Kristalina Georgieva, IMF Managing Director, moderated a media roundtable on Wednesday, January 13th 2021 where she discussed the outlook for the global economic recovery, the impact from an uneven vaccination rollout, the fears of renewed virus surges and lockdowns, long term scarring and the concerns regarding debt sustainability, particularly in LICs, as well as the potential for growing inequality and poverty.
Kristalina Georgieva: I want to start by wishing you all a healthy and productive 2021. It promises to be a consequential year. We face an unprecedented race between the virus and the vaccines, and a risk of diverging recoveries, and I will come later to that point. We are in a process of updating our 2020 growth estimates and growth forecasts for 2021.They paint a less dire picture than our October forecasts, especially with data from the 3rd quarter surprising on the upside.
We are still faced with tremendous uncertainties about the exit from the health crisis and we do have a difficult period ahead. There is scarring from we are yet to address. And inequalities within and across countries are on the rise. We also have incredible opportunities for structural transformation that we need to absolutely pursue.
So, my first message to you is stay tuned: on the 26th of January we will bring forward our new projections. My second message is the following. We need to be clear – 2020 is the worst year since the Great Depression. But now when we are stepping into 2021, the picture is less bad for three factors. One, the decisive and sustained monetary policy and fiscal measures in advanced economies: they raised to Mario Draghi’s “whatever it takes” level. Two, because we have seen countries adjusting these measures based on rapidly changing circumstances, for example in Japan and US there is now new fiscal stimulus that comes on the back of the pandemic moving from bad to worse. Three, we have been handling the pandemic better over time. Adjusting to the digital economy, like you and me meeting in this format. Adjusting to micro measures—masks, social distancing—that allows us to function with pandemic still with us. And of course, most importantly with vaccines in place and mass vaccinations starting. So that is my second message, there are reasons why, while it is bad, it is less bad.
My third message is on priorities. We see at the Fund three key priorities for the year.
One: pursuing a durable exit from the health crisis. Vaccination of the global population is going to be an uneven process across countries, across regions—meaning that some will recover faster than others. To speed the recovery would require international cooperation—particularly to ensure that vaccines cover low- and middle-income countries. We [the international community] have yet to bring full funding for COVAX. We must do that. And we need to look at redistributing of vaccine capacity for countries that have booked for their population multiple times than the size of their population to countries that are in need of support for vaccination.
The number that I always flag, and I want to repeat it, is $9 trillion. This is what we can gain between now and 2025 if we accelerate vaccination across the world. Of this, 60% would go to low income countries and emerging markets and 40% would go to advanced economies. In other words, it is great value for money for everybody to do.
The second policy priority is to purse a sustainable and inclusive recovery. We will continue to make the case for sustained policy support until the recovery is firmly underway, and a gradual move to more targeted assistance for the most vulnerable. We will also work with our members on the concept of resilient economies, accelerating the transition to the new digital and climate economy. How we can do that? We have been advocating coordinated fiscal stimulus aimed largely at green and digital investment, and helping countries reduce high debt burdens and cope with volatile capital flows. Everywhere in poor and rich countries, we must help workers as they transition from shrinking to expanding sectors.
Three—and this is something that we have to zero in on big time in 2021—arrest and reverse the dangerous divergence between rich and poor countries. Many emerging markets and low-income nations continue to hurt badly and their capacity to act is so much smaller than in advanced economies. Advanced economies deployed the equivalent of 20% of GDP and low-income countries 2% of GDP. And of course, their GDP is much smaller than that of advanced economies. Without coordinated international support we will see that divergence becoming a problem for the countries themselves but also for security and stability of the world in the future. So, we see in that regard two very important actions. One is on the debt front. We have the Common Framework in place, we have to make sure that we press private and public lenders to engage on debt restructuring when it is necessary. And two, to provide more grants and concessional finance especially for digital infrastructure and climate resilience. That is going to be good for growth, good for jobs, and it would also be good for security and stability for the world as a whole.
