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IMF: Trade tensions could derail global growth prematurely

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Alicia Nicholls

Currently strong global growth could be derailed by escalating trade tensions and retaliation. That is the word from the International Monetary Fund (IMF) in its latest World Economic Outlook (April 2018) entitled “Cyclical Upswing, Structural Change”. The lending agency has forecast global growth of 3.9% both for this year and the next, up from 3.8% in 2017, which was the most robust since 2011. Increased trade and investment has been a major propeller of this growth, according to IMF economists, which makes the current trade tensions between the United States and China a cause for concern.

GDP growth for Latin America and the Caribbean (LAC) is projected to be 2.0% in 2018 and 2.8% in 2019, up from 1.3% in 2017, but still below the projected global average. The IMF projects positive growth for all LAC countries (to varying degrees), with the exceptions of Dominica (-16.3%) which was ravaged by Hurricane Maria last year and Venezuela (-15%), which is currently in the throes of a deep economic crisis.

Longer-term prospects not as bright

However, it was not all positive news. While near-term global growth prospects remain positive, the IMF projects a slowing of growth in the medium-term. It was noted that ageing populations, lower rates of labor force participation and low productivity growth all made it unlikely that advanced economies would return to their pre-crisis per capita growth rates any time soon.

According to the IMF, some emerging and developing economies are likely to achieve longer-term growth rates comparable to their pre-crisis rates, but the outlook for commodities exporters was not as positive even though the outlook for commodities prices had improved somewhat. The IMF emphasised that economic resilience of these economies would be contingent on their diversification.

The IMF has also again sounded alarm about the rise in global private and public debt levels and the prospect of repayment difficulties due to monetary policy normalisation. This is an issue which is of particular relevance to the region, as some Caribbean countries are among the most indebted in the world.

Trade tensions could undermine current growth trajectory

During the press conference launching the report, IMF Economic Counsellor and Director of the Research Department, Mr. Maurice Obstfeld cautioned that while a slowing of growth is predicted in the longer term, “the prospect of trade restrictions and counter-restrictions threatened to undermine confidence and derail growth prematurely”.

Acknowledging the political imperatives driving the protectionist turn taken by some countries, namely public skepticism about the benefits of free trade and economic integration, Mr. Obstfeld noted that technology as opposed to trade was to blame. He further warned that fights over trade distracted from, rather than advanced the agenda of promoting growth whose benefits were more broad-based.

Multilateral system  in danger of being torn apart

In the report, the IMF warned that the multilateral system was in danger of being torn apart. Making the case against unilateral action, the IMF Economic Counsellor argued that inequitable trade practices were best coped with through “dependable and fair dispute resolution within a strong rules-based multilateral framework”.

He acknowledged that there was room to strengthen the current trading system and that plurilaleral agreements could be used as a “springboard” to more open trade. He also noted that multilateral cooperation was essential “to address a range of challenges in addition to the governance of world trade.”

The full press conference may be viewed here and the report may be downloaded here.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is an international trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

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IMF raises global GDP growth forecast but protectionist policies a threat

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Alicia Nicholls

“The sharp downtown in global trade in recent years is both a symptom of and a contributor to low growth“. – Making Trade an Engine of Growth for All (IMF, WTO, World Bank Report of April 2017)

Protectionism leading to trade warfare is a ‘salient threat’ to global economic growth, warned the International Monetary Fund (IMF) economists, not for the first time, in their recently released World Economic Outlook for April 2017.

The good news is that the Fund’s April outlook was much more upbeat than its January 2017 outlook. According to the Fund, the global economy is projected to expand by 3.5 percent in 2017, a modest increase from its 3.4 percent projection in its January 2017 outlook but greater than the 3.1 percent growth in 2016. The Fund has maintained its outlook for 2018 at 3.6 percent.

The not so good news, as already noted, is that the tenuous economic recovery remains vulnerable to several downside risks, including protectionism. Bear in mind as well that the global economy expanded on average 4.2 percent between 1999-2008, so the projected rate of growth is still below the pre-crisis rates of growth.

The Fund’s most recent WEO report comes on the heels of the release by the World Trade Organisation (WTO) of its trade growth forecast which projected some recovery in global trade growth to 2.4 percent in 2017. Most readers would remember that 2016 saw the slowest rate of global trade growth since the global economic and financial crisis which coincided with the slowest rate of global economic growth in 2016 since 2009.

