Prospects for actual and potential growth have been repeatedly marked down, highlighting concerns about a “new mediocre”, said Christine Lagarde, the managing director of the International Monetary Fund (IMF), during a press conference at the inauguration of the IMF and WB meetings in Peru.
Lagarde also presented the Global Policy Agenda: Responding to New Realities, ahead of the forum that will be held from 8 to 11 September.
She explained that many emerging market economies are facing a major slowdown after years of rapid growth that was fueled by buoyant commodity prices, favorable external financial conditions, post-crisis credit and investment booms, and strong growth in China.
Low-income developing countries, particularly commodity producers, have also been affected. Lagarde argued, in advanced economies, demand remains deficient and concerns about stagnation persist. Potential growth is constrained by slowing productivity and aging populations.
Although, she said, improved macroeconomic management and more robust financial structures have increased resilience in many emerging market and developing countries. Though tighter financing conditions, slowing capital inflows, and currency pressures are adding to balance sheet and funding strains amid high corporate leverage and foreign currency exposures.
“Policy responses to these evolving transitions and the priorities laid out when we last met varied,” she continued.
That’s why, as Lagarde said, in many emerging market and low-income developing countries room for policy maneuver to support demand is narrowing.
The scope to ease fiscal and monetary policies is constrained by debt, inflation, or balance-sheet risks. Commodity exporters, Lagarde argued, in particular face prospects of painful adjustment amid rising financial and external vulnerabilities, deteriorating fiscal positions, and expectations of a protracted period of low commodity prices.
“Policymakers in many emerging market and frontier economies face difficult choices”, said the managing director. Allowing for greater exchange rate flexibility is constrained in some countries by high foreign exchange exposures. Credit quality is also deteriorating in some countries. This raises questions about the relative role of better provisioning, insolvency regimes, foreign exchange intervention, and capital flow management measures to avoid disorderly market conditions and safeguard financial stability, Lagarde argued.
In emerging market and developing economies, “demand support should be carefully weighed against the need to manage vulnerabilities”, she added.
Those with policy flexibility like Gulf cooperation council countries should use it, including to smooth adjustment to lower commodity prices. Other countries should rely on growth-friendly fiscal rebalancing, including tax reforms (Bangladesh, India, Tunisia), energy pricing reforms (Egypt, Nigeria), and expenditure prioritisation to preserve essential social and infrastructure spending, Lagarde continued.
More clear and effective communication about policy stances in larger members like the United States and China is essential to help limit excessive market volatility and spillovers, Lagarde argued, also saying that policy action by both surplus and deficit countries can support external adjustment and help foster balanced global growth and financial stability. Excessive reliance on exchange rate depreciations to spur domestic activity should be avoided.
“Implementing complementary structural reforms to address growth challenges is gaining further urgency”, Lagarde said.
She explained that some reforms could have potential short-term negative effects that often go against vested interests and populist pressures which is why decisively tackling structural rigidities and the misallocation of resources is urgently needed to lift growth potential and sustain and improve living standards.
“The exact needs vary by country and region and will require reforms that lift labor demand and supply, investment, and productivity,” she said.
Lagarde also highlighted that effectively addressing social and environmental stresses constitutes a defining global challenge with a bearing on growth sustainability, shared prosperity, and social cohesion. Inequality is rising, gender gaps persist, and unequal access to financial services remains widespread.
Climate change and water scarcity are already afflicting many parts of the world. Growing migration pressures, reflecting demographic shifts and geopolitical conflicts, are creating fiscal and social costs but they also provide opportunities that need to be harnessed, Lagarde said.
Striking the right balance between supporting demand, managing financial stability risks, and implementing urgently needed structural reforms to lift potential growth is crucial to adapt to new realities, Lagarde added.
Cooperation is essential in areas of mutual interest—the global financial safety net, trade, climate change, international taxation, SDGs, and demographics and migration, according to Lagarde.
Finally, the managing director confirmed that the fund will deliver critical policy advice by combining macroeconomic, financial, and structural perspectives and assess how policies in individual countries affect, and are affected by, the rest of the world. It will deliver also for its members with purpose and aim to be even more agile, integrated and member-focused to support the transition to a new era of durable, inclusive growth.