The global economy’s system for coping with financial shocks needs to be overhauled to prepare for looming crises in emerging economies,
The global economy’s system for coping with financial shocks needs to be overhauled to prepare for looming crises in emerging economies, the head of the International Monetary Fund has warned.
Christine Lagarde called on policymakers to bolster the existing “safety net” - ranging from swap lines between central banks to access to credit lines from multilateral lenders - to prepare for crises developing in commodity- exporting emerging economies now coming “under severe stress”.
“One could also increase the size of the safety net,” she said.
Oil-dependent countries like Nigeria were facing a potent mix of rising budget deficits, increasing foreign exchange pressures and slowing growth and needed to accept that commodity prices were likely to stay low for some time.
Governments needed to spend more efficiently and scale down “Pharaonic” public projects, she said. They also needed to allow their currencies to trade more freely to absorb economic shocks.
But Ms Lagarde also warned that the global economy needed to be better prepared to respond to a new round of possible crises in emerging economies driven by tumbling commodity prices.
“While the [global economy’s] safety net has expanded in size and coverage since the 2008 financial crisis, it has also become more fragmented and asymmetric,” she told students at the University of Maryland.
The IMF would in the coming months work on new proposals to improve and expand that global safety net, she said, and China, as this year’s president of the Group of 20 leading nations, had also made doing so a priority. The US approval in December of a package of IMF reforms had given the fund greater resources to respond to economic emergencies and also given emerging economies like China a bigger voice, she said. The IMF was also looking at “strengthening and broadening” the availability of precautionary credit lines “that work for everyone”.
But she said there were still holes in the system that led to distortions in the global economy. Among them was that emerging economies did not have the access they needed to instruments including currency swaps with big central banks like the US Federal Reserve and the European Central Bank.
“This is a challenge because emerging economies depend critically on advanced country currencies in their trade and finance,” she said. “It is not surprising . . . many emerging economies have built up their own large safety buffers of foreign exchange reserves.”
That caused its own problems by leading to flow “uphill” of capital “from poorer emerging markets to richer advanced economies”.
“A stronger safety net would help reduce the need for this kind of ‘self-insurance’,” Ms Lagarde said. “It would also free up capital for much-needed investments in the emerging world in infrastructure, health and education, for example.”
Ms Lagarde repeated a call for policymakers to re-examine tax and other incentives that she said encouraged investors to make short-term rather than long-term investments in emerging economies.
Capital flows into emerging markets had proved too volatile in recent years, she said.