At the IMF, as you know, last year we have provided $102 billion in new financing to 83 countries. We provided debt service relief to 29 countries. Internally at the Fund, I told staff that I see this as a soccer game with two halves. 2020, the first half, we did well, the world came out relatively speaking in a better shape than it could have been. But 2021 is going to be the second half and we know that in a soccer game what counts is the result in the end. So, a lot to do this year, and we at the Fund are absolutely ready to do our part in policy advice, in programs and financing, and in capacity development. So, this is my opening and welcome to 2021 it will not disappoint you as an interesting year.
The advice is very straightforward. Yes, we do need more stimulus. In the United States, fortunately, there is fiscal space to do so. In China, there can be also more to be done, specifically in the direction of this transition to the low carbon economy, they have committed to. In relative terms, the US has more, relatively speaking, more fiscal space for action. And the US has the need to do so. Because what we have seen in this crisis is that monetary policy intervention, the accommodative monetary policy action, it is good for the whole economy, but it tends to benefit the wealthier part, those that are in the digital economy, those that are in high tech, those that that are invested in markets a bit more. Fiscal policy can and must play a balancing role. And we have seen in the US, part of the population being very severely impacted. Low skilled workers, women—not only in the US, it is universal, but we see here in the US, young people, low skilled young people are particularly severely impacted. And providing support for this part of the population is simply a must.
Also, we have specifically for the US the issue of health coverage for many workers that had health coverage through their employers and lost it. Certainly, there is need of a backup, especially in the midst of a pandemic. And the US can do much more to accelerate its own transition to the new climate economy and can do quite a lot in infrastructure, where a compensation of the loss of jobs in some sectors, like tourism, restaurants, that may or may not return to the fullest, that compensation can be played over there.
So, you ask about the size. Of course, this is for the US authorities to decide. They need to balance their own books and think about long term [and] short-term action, longer term implications of this action, but a sizable support in the US that helps with the pandemic, but also helps with some of the problems that were inherited from before the pandemic. And, you know, education, quality of education, especially in poorer areas. I mentioned already infrastructure and building up the foundation for this accelerated structural change that is happening everywhere.
We that we have done research at the IMF on prior pandemics, SARS, H1N1, Zika. And what it shows is that during and after a pandemic, inequality goes up. And it is because of this impact on parts of the population that are more vulnerable to begin with [that] I am very deeply concerned that a global pandemic of the scale that this one has can push inequality up quite significantly unless we act.
And what does it mean to act? One hugely important lesson to take [away] from the pandemic is on the value of social safety nets for the resilience of people, communities and countries. And do more in the future for integrating social safety nets. By the way, the best social safety net is a social safety rope to help people to climb up. Which is the second very big message on inequalities; inequality of opportunity is harming people and it is harming productivity and growth for the country as a whole. We know what inequality of opportunity is about. It is about access to quality education. It is about financial inclusion, access to assets. And these are measures that governments by now know what to do about. It is not about knowing. It is about doing. And three, we have to recognize that one of the biggest [elements of] scarring from this crisis could potentially be kind of good news, bad news. Good news, accelerated digitalization and automation. And we see it already happening. Bad news, big parts of the population being left out and inadequate investment in sectors that can be job creators for people losing their livelihoods today.
Climate action happens to be wonderful because it is a win, win, win. Win of course, for our planet. We do want a resilient planet! This climate crisis that has been hanging over our heads before the pandemic has gone nowhere. It is still with us. It is good for the economy because many of the measures related to the transition to the new climate economy, to climate resilience and low carbon growth, they can be in job rich sectors, reforestation, mangroves restoration, dealing with land degradation, buildings’ renovation that bring efficiency, building solar panels, moving to solar energy. There are many areas where a resilient infrastructure—maybe this is the biggest chunk of job creation that countries need. And given that that we have now seen finally a massive shift towards recognition that this climate investments need to happen, I'm kind of hopeful that they actually will happen. In parentheses at the Fund, we take this very much to heart. We want to be [a] systemically significant institution in this transition to the new climate economy. And the third win is for individuals that can find a chance to be productive in this new climate economy, a combination of a public investment boost with incentives for private sector investment. And the best incentive is forward guidance on carbon price that says carbon is going to be that much this year, next year, by 2050, it is going to get to the level that that guarantees [that] we are going to need to carbon neutrality.
