The expected slowing of activity in China as it transitions to safer, more sustainable growth and recent market volatility are having larger-than-anticipated spillovers. Commodity prices have fallen sharply and are likely to remain low for a prolonged period. Changes in the global financial landscape have pushed risks to less liquid and often less transparent parts of the system.
…and spillovers have intensified.
Rising financial volatility, large exchange rate movements, a sharp slowdown in global trade, weaker growth forecasts, and elevated downside risks are symptomatic of these transitions. Economic and financial linkages are becoming more complex and difficult to assess as business and financial cycles are diverging among advanced and emerging and developing economies.
Growth prospects have diminished…
Prospects for actual and potential growth have been repeatedly marked down, highlighting concerns about a new mediocre. Many emerging market economies are facing a major slowdown after years of rapid growth that was fueled by buoyant commodity prices, favorable external financial conditions, post-crisis credit and investment booms, and strong growth in China. Low-income developing countries, particularly commodity producers, have also been affected. In advanced economies, demand remains deficient and concerns about stagnation persist. Potential growth is constrained by slowing productivity and aging populations.
…and risks are rotating to emerging market and developing economies
Improved macroeconomic management and more robust financial structures have increased resilience in many emerging market and developing countries. But tighter financing conditions, slowing capital inflows, and currency pressures are adding to balance sheet and funding strains amid high corporate leverage and foreign currency exposures. The interaction of domestic and external headwinds renders many of these economies vulnerable to shifting global tides and abrupt changes in market sentiment. This could create spillovers and spillbacks into advanced economies.
Structural and fiscal reform efforts by members have lagged (Annex I)
Policy responses to these evolving transitions and the priorities laid out when we last met varied. Monetary policy remained supportive in advanced economies, with signs of policies gaining traction (Euro area, Japan). Some emerging market and low-income developing countries embarked on important policy adjustments, reducing energy subsidies (Angola, India, Indonesia, Thailand, United Arab Emirates), allowing for exchange rate adjustments (Azerbaijan, Kazakhstan) in response to falling export and fiscal revenues, and strengthening financial regulatory frameworks (Indonesia, Poland, Ukraine). But progress in implementing needed structural reforms and in strengthening fiscal policy frameworks fell short across the membership.
Policy Challenges
Policymakers are grappling with difficult policy trade-offs in adapting to new realities.
Supporting demand while managing macroeconomic and financial risks
In many emerging market and low-income developing countries room for policy maneuver to support demand is narrowing. The scope to ease fiscal and monetary policies is constrained by debt, inflation, or balance-sheet risks. Commodity exporters in particular face prospects of painful adjustment amid rising financial and external vulnerabilities, deteriorating fiscal positions, and expectations of a protracted period of low commodity prices. China is facing a delicate balancing act of avoiding growth from slowing too sharply while unwinding excess leverage and transitioning toward a more market-based financial system. In many advanced economies, sizeable output and inflation gaps still remain. Bringing high public debt down to safer levels in a low-growth and low-inflation environment remains a key challenge.
Navigating tighter financing conditions while safeguarding financial stability
Policymakers in many emerging market and frontier economies face difficult choices. Allowing for greater exchange rate flexibility is constrained in some countries by high foreign exchange exposures. Credit quality is also deteriorating in some. This raises questions about the relative role of better provisioning, insolvency regimes, foreign exchange intervention, and capital flow management measures to avoid disorderly market conditions and safeguard financial stability.
Quelling financial risks while encouraging investment
An extended period of monetary accommodation in advanced economies has led to emerging pockets of financial vulnerabilities, especially in the non-bank financial sector, and systemic market liquidity is fragile. Investment in the real economy remains tentative reflecting crisis legacies in some. Safeguarding financial stability while promoting real investment remains a major policy challenge.
Identifying sources of growth and needed structural reforms
Implementing complementary structural reforms to address growth challenges is gaining further urgency. But some reforms can have potential short-term negative effects that often go against vested interests and populist pressures. Decisively tackling structural rigidities and the misallocation of resources is urgently needed to lift growth potential and sustain and improve living standards. The exact needs vary by country and region and will require reforms that lift labor demand and supply, investment, and productivity.
