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Enhancing global macroeconomic stability with sustainable development

A stable global macroeconomic environment is a public good that can help support countries’ ability to implement policies that contribute to sustainable development. This section looks at how countries’ policies and international organisations’ analysis, advice, and financial support can contribute to both macroeconomic stability and sustainable development.

As noted in the Addis Agenda, “regulatory gaps and misaligned incentives continue to pose risks to financial stability, including spillover effects of financial crises to developing countries.” A parallel cluster, shaping financial market regulation for sustainable development, looks at regulations, policies and incentives that govern financial markets. Both sets of policies, those related to macroeconomic policy and those related to financial market governance, must be coherent and mutually reinforcing.

Economic system performance and stability

In recent years developing countries have seen capital outflows and bouts of heightened volatility, reflecting rising interest rates in developed economies and growing investor risk aversion due to heightened geo-political uncertainty.

Source: IMF Global Financial Stability Report October 2018.

There is dispersion in volatility of currencies, with currencies reflecting idiosyncratic domestic risks, which are not necessarily correlated with global risk-aversion. At other times, the volatility of most emerging market currencies increases synchronously; these episodes correspond to global macroeconomic and liquidity conditions. In general, though, domestic interest rates compensate for the volatility, on a diversified basis.

The direction of capital flows also varies by region with Asia and Europe currently being the prime suppliers of capital to the rest of the world and North America the largest recipient. The global imbalances in capital flows are the inverse of the imbalances in the current account (largely trade in goods and services) and movements in international reserves, which have been a feature of the international financial system for several decades, but from which risks could be elevated during periods of policy uncertainty.

International reserve accumulation by monetary authorities increased dramatically following the Asian financial crises of the late 1990s, with reserve accumulation rising to a peak of 15.2 per cent of world gross product in 2013. 

According to the United Nations World Economic Situation and Prospects 2019, global gross domestic product (GDP) growth is expected to remain steady at 3.0 per cent in 2019 and 2020, following growth of 3.1 per cent in 2018.

In many parts of Africa, investment levels still appear insufficient to achieve faster and more inclusive growth.

Growth in Africa, Latin America and the Caribbean, and Western Asia—home to half of the world’s people in extreme poverty—is on average significantly below 1.5 per cent on a per capita basis. While a modest recovery is projected in 2019, per capita incomes are still likely to remain stagnant or grow only marginally.

Financial stability monitoring

To date, there is evidence that the changes in financial sector regulation have been achieved without impeding the overall provision of credit to the global economy. Total credit growth in emerging markets and developing economies (EMDEs)  has grown faster than in advanced economies relative to gross domestic product, with a dip only in 2008. This in part reflects the low cost of bank credit and bond finance in recent years, supported by exceptionally accommodative monetary policies. The greatest growth has been to non-financial corporations (vs. households), which shows that, in general, lending is supporting economic activity.

While international banks deleveraged after the crisis, since 2014 bank lending and total credit to non-financial firms and households has grown relative to gross domestic product.

Evidence to date suggests that the financial crisis slowed, but did not necessarily reverse, the long-term trend toward higher global financial integration. While total gross cross-border bank claims dipped between 2010 and 2016, following initial deleveraging after the financial crisis. 

Total cross-border bank lending to borrowers in emerging markets has grown since 2009, despite volatility over the years. However, much of this increase has been short-term, with long-term lending growing more slowly, underscoring some of the challenges for policymakers in developing countries in ensuring the quality of borrowing, and in managing debt and capital account risks.

The 2008 financial crisis prompted efforts at all levels to strengthen monitoring mechanisms for financial stability, including by international, regional and national institutions, as well as by academia. Much of the work at the international level is done by the IMF, which has revamped its tools to address critical gaps identified in the wake of the crisis. Analyses of vulnerabilities in different types of economies have been consolidated into an overall framework, which continues to evolve.

The Financing for Development process and the UN system as a whole also plays a role. The global context chapter of the IATF report brings together the work of the UN Secretariat with that of the major institutional stakeholders of the Financing for Development Process (World Bank Group, IMF, WTO, UNCTAD, and UNDP) on the principle global financial and economic risks.

The IMF’s six-monthly global financial stability map, produced in the Global Financial Stability Report, has charted four risks and two overall market conditions since 2007. Complementary IMF assessments of  financial sector stability are contained in the World Economic Outlook (WEO), bilateral surveillance (Article IV staff reports), and country-specific Financial System Stability Assessments.

The international monetary system

The design and functioning of the international monetary system is a critical factor in global macroeconomic stability. While there have been major changes in the global financial system in in the last four decades, there has not been a fundamental change in the structure of the international monetary system since the 1970s.

There have been a range of efforts to address relevant risks, including national policy choices, such as the accumulation of international reserves as a form of self-insurance. However, the limits of these approaches (as discussed below) have led to the recognition of the need to pursue further reforms of the international monetary system. There are various ongoing work streams that address the call in the Addis Agenda on the “need to pursue further reforms of the international financial and monetary system.” The IMF is continuing work on the role of the special drawing right (SDR). 

Other efforts have included discussions on the international reserve system, along with strengthening the global financial safety net (see below).

Lending commitments and disbursements from IFIs

The IMF assists developing countries in addressing balance of payment pressure through its lending facilities.  The IMF’s non-concessional financial commitments from the General Resources Account to 21 countries amounted to SDR 113 billion (USD 157.2 billion) at end-June 2017. In the financial year to end April 2017 15 new arrangements were approved under the non-concessional facilities, totalling SDR 98.2 billion (USD 134.7 billion). For low-income member countries, the IMF committed loans amounting to SDR 1.1 billion (USD 1.5 billion) under concessional programs supported by the Poverty Reduction and Growth Trust (PRGT); at the end of April 2017, total concessional loans outstanding to 54 members amounted to SDR 6.4 billion. Work is also underway to assess the adequacy of the IMF’s concessional facilities, with a comprehensive review planned for 2018.

Global financial safety net adequacy

The global financial safety net (GFSN) has expanded since the global financial crisis, including through a large increase in the IMF’s lending capacity and expansion of regional financial arrangements. Nonetheless, Member States in the Addis Agenda recognised the need to further strengthen the system. As noted in a recent IMF paper, the GFSN has become more fragmented, has uneven coverage with sizeable gaps (especially in regard to access to financing for systemic emerging markets and those that can act as transmitters of shocks) and remains too costly, unreliable and conducive to moral hazard.