So, I do believe that there is a way to address inequalities that are good for productivity and growth and are also good for the social fabric, because what we remember from 2019. What was one of the markers of 2019? Protests, people being on the street in Paris, in Chile, in Lebanon. Why are people on the streets? By and large because of that sense that they don't have hope to make good of their lives. And I, and I am convinced that a crisis—when we say crisis is opportunity, this is our best shot to change course for the better. We must take it on.
Well, we should, but not just yet. We obviously—what we are seeing in advanced and developing countries is also a buildup of debt and deficits. It happens at a time of historically low interest rates and a very, very high probability that they will stay low for quite a long period of time. That gives space for action to be taken during this crisis, as well as for some fiscal action to accelerate the recovery and especially to support the transition to digital and green economy.
In our view, the time to take action on debt and deficit is when we have a durable exit from the health crisis. In other words, we see it in the rearview mirror. And we are not there yet. You're asking also a question whether it should be paid in full. In the European Union there is in fact, some redistribution of the debt burden from this crisis through the new generation EU fund, because some of this is going to be provided to countries in relation to needs and capacity in the form of grants. And yet some of it is being is being raised from markets as a loan. Within countries, given how low interest rates are at this point of time, debt service does not present a particularly significant challenge. And as you know, in some countries, interest rates are in negative territory. So, you kind of get some debt forgiveness through this channel. I would find it very problematic to go in a direction of massive questioning whether when you borrow, you are supposed to pay back, because that would be a dramatic shift away from the way market economies function.
But to finish on your question, within countries, of course, there has to be careful assessment as to who borrowed for what, under what terms. And when you get in the territory of corporate and household debt, there has to be careful calibration of policies to make sure that this debt remains manageable. In fact, one thing that that we are going to see inevitably as conditions improve, as the economy improves, paradoxically, we are likely to see more bankruptcies. In the last year, and I'm sure this would be the first half of this year, vis a vis historical trends, the level of bankruptcies is lower. Why? Because we are providing support uniformly across the board to prevent, and rightly so, the massive wave of bankruptcies and unemployment. Once we start gradually and carefully withdrawing some of this support and targeting it more towards the most vulnerable and the most promising, then countries ought to have in place strong insolvency frameworks and deal with this question. And in that sense, when we get there, you would see treatment of debt that is appropriately calibrated to different conditions.
Where our focus must be is in what we do with debt that is already unsustainable in the developing world. And there, from IMF standpoint, it is paramount—on a case by case basis—to work towards debt reduction and debt sustainability, so we can prevent the risk of a wave of insolvencies on the national level, that can be quite problematic for the countries themselves, but also for the world as a whole.
Let me first say my deepest sympathy, I know how severely South Africa has been hit and continues to be hit by the by the pandemic. The country has taken prudent action so far, both in terms of striving to contain the pandemic, but also in terms of support for the economy. The actions taken by the central bank have helped, and South Africa stretched its fiscal capacity, including by tapping into, as you know, emergency financing from the IMF, so it can support vulnerable people in vulnerable parts of the economy.
The big question for South Africa is going to be, is there will and space to undertake the reforms that are going to improve the country's fiscal position. And these are not new issues for South Africa, how the country is going to deal with SOEs (state-owned enterprises). Obviously, supporting those SOEs has opportunity costs, you cannot support other parts of the of the economy. Whether there could be a more thoughtful deployment of very limited fiscal space to inject growth momentum and to kind of help the economy become more competitive. Job generating is going to be hugely important, you know it, with the unemployment levels are way too high. From what I recall, 31 percent unemployment and it is particularly dramatic for young people.
So, you're right to ask, what can the country do with limited fiscal space. Well, prioritize the use of that very limited fiscal space and kind of re-prioritize the deployment of resources. It is a wonderful country it has great potential, there is no reason why it could not overcome this crisis. I also would stress that like the rest of emerging markets in more difficult position and low-income countries, there ought to be concerted international support. How South Africa can tap into more financing that is available at lower rates this is for the South African leadership to decide. But it is an option and it should be carefully, carefully considered.
