Don’t shy from structural reform, says IMF’s Georgieva

Managing director of the International Monetary Fund (IMF) Kristalina Georgieva shares her views amid global economic uncertainty during the 35th Asean Summit and Related Summits being held in Bangkok and Nonthaburi in an exclusive interview with the Bangkok Post. She is in Bangkok to attend the summit.

As IMF managing director, what is your vision amid global economic uncertainty?

After a synchronised upswing, the world economy is now facing a synchronised slowdown. This is mainly because of increased policy uncertainty — from trade tensions to Brexit. The IMF plays an important role to help reduce uncertainty by offering sound diagnostics and policy advice to its members. Countries should use all available tools: monetary policy; fiscal policy; and structural reforms, as appropriate.

My approach is to make a clear connection between the IMF’s work and the benefits it brings for the economies and people of our member countries. This means supporting sound policies and it also means working on issues that matter to people such as addressing inequality and climate change, fighting corruption, closing gender gaps, and enhancing social spending — these are all macro-critical issues. And they are issues very close to my heart.

In the light of trade war between the US and China, affecting the global economy, what is the IMF’s role in helping to stabilise the global financial sector?

Everyone loses in a trade war. For the global economy, the cumulative effect of trade conflicts could mean a loss of around $700 billion by 2020, or about 0.8 percent of GDP. So, we must relieve trade tensions and find a lasting solution that will help us build a stronger trading system that is open, stable and transparent and that unlocks the full potential of services and e-commerce.

The Fund will play its role in supporting these efforts by providing objective analysis of the impact and risks of trade tensions to members’ economies.

In terms of macroeconomic policies and the global slowdown, the accommodative monetary policy stance being deployed in many countries should be underpinned by independence of central banks and guided by clear communication. Low interest rates are also prompting investors to search for higher yields in emerging markets like Thailand.

This leaves them potentially exposed to a sudden reversal of capital flows. Stronger macroprudential policies and a proactive supervisory approach is needed to prevent further buildup of financial vulnerabilities.

Monetary policy cannot do the job alone. Where necessary countries with room in their budgets should deploy fiscal firepower or be ready to use it. Countries need to strike a balance between supporting growth and reducing debt vulnerabilities while ensuring that critical spending such as on education, health and social protection is supported. Countries also need to be committed to structural reforms that can boost productivity and resilience. Think of lowering barriers to entry in service sectors, tackling gender discrimination in the labour market, and modernising legal frameworks to reduce red tape and fight corruption.

How concerned are you that politics look like playing an increasing role in contributing to global policy uncertainties?

Geopolitical tensions are certainly taking a toll on business confidence, investment, manufacturing, and trade — and they are holding back economic potential.

Uncertainty is a significant problem. When companies are unsure of what will happen next, whether it be on trade or another issue, it stifles long-term investment planning. We are seeing some of that happen in this region. The good news is that policy-induced uncertainty can be removed and the drag on investment decisions reversed.

We greatly welcome the recent positive announcement on trade between the US and China and hope that a lasting solution can be reached, moving from a trade truce to trade peace.

I would also like to point out another recent positive development where uncertainty was reduced. I am very pleased to say that last month, at the IMF’s Annual Meetings in Washington, DC, the IMF membership, which is made up of 189 countries, endorsed a package of actions on IMF resources and governance to ensure the IMF will continue to have sufficient resources to adequately support its membership. This endorsement highlights the strong support for the IMF to play its role at the centre of the global financial safety net. It was most welcome news, and I thank the whole membership.

What do you think about US-China trade tension and its implication for Asean and Thailand?

We have warned about the impact of trade tensions amid a “synchronised” slowdown. Trade tensions are a key risk to Asean given the important role that trade plays in their economies, especially trade with China, and Asean economies’ deep integration with regional supply chains.

The Asean-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) are also potentially exposed to capital flow volatility, while Cambodia, Laos, Myanmar, and Vietnam are more reliant on foreign direct investment.

Growth is slowing across Asean members primarily due to external headwinds but remains robust in some countries such as Vietnam. Risks are tilted to the downside with trade tensions and potentially abrupt changes in global financial conditions and capital flow movements.

