The International Monetary Fund (IMF) advised heavily-indebted nations yesterday to pursue debt restructuring when necessary to achieve macroeconomic stability and sustainable growth.
In a report titled “Toward a Better Balanced and More Resilient World Economy,” which was released ahead of the IMF/World Bank Spring Meetings in Washington D.C., IMF Managing Director Kristalina Georgieva stated that countries facing unsustainable public debt should act proactively to restore sustainability.
She emphasized that when needed, nations must take the challenging step of debt restructuring.
Georgieva urged countries to implement decisive fiscal measures to expand policy space, while outlining gradual adjustment strategies that adhere to established fiscal frameworks.
She also pointed to severe consequences arising from trade tensions and tariff increases on global economies, warning that many countries could find themselves in tighter financial situations.
Furthermore, she cautioned that prolonged high levels of uncertainty increase the likelihood of stress within financial markets.
The IMF Managing Director explained that smaller advanced economies and many emerging markets are more dependent on trade for their growth, making them particularly vulnerable to tighter financial conditions.
She noted that low-income countries face the added difficulty of decreasing aid flows as donor nations shift their focus to domestic issues.
As a result, Georgieva urged emerging market economies to maintain exchange rate flexibility, serving as a buffer in times of shock.
To ensure price stability, she asserted that monetary policy must remain responsive and credible, backed by a strong commitment to central bank independence.
Central bankers must remain vigilant regarding data, especially concerning rising inflation expectations in certain instances. She highlighted the necessity of robust regulation and supervision to safeguard banks, while also emphasizing the need to monitor and manage increasing risks arising from non-banking entities.
Georgieva stated, “Policymakers can look to the IMF’s Integrated Policy Framework for insights on how and when temporary measures may be warranted. Tighter budget constraints will entail difficult choices everywhere—but nowhere more so than in low-income countries. Here, weak revenues necessitate stronger efforts for domestic resource mobilization, but also call for support from international partners—both to improve capacity for reforms and to secure crucial financial assistance.”
Addressing the effects of these trade tensions, she remarked that uncertainty is costly.
Georgieva elaborated: “The complexity of modern supply chains means imported inputs feed into a broad range of domestic products. The cost of one item can be affected by tariffs in dozens of countries. In a world of bilateral tariff rates, each of which may be moving up or down, planning becomes difficult. The result? Ships at sea not knowing which port to sail to; investment decisions postponed; financial markets volatile; precautionary savings up. The longer uncertainty persists, the larger the cost.”
She pointed out that rising trade barriers have an immediate negative impact on growth, as tariffs, much like other taxes, generate revenue by reducing and shifting economic activity, and evidence from previous instances indicates that higher tariff rates are not solely borne by trading partners. Importers also incur costs through reduced profits, and consumers face higher prices.
She added: “By raising the cost of imported inputs, tariffs act upfront. Of course, if domestic markets are large, they also create incentives for foreign firms to respond with inward investment, bringing in new activity and new jobs. This, however, takes time.”
Georgieva warned that protectionism diminishes productivity over the long term, particularly in smaller economies. She stated that shielding industries from competition dampens incentives for efficient resource allocation.
She commented: “Past productivity and competitiveness gains from trade erode. Entrepreneurship gives way to special pleadings for exemptions, protection, and state support. This hurts innovation. But again, if domestic markets are large and domestic competition is vibrant, negative effects can be mitigated.”
Ultimately, she noted, trade is comparable to water; when countries impose barriers in the form of tariffs and non-tariff obstacles, the flow is diverted.
The IMF chief highlighted that while some sectors in certain countries might be overwhelmed by inexpensive imports, others may experience shortages, adding that trade will persist, but disruptions result in costs.
As trade tensions escalated, global stock prices dropped, indicating that the world is currently experiencing sudden and extensive shifts.
“Trade tensions are like a pot that was bubbling for a long time and is now boiling over. To a large extent, what we see is the result of an erosion of trust—trust in the international system, and trust between countries,” stated Georgieva.
She acknowledged that global economic integration has lifted many people out of poverty and benefited the world at large, but not everyone has profited equally.
Georgieva remarked: “Communities were hollowed out by jobs going overseas. Wages were repressed by the growing availability of low-cost labor. Prices went up when global supply chains were interrupted. Many blame the international economic system for the perceived unfairness in their lives.”
“Trade distortions—tariff and non-tariff barriers—have fed negative perceptions of a multilateral system seen to have failed to deliver a level playing field.”
She indicated that the sentiment of unfairness in certain regions feeds the narrative that while some countries adhere to the rules, others exploit the system without consequences.