Governments risk undoing central bank inflation fight, says IMF

Governments need to focus cost-of-living support to those most vulnerable in order to avoid undoing central bankers’ work in fighting inflation, the International Monetary Fund’s chief said.

“If help is not well-targeted, it might be that providing support to populations in an un-targeted manner creates more pressure for prices to go up, and then the monetary policy should target even further action,” IMF Managing Director Kristalina Georgieva said in an interview Saturday with Bloomberg Television’s Haslinda Amin.

“Monetary policy is tightening, but the fiscal policy could unintentionally go the other way,” she said in the interview at the conclusion of the Group of 20 finance chiefs meetings in Bali, Indonesia.

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Officials at the meetings were quick to lay the blame squarely on Russia for the global economy’s woes. US Treasury Secretary Janet Yellen judged that about half of the surge in US inflation is due to energy costs, for which she said Russia is directly responsible through its war actions.

While other country representatives added their own condemnations of Russia, G-20 conference attendees did acknowledge that there was no walkout when Russian officials spoke at this gathering -- unlike a previous meeting of the group this year.

With officials unable to agree on a communique at the meetings’ conclusion, they turned their focus to areas where consensus could be reached, such as food security and debt distress.

“We have to be objectively analysing what are the reasons inflation has shot up so much,” said Georgieva, noting that the war’s effects came after successive rounds of Covid-related spending, hobbled goods production, and earlier supply-chain strains. For food, weather shocks have added to the cost pressures.

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Georgieva said there’s “much more awareness that the horizon has darkened” over the past few months, noting that the IMF has downgraded economic growth forecasts twice this year, and in two weeks they’ll slash forecasts again. Downside risks have materialised from the war, pandemic, and tighter financial conditions, she said.

“I would remind everybody willing to listen that in two years we had two unthinkable events” in Covid and the war in Ukraine, Georgieva said. “What is to guarantee that there is no other shock for which we have to be prepared?”

Some 30 per cent of emerging and developing economies are in debt distress, paying 10 per cent or more to service what they owe. The distressed share soars to 60 per cent for lower-income markets, she said.

As for Sri Lanka, whose government defaulted earlier this year and has been in discussions with the IMF over debt restructuring, Georgieva assured that once a new government is in place, negotiators will return and move the debt talks “quite quickly.”

The IMF is in talks with several countries whose prospects have darkened in recent months, with Georgieva noting recently completed staff-level discussions in Pakistan, where the aim is to return that economy to “where they were just a year ago.”

The development bank also has had a keen focus on Tunisia and on Egypt, which has “done quite a lot” to build up buffers.

Zambia, the first African nation to default during the pandemic, has been in focus among G-20 officials who must deliver on a promise to provide relief through the IMF’s Common Framework. Georgieva said they still aim to have a creditors’ agreement by the end of July.

“I was very pleased to see that China has stepped forward” to co-chair the creditors’ committee for Zambia, Georgieva said.

For Zambia and Chad, she said she’s “cautiously optimistic” on debt-restructuring progress via the G-20.

The yawning divide between emerging markets and developed markets that Georgieva and others flagged early in the Covid era “has not gotten better.” There’s still not a return to the three-decade trend, before the pandemic, of emerging markets catching up to more advanced economies, she said.

While dollar liquidity in aggregate is aplenty, it’s more a matter of affordability than the availability of dollars right now for many countries -- especially those that have seen currencies plummet amid surging inflation, she said.

“We have to get to price stability again, because if we don’t, then investor and consumer sentiment suffers, people’s incomes are eroded, and the foundation for growth is not as sound as it has to be.”