Ensuring socially and environmentally sustainable long-term growth
Effectively addressing social and environmental stresses constitutes a defining global challenge with a bearing on growth sustainability, shared prosperity, and social cohesion. Inequality is rising, gender gaps persist, and unequal access to financial services remains widespread. Climate change and water scarcity are already afflicting many parts of the world. Growing migration pressures, reflecting demographic shifts and geopolitical conflicts, are creating fiscal and social costs but they also provide opportunities that need to be harnessed.
Global Policy Priorities
Mutually reinforcing policies to support durable, inclusive global growth
Striking the right balance between supporting demand, managing financial stability risks, and implementing urgently needed structural reforms to lift potential growth is crucial to adapt to new realities. Cooperation is essential in areas of mutual interest—the global financial safety net, trade, climate change, international taxation, SDGs, and demographics and migration.
Supporting growth today
Economic slack and low inflation justify continued accommodative monetary policy in major advanced economies (Euro area, Japan). Fiscal policy needs to be more supportive where conditions allow (Germany, Netherlands). In some advanced economies, credible medium-term budget plans are a priority, and unnecessary disruption should be avoided (United States).
In emerging market and developing economies, demand support should be carefully weighed against the need to manage vulnerabilities. Those with policy flexibility should use it, including to smooth adjustment to lower commodity prices (GCC). Other countries should rely on growth-friendly fiscal rebalancing, including tax reforms (Bangladesh, India, Tunisia), energy pricing reforms (Egypt, Nigeria), and expenditure prioritization to preserve essential social and infrastructure spending.
Clear and effective communication about policy stances in larger members is essential to help limit excessive market volatility and spillovers (United States, China). Policy action by both surplus and deficit countries can support external adjustment and help foster balanced global growth and financial stability. Excessive reliance on exchange rate depreciations to spur domestic activity should be avoided.
Investing in resilience
Advanced economies should strengthen regulation and supervision of rapidly expanding financial activities outside the banking system. Addressing low structural market liquidity (United States) and reducing nonperforming loans and improving and harmonizing insolvency rules (Euro area) are also priorities.
In emerging market and low-income developing countries, solid policy frameworks will be crucial, including ensuring adequate provisioning of bad loans, flexible insolvency procedures, and avoiding market dysfunction. Where feasible, exchange rate flexibility should serve as a shock absorber. Foreign exchange intervention can provide short-term insulation against disorderly market conditions. Capital flow management measures on outflows could also play a temporary role in a broad policy response to crises.
In China, upgrading the policymaking framework, broader financial sector reforms to address shortcomings in regulation and supervision, and moving consistently to a more market-based financial system are priorities.
Swift implementation of the global regulatory reform agenda, including establishing macro- and micro-prudential policies for non-banks, is essential for managing systemic risks. An adequate and integrated global financial safety net is vital for bolstering the international monetary and financial system.
Securing the future
In emerging market and developing countries, addressing energy infrastructure bottlenecks (India, Indonesia, South Africa, Tanzania), improving business conditions (Brazil, Russia, Senegal, Middle East and Central Asia), and education, labor, and product market reforms (Brazil, China, India, South Africa) can lift productivity and pave the way to higher income levels. In China, fiscal, social security, and state-owned enterprise reforms are needed to transition to more domestically-driven growth, which will benefit the global economy over time. In commodity exporters and low-income developing countries, policies to promote economic diversification are essential.
In advanced economies, reducing tax wedges that hurt job creation, targeted labor market policies to boost demand, and immigration reforms can boost trend employment and labor force participation. Overcoming crisis legacies (Euro area) will also support stagnant demand by reviving investment. Invigorating waning productivity will involve infrastructure investments, removing product and labor market barriers (Euro area, Japan), and providing better incentives for innovation (Canada, Euro area, Japan, United States).
On a global level, decisive efforts to reach the post-2015 Sustainable Development Goals and ensure adequate financing for development can help secure economically, socially, and environmentally sustainable growth. Trade deals within a multilateral agenda can help revitalize global trade.
Implementing quota and governance reforms
Implementation of the 2010 reforms remains an imperative for Fund credibility and legitimacy. It is also crucial for ensuring sufficient permanent resources to effectively meet members’ needs and support the stability of the international monetary and financial system.
