US Fiscal Woes Cast Shadow over IMF Annual Meeting

17 October 2013

The US Congress reached an eleventh-hour deal preventing Washington from defaulting on its debts on Wednesday, within hours of an impending deadline. The prospect of a US default - and the likely ramifications abroad - had dominated last week's Annual Meeting of the International Monetary Fund, which had aimed to focus primarily on the state of the global economy.

The prolonged fiscal impasse in Washington figured prominently during the three-day meetings of the IMF and World Bank Group, which were held concurrently in the US capital from 11-13 October. The next steps for developed country monetary policy, as well as the upcoming WTO ministerial conference in Bali, were among the other topics that were featured during the high-profile gathering.

Had a congressional deal not been reached by today, the US government would likely have run out of funds to meet its debt obligations in a timely manner, and would have instead been forced to rely solely on the daily balance between Treasury cash inflows and outflows. Under the terms of the agreement announced on Wednesday, Washington's borrowing authority has now been raised through 7 February, momentarily averting a crisis that many warned would have widespread consequences on the international stage.

Were the US Treasury be forced to default on its debt, this would risk a "massive disruption the world over," IMF Managing Director Christine Lagarde told NBC News in an interview late last week. Such fears were reiterated from private sector leaders, central bank governors, and finance chiefs alike over the three-day meetings.

Even coming this close to a default could be dangerous, officials said last week. The US' "near miss" in 2011, World Bank President Jim Yong Kim noted, had "major impacts lasting for months."

"This time could be more serious," he warned last week. "Uncertainty and volatility make it more difficult for developing countries to access needed finance, and this would both slow investment and negatively impact growth. And the poor and vulnerable would suffer the most."

In light of these worrisome prospects, the IMF's International Monetary and Financial Committee (IMFC) - which is made up of the organisation's governors, specifically finance ministers and central bank governors of member countries - had urged Washington to take "urgent action to address short-term fiscal uncertainties."

Monetary policy

When the IMF held its previous annual meeting in October 2012, the global economy was working to stave off a potential slowdown. (See Bridges Weekly, 17 October 2012) This year, IMF officials say, the world is entering a "transition phase," with advanced economies showing stronger signs of recovery while emerging economies are displaying worrisome signs of decreased momentum.

New IMF figures, released in the days preceding the Washington meetings, indicate that global growth is set to hit 2.9 percent this year - lower than earlier estimates. Next year, the international finance institution predicts, has slightly rosier growth prospect, though IMF officials warn that the recovery continues to be "slow and unbalanced," and could remain subdued for years to come unless this transition period is properly addressed.

With advanced economies being one of the main drivers of global growth, their impending "exit" from their unconventional monetary policies has become one of the main "transition" areas drawing the attention of financial observers.

The US, EU, and Japan have all come under scrutiny over the past few years due to their increased use of quantitative easing, a controversial practice that, some warn, could alter exchange rates and impact international trade. Some emerging economies, particularly Brazil, have warned repeatedly that overly loose monetary policy could spark a "currency war," and have advocated for increased analysis of how exchange rates and trade interact.

More recently, however, emerging economies have been among those to urge that any retreat from these same policies be conducted with extreme caution, given that this too could have potentially dangerous spillover effects on world markets that could, in turn, dampen the global economic recovery. (See Bridges Weekly, 12 September 2013)

The US had been expected to be the first of these advanced economies to rollback its quantitative easing programme, only for the Federal Reserve to surprise financial observers last month when it decided not to slow down QE3 - despite previous hints to the contrary.

Noting that these "unconventional" monetary policies by advanced economies have helped "support" global growth, the IMFC warned at the close of last week's meetings that the eventual normalisation of this policy should be "well timed, carefully calibrated, and clearly communicated."

"Where country circumstances allow, medium-term fiscal plans should be implemented flexibly to take account of near-term economic conditions to support growth and job creation, while placing government debt on a sustainable track," they said, adding that such an approach could help in minimising risks and managing spillover effects.

Multilateral institutions make trade facilitation pledge

This year's IMF-World Bank meetings come just weeks before another multilateral institution - the WTO - holds its biennial ministerial conference in the Indonesian island province of Bali. The global trade body's 159 members are working furiously toward clinching a deal from the 12-year Doha Round negotiations, mainly in the area of trade facilitation, along with some agriculture and development-related components.

However, the trade facilitation talks at the Geneva-based WTO continue to face hurdles, as developed and developing countries work to bridge their differences on topics ranging from customs cooperation to flexibilities with regards to implementing new commitments. Sources say over 400 brackets remain scattered throughout the current trade facilitation draft text, with the negotiating group tasked with the talks set to meet in Geneva again this week.

Developing countries have traditionally been wary of taking on obligations that could prove prohibitively costly to put into effect. Some developed countries, however, have argued that obligations must be binding in order for a trade facilitation pact to yield results.

In this context, the IMF and World Bank, together with five regional banks - the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, and the Inter-American Development Bank - offered a pledge last week to help assuage developing country fears on this subject, should a trade facilitation pact be agreed at Bali.

"We recognise that concerns persist in the negotiations about access to and coherence of assistance," the organisations said. "We will work with the WTO and its members to help ensure that the new commitments that a trade facilitation agreement would bring are supported."

The seven institutions have also said that they will aim to coordinate this support with that provided for complementary infrastructure development.

WTO Director-General Roberto Azevêdo welcomed the news, particularly at this "crucial stage" in the Bali preparation process.

"This will greatly assist WTO members' efforts to conclude an agreement, because these institutions have strong expertise in this field," Azevêdo said upon news of the group's plans.

ICTSD reporting; "World Leaders Press the U.S. on Fiscal Crisis," THE NEW YORK TIMES, 13 October 2013; "IMF tells nations to raise their game," FINANCIAL TIMES, 8 October 2013.

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