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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

Global economic growth in 2016 has been below the expectations of members of the Task Force, with most agencies revising growth projection downward during the year, but expecting stronger growth in 2017. The IMF has described growth as “subdued”, UNCTAD has described the global economy as “fragile”, and the UN Secretariat has described the global economy as “trapped in a prolonged period of slow growth”. Underpinning the sluggish global economy are the feeble pace of global investment, dwindling world trade growth, flagging productivity growth and high levels of debt. Economic vulnerabilities and downside risks have increased across a significant number of countries, including from policy uncertainties, the spillovers from growth slowdowns in major emerging markets, the unknown long-term impact of unconventional monetary policy, the possibility for capital flow reversals in developing countries, and geopolitical factors.

Growth of emerging market and developing economies picked up modestly in the first half of 2016, but the growth rates remain low compared to the period 2010-2012, and significantly below growth rates prior to the 2008 world financial and economic crisis. Investment growth has slowed significantly in many countries and regions, with weak investment from both the public and private sectors driving a slowdown in productivity growth. These issues are explored in greater depth in the global context chapter of the 2017 report of this Task Force.

Dwindling world trade growth, to a projected 1.2 per cent in 2016, is a symptom of the global economic slowdown. Persistently low commodity prices have intensified fiscal pressures in the commodity-dependent economies and in some cases spurred exchange rate depreciation which has raised the cost of servicing external debt.  Recent increases in international financial integration across developing countries have allowed investment diversification but also bring new sources of vulnerability through amplification and booms and busts.

A global debt build-up after the financial crisis has resulted in increased public debt, in both developed and developing economies, while progress on private sector deleveraging in developed countries has been uneven. Increased emerging market corporate debt in a small number of more advanced developing countries presents financial stability risks. The heightened risks are also reflected in the high volatility of capital flows, with total net flows to all developing countries and economies in transition turning negative, driven by withdrawal of other investment flows and portfolio flows.

In late 2016, the IMF’s Global Financial Stability Report (GFSR) reported that medium-term risks from a slowdown in growth, growing inequality and political instability are building. The report highlighted four areas of risk: banking sector profitability, the solvency of insurers and pension funds, the increase in emerging market corporate debt, and rapid overall credit growth in some emerging markets.

The correlations between the volatility of developed countries currencies and emerging market (i.e. larger middle income countries) currencies has recently increased, as shown in the chart above. These increased financial linkages between emerging market and advanced economies have increased the risk of spillovers between the two and have left some countries particularly exposed to political risks from abroad.

Financial stability monitoring

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. It shows that while risks have dropped from the peaks at the time of the financial crisis they still remain high. In particular, market and liquidity risks and emerging market risks have returned to near-crisis highs. Monetary and financial conditions have become much easier over time, while risk appetite has varied considerably. 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). In July 2016, IMF staff prepared a note for the G20 outlining initial considerations on whether a greater role for the SDR could contribute to the smooth functioning of the international monetary system. In October 2016, a high-level external advisory group, consisting of prominent academics, former policymakers, and market practitioners, was convened to advise on this issue. The IMF will continue exploring whether a broader role for the SDR could contribute to the smooth functioning of the international monetary system. This work will seek to identify gaps and market failures that the SDR could help to address in light of the structural shifts in the international monetary system.

Other efforts have included discussions on the international reserve system, along with strengthening the global financial safety net (see below). UNCTAD proposes new multilateral arrangements as the best way to correct the system’s weaknesses and biases. It suggests attenuating the role of private international capital flows as a source of international liquidity and ensuring that institutional mechanisms can effectively provide sufficient official international liquidity, thereby reducing the need for the large-scale accumulation of foreign exchange reserves as self-insurance, and ensuring that surplus countries share the burden of adjustment.

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 twenty countries amounts to SDR 80.6 billion ($109.6 billion) as of October 2016, of which SDR 60.3 billion ($82.0 billion to ten countries) became effective in 2016. In addition, low-income countries’ demand for loans from the IMF is expected to be high in 2016. New lending commitments to countries eligible for concessional financing worth SDR 1.7 billion ($2.3 billion) were approved during January–October 2016.

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. Given its central role in the GFSN, the IMF is currently working on reviewing and modifying its lending facilities and improving cooperation with regional financial arrangements. The Fund is planning to issue a paper on IMF-regional arrangement cooperation in the coming year.