How the Fund will Help the Membership
The Fund has continued to refine its core activities (Annexes II and III)—surveillance, lending facilities, and capacity building—and is adapting to support the membership as they face the multiple challenges of the ongoing transitions. The Fund will deliver critical policy advice by combining macroeconomic, financial, and structural perspectives and assess how policies in individual countries affect, and are affected by, the rest of the world. The Fund will deliver for its members with purpose and AIM: to be even more Agile, Integrated and Member-focused to support the transition to a new era of durable, inclusive growth.
Becoming more agile
Policy advice will assist members manage multiple transitions
Policy advice will center on managing short- and medium-term risks and spillovers from tighter financing conditions and China’s ongoing growth transition. This includes managing disorderly market conditions and balance sheet strains in emerging market and low-income developing countries. Fiscal policy advice will focus on managing risks and developing appropriate long-term anchors. Staff will expand work on macro-critical structural reforms, including complementary reforms, potential short-term tradeoffs, sequencing, and interactions with other macroeconomic policy levers to guide country-specific options for supporting growth.
Lending must be delivered quickly.
The Fund must be ready to handle greater demand for its resources and quickly deliver financial assistance. In an increasingly uncertain global environment, financial assistance—including through crisis prevention instruments—may need to be extended for longer terms, while ensuring timely exit. The Fund will assess the possible implications of these developments on its size, financing structure, and lending toolkit; distill lessons from previous crisis lending; and propose modifications to promote more efficient resolution of sovereign debt crises.
Delivery of capacity building will be improved.
Capacity building will provide more high quality advice by improving the efficiency of delivery, including by using online tools, a results-based management framework, and developing a common evaluation framework. Key areas include managing fiscal risks, debt and public investment management frameworks, monetary and financial stability policies, and closing data gaps. Technical assistance will further exploit lessons from cross-country experiences. This year’s push on SDGs will focus on assistance in areas of Fund expertise, such as boosting domestic revenue mobilization—including international taxation—promoting financial sector deepening, and supporting small and fragile states.
Integrating activities and exploiting synergies
More holistic policy advice
Achieving the dual challenges of managing vulnerabilities and sustaining growth requires more effective integration of fiscal, monetary, exchange rate, financial, and structural reform advice. Developing and disseminating analytical frameworks (for example, guidance or toolkits) for macro-financial linkages, macro-structural analysis, and management of capital outflows will support this effort. Macro-financial linkages will be integrated more fully into projections, risk assessments, and policy advice. The Fund will take stock of members’ policies with respect to handling capital flows, in the context of the IMF’s institutional view. Refining the coverage of cluster reports and quantifying alternative risk scenarios will better integrate bilateral, multilateral surveillance and risk analysis.
Widening the scope of advice
Surveillance and capacity building will incorporate macro-critical issues with bearing on growth stability and sustainability in the Fund’s areas of expertise. For example, fostering economic diversification, financial deepening and inclusion, assessing fiscal and other economic implications of climate change and inequality, and identifying country-specific policies in support of SDGs. Particular attention will be given to examining the macroeconomic consequences of demographic transitions and migration for source and recipient countries. The Fund will strengthen collaboration on these issues with relevant international institutions, and better leverage their expertise.
Strengthen the resilience of the international monetary and financial system
The IMF will continue to foster policy cooperation to support growth and limit stability risks and ensure that its policy advice takes account of member circumstances but also adds up to a coherent whole—so that demand is created not substituted, market resilience is enhanced not circumvented, and that structural reforms are enacted. The Fund will continue to assess the progress and implications of the global financial regulatory reform agenda. The Fund will also review the adequacy of the global financial safety net architecture and leverage its surveillance capabilities and strength in monitoring developments to better integrate bilateral, regional, and multilateral safety nets.
Synergies between activities
Surveillance, technical assistance, and training will be further integrated to effectively identify and address emerging vulnerabilities and deliver a stronger overall package of capacity development. External training programs will be redesigned to better complement and enhance policy analysis and advice.
Supporting safe financial integration
Policy advice and technical assistance will seek to help emerging market and low-income developing countries reap the benefits of foreign financing. This will support economic convergence while minimizing risks of capital flow reversals and avoiding “de-risking” pull-backs by international banks. Advice will focus on financial sector deepening, developing macro-prudential and regulatory frameworks, and maintaining debt sustainability.