In the case of Thailand more specifically, tariffs on US imports from China have impacted Thai exports, particularly electronics, through global value chains. Because of the impact of trade tensions and the global slowdown, we expect Thailand’s growth to slow to 3% during 2020 and — like the region overall — risks are tilted to the downside.

What is the IMF’s global economic outlook for 2020? Is there evidence of a looming recession or slowdown?

The global economy is still growing — but too slowly. Almost 90% of the world economy is decelerating. Our global growth forecast for 2020 is 3.4%, higher than the 3% forecast for 2019. While we do not see a recession in the baseline, the modest growth uptick for 2020 is precarious and predicated on no further policy missteps.

As countries decide which policy actions make the most sense in the near term, we also need to keep an eye on the horizon. In particular, we need to find ways to lift productivity — I call it the “sleeping beauty”. From cutting red tape to boosting female labour force participation, there are a range of measures that countries can take so they can invest in a stronger, more dynamic future.

What are the IMF’s recommendations for Thailand to counter slowing growth and declining exports as well as the baht’s persistent appreciation?

Given the blackout period prior to the Bank of Thailand’s monetary policy committee meeting this week, I would not want to comment too specifically on policy prescriptions. What I can say — and in line with the Fund’s recent health check of the Thai economy published in early October — is that Thailand has policy space and we would recommend a comprehensive package of macroeconomic, financial and structural policies that should aim at boosting growth, while supporting domestic demand and external rebalancing and making growth more inclusive.

We believe the government should boost public investment further and implement fiscal reforms. Scaling up on public infrastructure projects can help unlock private investment, support the recovery and external rebalancing, and foster potential growth.

Fiscal reforms are also important in this context as they can help spur domestic demand and foster labour force participation, especially by increasing opportunities for women. Better targeting of the welfare program is also important to provide more support to help the poor and vulnerable household segments of the population.

In addition, the policy mix should be supported by structural reforms that can help raise potential growth. Technology can also help. Thailand’s path towards a digital economy with “Thailand 4.0” can help to transform this country from being an importer of innovation to also being an innovation exporter. It can also foster potential growth and enhance Thailand’s overall competitiveness.

What is your response to claims that IMF’s policies treat developing nations unfairly and its austerity programmes in countries like Argentina have done more harm than good?

As a lender of last resort, the IMF assists countries hit by crises by providing them financial support to create breathing room as they implement adjustment policies to restore economic stability and growth.

We help protect the broader economy — and especially the most vulnerable population — from a more abrupt and difficult economic adjustment than what might otherwise occur.

It is also important to remember that when the IMF is called upon a member is already facing enormous economic difficulties. Since we are in the business of helping countries weather economic storms, we confront difficult and fragile situations.

We recognise assisting countries in those situations is not without risks. But that is our job and our responsibility. We are always conscious of treating countries fairly and our analysis is transparent and open for review.

At the same time, we recognise that we can always improve and find ways to do our job better and learn from our experiences. That is something I take very seriously as the new IMF managing director.

It is also important to note that each programme supported by the IMF requires approval by the IMF’s Executive Board, representing 189 countries. Southeast Asia is currently most ably represented on the Executive Board by Alisara Mahasandana from Thailand.

There is a growing backlash against organisations like the IMF and World Bank that represent the global “neoliberal” order, based on populist movements across the world. How does the IMF respond to increasing resentment against its policies and the organisation itself?

History teaches us that our effectiveness depends on cooperation and strong partnerships. International organisations like the IMF and World Bank are an embodiment of that spirit. Ordinary people benefit when nations come together.

I have seen this first-hand when the IMF supported my own country, Bulgaria, in its economic transformation–from crisis, to recovery, to more jobs and better living standards.

Given today’s global challenges, we cannot afford to operate in a fractured world. We need to reinvigorate international cooperation and build bridges between nations.

One way to do this is to learn from one another, and the IMF is learning from our membership.

Take my trip here as an example: I am using this opportunity to listen and learn from my Thai and Asean colleagues. Since the East Asia crisis, they have taken measures to strengthen their financial systems including through regional arrangements.

These have enhanced the resilience of their economies. I look forward to discussing how we can collaborate further at the summit this week. We share the same goal. We want to improve people’s lives.

Source: Bangkok Post