The International Monetary Fund (IMF) yesterday advised heavily-indebted countries to seek debt restructuring where necessary to restore macroeconomic stability and sustainable growth.
In a report titled: “Toward a Better Balanced and More Resilient World Economy” released ahead of the IMF/World Bank Spring Meetings in Washington D.C., IMF Managing Director, Kristalina Georgieva, said countries with unsustainable public debt need to move proactively to restore sustainability.
According to her, where necessary, countries must take the difficult route of debt restructuring.
She called on countries to take resolute fiscal action to rebuild policy space, setting out gradual adjustment paths that respect fiscal frameworks.
Georgieva also outlined grave implications of trade tensions and tariff hikes to global economies, including putting many countries in tighter financial conditions.
She cautioned that protracted high uncertainty raises the risk of financial market stress.
The IMF chief explained that smaller advanced economies and most emerging markets rely more on trade for their growth, and are thus more exposed to tighter financial conditions.
She said that low-income countries face the additional challenge of collapsing aid flows as donor countries pivot to dealing with domestic concerns.
Georgieva therefore, called on emerging market economies to preserve exchange rate flexibility as a shock absorber.
According to her, to protect price stability, monetary policy must remain agile and credible, supported by a strong commitment to central bank independence.
She said central bankers must keep an eagle eye on the data, including higher inflation expectations in some cases, noting that in finance, strong regulation and supervision remain essential to keep banks safe while rising risks from non-banks must be monitored and contained.
She said: “Policymakers can look to the IMF’s Integrated Policy Framework for insights on how and when temporary measures may be warranted. Tighter budget constraints will entail difficult choices everywhere—but nowhere more so than in low-income countries. Here, weak revenues necessitate stronger efforts for domestic resource mobilization, but also call for support from international partners—both to improve capacity for reforms and to secure crucial financial assistance”.
Explaining the impacts of these tensions, she said that uncertainty is costly.
Georgieva said: “The complexity of modern supply chains means imported inputs feed into a broad range of domestic products. The cost of one item can be affected by tariffs in dozens of countries. In a world of bilateral tariff rates, each of which may be moving up or down, planning becomes difficult. “The result? Ships at sea not knowing which port to sail to; investment decisions postponed; financial markets volatile; precautionary savings up. The longer uncertainty persists, the larger the cost.”
According to her, rising trade barriers hit growth upfront. She said that tariffs, like all taxes, raise revenue at the expense of reducing and shifting activity—and evidence from past episodes suggests higher tariff rates are not paid by trading partners alone. Importers pay some part through lower profits, and consumers pay some part through higher prices.
She added: “By raising the cost of imported inputs, tariffs act upfront. Of course, if domestic markets are large, they also create incentives for foreign firms to respond with inward investment, bringing in new activity and new jobs. This, however, takes time.”
Georgieva said protectionism erodes productivity over the long run, especially in smaller economies.
According to her, shielding industries from competition reduces incentives for efficient resource allocation.
Georgieva said: “Past productivity and competitiveness gains from trade erode. Entrepreneurship gives way to special pleadings for exemptions, protection, and state support. This hurts innovation. But again, if domestic markets are large and domestic competition is vibrant, negative effects can be mitigated.”
She noted that that ultimately, trade is like water given that when countries put up obstacles in the form of tariff and nontariff barriers, the flow diverts.
The IMF chief said that some sectors in some countries may be flooded by cheap imports; others may see shortages adding that trade will always go on, but disruptions incur costs.
As trade tensions flared, global stock prices dropped, meaning that the world is currently in a phase of sudden and sweeping shifts.
“Trade tensions are like a pot that was bubbling for a long time and is now boiling over. To a large extent, what we see is the result of an erosion of trust—trust in the international system, and trust between countries,” Georgieva said.
She said that global economic integration has lifted vast numbers of people out of poverty and made the world as a whole better off, but not everyone benefitted.
Georgieva said: “Communities were hollowed out by jobs going overseas. Wages were repressed by the growing availability of low-cost labor. Prices went up when global supply chains were interrupted. Many blame the international economic system for the perceived unfairness in their lives.”
“Trade distortions—tariff and nontariff barriers—have fed negative perceptions of a multilateral system seen to have failed to deliver a level playing field.”
She said the feeling of unfairness in some places feeds the narrative that while some countries play by the rules, others game the system without penalty.