Well, let me let me first say that when I called on everybody to stay tuned for January 26, that applies very much to India. You would see a picture in our update that is less bad. Why? Because the country actually has taken very decisive action, very decisive steps to deal with the pandemic and to deal with the economic consequences of it. On the pandemic side, you know much better than me. You went for a very dramatic lockdown for a country of this size of population with people clustered so closely together. And then India moved to more targeted restrictions and lockdowns.
And what we see is that that transition, combined with policy support, seems to have worked well. Why? Because if you look at mobility indicators, we are almost where we were before Covid in India, meaning that economic activities have been revitalized quite significantly.
What the government has done on the monetary policy and the fiscal policy side is commendable. It is actually slightly above the average for emerging markets. Emerging markets on average have provided six percent of GDP. In India this is slightly above that. Good for India is that there is still space to do more and the same way I answered [the previous question]. If you can do more, please do. 2021 is the year to use that space but use it wisely in a more targeted manner and to support an accelerated transformation of the economy. Because what we see is amazing how much faster structural change takes place. And policymakers ought to be leaning forward in this environment to support this structural transformation and to cushion the impact it has on those that are on the losing side of it.
I would finish by saying that I am impressed by the appetite for structural reforms that India is retaining. We welcome that. No question those reforms, and actually that applies very much to South Africa, those reforms will determine competitiveness in the future. We need higher productivity. We need more vibrant and inclusive economies. And they are not going to fall from the sky. There have to be reforms that support them. [CONNECTION LOST FOR ABOUT 20 SECS]. Are you back?
So, I was welcoming the fact that India does not give up on structural reforms. And I'm saying, yes, do it! Because the world change is accelerating and economies have to be agile and adaptable to change. Meaning that is in the past we can talk about a year of reforms that they will reform and they will say hooray, and then we can relax. This is gone. We have to be constantly leaning forward. And in the case of India, something that I mentioned in the opening, one of the aspects of Indian reforms that are still lagging is on gender equality. I want to just stress it is scary to see how we are losing ground on gender equality over these months so fast. Women are front line workers, but they are also, by and large, in the contact intensive industries hit. They are often in the informal economy, help cannot easily reach them, so they are hit. Labor market participation, once people start losing jobs, who is to lose jobs first? [Again] women are on the front line. Labor market participation in India for women has been low. It is shrinking and more attention to, and I know I know the government is paying attention, it is moving in that [direction], but there is so much space to tap into the productive potential of women and the entrepreneurial potential of women.
KG: Well, SDRs are certainly under consideration. It is one of the instruments that can be applied against divergence, against these diverging recoveries. Going back to [one of the previous questions], of course, having provision of additional liquidity that can come from an SDR allocation is helpful.
As your question indicated, we have not had the necessary consensus to move forward with a new SDR allocation. And the membership is asking that we don't take it off the table, and we haven't. It is one of the instruments we would be looking into.
At the IMF, we have one government at one time. So we have a [current US] governor. We will engage immediately with the arrival of the new administration. We will, of course, engage on a number of issues, including very much on this issue of how we can arrest and reverse this divergence. And certainly, we would be talking of all possible instruments, including SDRs. There are many that are very much in favor. You ask me about my opinion. In March of last year, I put it forward to the G20 as one of the possible ways to help emerging markets and developing economies. And I remain of the view that it is one of the instruments that can boost liquidity at no cost for emerging market and developing economies. One of the substantive and meaningful arguments against SDR allocation is that 60 percent of it goes to countries that don't need it and, in a sense, that is inefficient. It creates inefficiency in the use of the instrument.
What we have done this year is very important. We say, OK, you have SDRs that you don't need. There are the countries that are desperate for liquidity. Can we borrow your SDRs and lend it on to countries in need on concessional terms? And we have done about 20 billion of that reallocation. So, we will continue with this. We will continue to redirect this resource to emerging markets, but especially to low income countries.
And if there is a new allocation one can handle this problem of “I get it [but] I don't need it” by actually redirecting this resource on concessional terms, providing a massive fiscal space injection against conditions for good governance, structural transformation, dealing with inequalities. And that, I think is going to be discussed. Our Board of Directors has asked that we do our duty to organize a discussion on this topic.