As noted by the WTO in its press release, “the volume of world merchandise trade has tended to grow about 1.5 times faster than world output, although in the 1990s it grew more than twice as fast.” However, dampened trade volumes have been linked to a subdued global economy and global trade grew less than global economic growth in 2016. Although, the WTO’s projected rate of growth for 2017 signals a cautious recovery, the rate of merchandise trade growth is still much lower than pre-crisis merchandise trade growth and the forecast risk is higher due to both economic and policy uncertainty.

The IMF’s most recent WEO also follows a joint report released by that institution, the WTO and the World Bank entitled “Making Trade an Engine of Growth for All: The Case for Trade and for Policies to Facilitate Adjustment” in which it was stated, inter alia, that the role of trade in the global economy is ‘at a critical juncture’, and arguing that further trade integration was important for stimulating global growth.

At the same time, the IMF warned that protectionism could lead to trade warfare, citing several factors in mainly advanced economies which have seen greater political support for nationalist and protectionist policies. There is good reason for this concern, stemming from protectionist turns and mercantilist rhetoric emanating from political quarters in advanced economies, namely the US and Europe. Moreover, the communique from the March 2017 G-20 Finance Ministers’ Meeting in Germany  saw, for the first time, the exclusion of the pledge to “resist protectionism”. On the multilateral front, although the WTO’s Trade Facilitation Agreement has come into effect, there has been little progress otherwise on multilateral trade negotiations.

Trade is an important driver of global growth, and helped to propel global growth in the latter half of the 20th century. Trade has also played an important role in boosting competition, productivity and improving living standards and productivity. However, there has been dislocation as a result of free trade. In the case of developing countries, there has been the negative impact of competition from cheaper subsidised (particularly agricultural) imports from advanced countries on domestic industries which have higher production costs due to lack of economies of scale and lower technology use. An Oxfam report noted the  negative impact on Mexico’s corn industry following the introduction of the North American Free Trade Agreement (NAFTA).

While the cheaper imports benefit consumers through lower prices, they, however, can negatively impact domestic industries and jobs, and with implications for countries’ balance of trade, and in the case of the agricultural sector, food security. This is an issue which has been noted by developing countries and development economists for years but only seemed to gain mainstream discussion once the effects became more palpable in advanced economies, such as the US and Europe.

However, this is not to suggest that trade is undesirable or that the negatives outweigh the positives. Trade, as the IMF has rightly noted, is an important driver of the global economy. It does, suggest, however, that there needs to be greater consideration of the “social impact” of trade policies and of the need to make trade policies much more inclusive by ensuring that the most vulnerable to the negative fall-outs of trade, such as women and the poor, are protected through supporting policies and mechanisms. As such, domestic policies to assist with, and mitigate, these trade-related adjustments are important, a point made in the joint report by the IMF, WTO and World Bank.

Besides protectionism, the IMF also noted faster than expected interest rate hikes in the US, aggressive financial deregulation, financial tightening in emerging market economies, geopolitical tensions, inter alia, as among the inter-connected downside risks to global growth. Furthermore, the IMF emphasised the importance that countries’ policy choices will have on the global economic outlook and on reducing risks to this outlook.

To read the full IMF WEO April 2017 report, please visit here.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

Caribbean Response to the Withdrawal of Correspondent Banking

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Alicia Nicholls

IMF Deputy Managing Director, Mr. Tao Zhang, gave an interesting and comprehensive speech summarising the “Caribbean response to the Withdrawal of Correspondent Banking” at the Conference on the Withdrawal of Correspondent Banking in Antigua & Barbuda on October 28, 2016.

The following realities stood out to me from Mr. Zhang’s speech:

  1. Almost 60% of the Caribbean Association of Banks’ member institutions,  which it has interviewed, report a loss of CBRs.
  2. In some cases where the banks have been able to hold on to CBRs,  some key services have been discontinued e.g: cheque clearance, trade finance and wire transfers
  3. Some banks face higher costs for the remaining services.
  4. Global correspondent banks are withdrawing from transactions involving money transfer operators.

Given the above, Mr. Zhang rightly noted that if this continues, not only would it affect the financial stability of affected countries, but also economic growth, financial inclusion, and other development goals. He further reiterated that continued loss of CBRs would drive legitimate transactions underground and encourage increased informality, thereby undermining anti-money laundering and countering the financing of terrorism (AML/CFT) objectives.

