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IMF warns debt overhang and financial vulnerabilities pose double threat to economic recovery

Photo taken on April 6, 2021 reveals the International Monetary Fund IMF headquarters in Washington, D.C., the United States.

Ting Shen | Xinhua News Agency | Getty Images

LONDON — Policymakers and central banks want to be “very selective” with stimulus measures to keep away from endangering world economic progress over the medium time period, in accordance to a high official on the International Monetary Fund, with a debt overhang and financial vulnerabilities recognized as doable dangers.

The warning comes because the IMF seems to be attempting to orchestrate a fragile balancing act at its spring conferences this week.

The Washington D.C.-based institute has singled out the U.S. for reward in enacting extraordinary stimulus amid the continuing coronavirus disaster to fast-track a worldwide economic recovery, whereas additionally warning concerning the potential for these measures to trigger longer-term structural harm to worldwide economies.

“There’s no question that stimulus in the United States presents a very favorable backdrop to the growth projections that we have made,” Geoffrey Okamoto, first deputy managing director of the IMF, advised CNBC’s Joumanna Bercetche on Wednesday.

“I wouldn’t characterize it as a crutch. This is a tailwind, right, that countries should be able to use or capitalize on to try and ride through the remaining amount of time until they can get all of their citizens jabbed and their economies reopen,” he added.

The IMF mentioned in its World Economic Outlook on Tuesday that the worldwide financial system was on observe to increase 6% this yr, upgrading its forecast for the second time in three months. It comes after an estimated 3.3% contraction in 2020 and the worst world recession since World War II.

IMF Managing Director Kristalina Georgieva mentioned the brighter outlook was underpinned by the rollout of coronavirus vaccines and economic stimulus measures, “especially in the United States.”

In a transfer anticipated to supercharge the U.S. economic recovery, President Joe Biden’s $1.9 trillion stimulus package deal handed final month. The White House has since sought to make a $2 trillion infrastructure plan the administration’s subsequent legislative precedence.

When requested whether or not policymakers and central banks had been susceptible to overeating economies on account of ultra-accommodative measures, Okamoto replied: “Both on fiscal and monetary policy posture, keeping accommodation in place for too long does invite risks.”

‘Risks to progress’

“On the monetary policy side, keeping monetary policy accommodation in place for too long does invite certain vulnerabilities to come into the financial sector,” Okamoto mentioned, including the institute had mentioned in its Global Financial Stability Report that regulators would wish to include these dangers.

The IMF’s GFSR report, revealed Tuesday, has mentioned that whereas there’s a urgent want to keep away from a legacy of vulnerabilities, actions taken throughout the coronavirus pandemic “may have unintended consequences such as stretched valuations and rising financial vulnerabilities.”

It additionally highlights a stark divergence between a small variety of superior economies and rising market economies, with low-income international locations seen to be susceptible to falling additional behind throughout a multi-speed recovery.

A employee works on a manufacturing line to produce electrical merchandise for home and Southeast Asian markets in Hai ‘an metropolis, east China’s Jiangsu province, March 29, 2021.

Costfoto | Barcroft Media | Getty Images

“On the fiscal side, just because rates remain low and your borrowing capacity is there doesn’t mean you can borrow unlimited amounts of money for any purpose,” Okamoto continued.

“We want people to spend resources prudently both to get through the pandemic and to make the proper investments to set themselves on a growth trajectory coming out of the crisis. But that requires being very selective and making sure that you’re funding the projects with the highest economic rates of return.”

Okamoto mentioned a failure to be selective with these initiatives would invite a debt overhang, “and both the debt overhang or the financial vulnerabilities could invite risks to growth over the medium term.”

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