More member-oriented
Two-way dialogue
As policy concerns rapidly evolve and advice becomes more dependent on country-specifics, the Fund will put increasing weight on its field presence and more frequent two-way discussions with members. It will also deepen existing engagement with regional bodies (such as ASEAN and the GCC), to facilitate multilateral cooperation. Efforts are underway to address perceptions of evenhandedness and stigma, including developing a framework for countries to voice specific concerns.
Knowledge management
The Fund will further strengthen knowledge management (e.g., data gathering and processing, and technology investments) to better organize information, and increase on-demand access by the membership. A new web management system is being launched to give the global community easier access to global and country-specific policy advice and lessons.
More timely feedback
Reducing the time between discussions with policymakers in countries and publication of Staff Reports is important for gaining traction. While progress has been made, more can be done.
Maintaining distinct competences and adequate financial resources
To further improve services to the membership, Fund activities, which have already been extensively reprioritized, will need to be fully supported by adequate financial, human, and technological resources. A dynamic and diverse work force able to provide appropriate policy advice and capacity building is crucial. It requires more diverse staffing to match changing skill requirements, to increase gender and regional diversity, and to improve talent management. It also requires adequate budgetary resources.
Annex I. Implementation of Policy Priorities by the Membership
Annex II. Implementation of IMF Deliverables
(April–November 2015)
Annex III. Key IMF Activities since the Spring Meetings
IMF provided financial assistance to members in need.
Access to concessional Fund resources for all Poverty Reduction and Growth Trust (PRGT)-eligible countries and support under the Rapid Financing Instrument (RFI) for all members was increased.
New disbursements under the Rapid Credit Facility and the RFI were approved for Iraq, Nepal and Vanuatu to the tune of $1.3 billion. New arrangements were also approved for Ghana, Guinea-Bissau, Haiti, Kosovo, the Kyrgyz Republic, and São Tomé and Príncipe involving a resource commitment of $1.3 billion. A successor arrangement for Colombia under the Flexible Credit Line (FCL) was approved in the amount of $5.5 billion.
A number of major policy reviews are ongoing or have been completed.
Steps were outlined to operationalize the MD’s action plan on the 2014 Triennial Surveillance Review (TSR) to cover the main building blocks of surveillance.
Operational guidance notes on the FCL and the Precautionary and Liquidity Line (PLL) as well as the new debt limits policy were published. The Crisis Program Review (CPR) is underway to distill lessons from Fund arrangements during the global financial crisis.
Staff published a report laying out initial considerations for the quinquennial review of the method of valuation of the Special Drawing Right (SDR) currency basket.
Analytical and policy work focused on challenges facing the membership.
Staff analyzed policy options to accelerate financing for development and support select SDGs. Work on monetary and financial sector policies focused on the link between monetary policy and financial stability, balance sheet analysis, tackling non-performing loans in Europe, housing finance and real estate booms, and Islamic finance. Analysis of fiscal issues included the nexus between fiscal policy and long-term growth, public investment management frameworks, energy tax and subsidy reform, fiscal consequences of shrinking populations, and fiscal governance reform in the Euro area. Analytical work on structural issues covered topics such as the causes and consequences of inequality, financial inclusion, managing water challenges, and implications of financial deepening for growth and stability in emerging market economies.
Capacity building activities supported the global policy agenda.
Most technical assistance and training has been provided to priority groups, including low-income countries, Arab Countries in Transition, fragile states, small states, the financial sector and highly vulnerable or program countries. In West Africa, capacity building has recently focused on compliance management to boost domestic revenue mobilization. Despite difficult security and political situations, the Fund remained engaged with its members in the Middle East, focusing technical assistance on banking supervision, public financial management, revenue administration, and macroeconomic statistics.
In line with 2014 TSR’s recommendation to strengthen the linkages between surveillance and capacity development, two successful pilot workshops were held in Bangkok and Fiji on macro-financial linkages and strengthening fiscal frameworks for officials from Cambodia, Lao PDR, Myanmar, Vietnam, and Pacific island countries. Online learning has continued to grow strongly and the first online course in French further extended its reach to Sub-Saharan and North Africa. Training delivery through regional technical assistance centers has also increased significantly.
