IMF urges countries to shift focus from economic rescue to reforms

The International Monetary Fund’s No. 2 official on Tuesday called on countries to pivot from saving their economies from collapse to reviving growth-oriented policy reforms to boost their recovery prospects and make them more sustainable.

IMF First Deputy Managing Director Geoffrey Okamoto said in a blog posting on the IMF website that the COVID-19 pandemic delayed and reversed some pro-growth reforms and restoring these can help make up for output lost during the pandemic.

Reforms that allow for faster restructurings and resolution of unviable businesses and labour policies to help retrain workers and line them up with job openings can help shift workers and capital to more promising, dynamic parts of the economy, Okamoto said.

Improved competition policy frameworks such as those being debated in Europe and the United States can reduce the concentration of market power among a few firms and create more dynamic competition and innovation.

“Using this moment for some of these difficult reforms means that the monetary and fiscal stimulus still flowing will serve as a springboard to a brighter and more sustainable future rather than a crutch to a weaker version of the pre-COVID-19 economy,” Okamoto said. “Seizing the opportunity could deliver years of solid post-COVID-19 growth and progress in living standards.” The call for a renewed focus on reforms comes as the IMF is shifting from non-conditional emergency COVID-19 pandemic financing toward the negotiation of more traditional IMF loan programs, which require recipient countries to meet policy reform benchmarks.

The Fund last week approved a new, $1.5 billion, three-year Extended Credit Facility arrangement for the Democratic Republic of Congo, which includes reforms to boost revenue collections, improve natural resource management governance and strengthen the country’s monetary policy framework to ensure central bank independence.


Picture used for illustrative purpose.

The IMF is also negotiating a new Extended Fund Facility with Argentina, which has struggled under a $57 billion IMF loan, arranged in 2018, the Fund’s largest-ever. The IMF estimates that comprehensive growth-enhancing reforms in product, labour and financial markets could lift annual GDP per capita growth by over 1 percentage point in emerging market and developing economies in the next decade.

Countries taking such steps would be able to double their speed of convergence with advanced economies’ living standards relative to pre-pandemic years, Okamoto said.

For advanced economies, pro-growth reforms that target the supply side could guard against persistent inflationary risks caused by excess demand pressures.

These reforms can boost investor confidence in emerging market countries that have been able to maintain access to global capital markets during the pandemic and help these countries cope with any tightening of financial conditions, especially if inflation persists in advanced economies, prompting interest rate hikes.

The higher growth by reforms can help poorer countries avoid harsh fiscal austerity, allowing them to maintain social and health spending while investing in the future, Okamoto said.

US recession in 2020: The US economy was in recession for two months in 2020 at the beginning of the Covid-19 pandemic as businesses shut their doors nationwide and laid off employees, the committee making the determination said Monday.

Economic activity peaked in February 2020 and hit its trough the following April, making the recession that began in March the shortest on record, according to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), a non-profit, non-partisan research organisation.

The downturn suddenly ended 128 months of expansion in the world’s largest economy as cities and states nationwide ordered businesses to close or curtail operations to stop the spread of Covid-19.

However increases in employment and economic growth that occurred from May 2020 onwards cut the recession short, the NBER said.

“The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession associated with the February 2020 peak. The basis for this decision was the length and strength of the recovery to date,” it said in a statement.

The pandemic caused horrific damage to the world’s largest economy, with government data showing 22 million jobs lost between February and April 2020, and GDP contracting 31.4 per cent, annualized, in the second quarter, when the restrictions were at their worst.

However the economy resumed expansion in May 2020, the NBER said, and in the year since has recovered ground.

The IMF predicts the US economy could expand seven per cent this year, its fastest pace since 1984, after collapsing 3.5 per cent in 2020, its worst year since modern record keeping began in 1946.