Mr. Zhang then turned to the issues driving this trend. A number of international organisations and agencies have studied this issue, including the IMF, and their findings were echoed in Mr. Zhang’s speech. He noted, for example, the cost-benefit considerations which banks have to weigh; rising expenses associated with compliance and international tax transparency versus limited profitability in some CBRs.

He made reference to several policy responses being made by Caribbean authorities and other affected regions which he  noted have already started to have some results. He gave the example of the US Treasury Department which has increased its education of financial institutions on the “precise nature of transactions and behaviours that are subject to sanctions”. He further made reference of Eastern Caribbean Currency Union (ECCU) countries’ decision to consolidate their national AML/CFT work into one regional operation under the responsibility of the Eastern Caribbean Central Bank (ECCB).

Mr. Zhang emphasised that there is “no quick fix” to the problem and reiterated the need for urgent action to mitigate the impact on affected economies.

In addressing what are the next steps, he outlined three areas for further exploration:

  • Addressing the problem of economies of scale
  • Mitigating cost and technical limitations
  • Improving information flows

He also set out a number of ways in which the IMF could be of assistance, including for example, facilitating dialogue and encouraging standard-setting bodies to take account of the impact of CBR policies.

In concluding, Mr. Zhang reiterated the IMF’s continued commitment to working with affected countries on the issue until it is solved.

The full speech is a must-read and may be accessed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

IMF trims global growth forecast to 3.2% in 2016

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Alicia Nicholls

In the run up to its annual spring meetings in Washington DC  this week, the International Monetary Fund (IMF) in its World Economic Outlook released today, has cut its baseline projection for global growth  to 3.2% in 2016 and 3.5% in 2017, down from 3.4% and 3.6%, respectively, in its forecast in the January 2016 WEO Update Report. The title of its latest WEO Report “Too slow for too long” pretty much sums up the sluggish and disappointing pace of global growth post the global economic and financial recession and comes on the heels of the recently released World Trade Organisation’s report in which the WTO cut its forecast for global trade growth yet again.

Noting that the global recovery has weakened further in the midst of turbulence in financial markets, the IMF report highlighted several factors which have hampered global growth including legacies from the global recession and the eurozone crisis, declines in potential growth, the impact of low oil and commodities prices (on oil and commodities exporting countries), currency fluctuations and geopolitical tensions which they assumed to remain elevated in 2016 given the situations in Russia, Ukraine and the Middle East. However, the IMF forecasts the modest eurozone recovery to continue in 2016/17.

Emerging market and developing economies are expected to grow by 4.1% in 2016, compared to 1.9% projected output growth from advanced economies for the same period. While emerging and developing economies will continue to comprise the largest share of global growth in 2016, the IMF forecasts that growth  in these economies will be uneven and weaker than in the previous year as a result of a moderate slowdown in China and a weak outlook for non-oil commodities exporters owing to further softening in commodities prices.

Not unrelated to the slowdown in global trade is the softer global investment demand, particularly in commodities-exporting economies due in part to China’s rebalancing and general uncertainty about global growth.

Caribbean

In regards to the Caribbean, the IMF forecasts real GDP growth of 3.5% (slightly above the global forecast) in 2016 and 3.6% in 2017. However, like the global situation, this growth will be uneven. The expected high flyers are as follows: Dominican Republic which is forecast to grow by 5.4% in 2016, Dominica at 4.9% and St. Kitts & Nevis at 4.7%. Barbados is projected to experience real GDP growth of over 2% in 2016, which is an improvement on the 0.5% growth in 2015 but still below both the global and regional average. Economic output in commodities exporting countries, Suriname and Trinidad & Tobago, is  forecast to contract by 2% and 1.1% respectively in 2016.

Turning to the United States, the Caribbean region’s largest trade partner and one of the beacons of hope in an otherwise still subdued global economy, the IMF cut the United States’ growth forecast to 2.4% in 2016, down from it previous forecast of 2.6%. However, the IMF noted that stronger balance sheets, an improving housing market and better fiscal position would help offset any negative effects on US exports from appreciation of the US dollar, weaker manufacturing and tighter domestic financial conditions in some sectors in the US economy.

In regards to the United Kingdom, a major tourist source market for many Caribbean countries, the IMF projects UK economic output to grow by 1.9% in 2016, down from 2.2% in 2015. The IMF listed Britain’s potential exit from the European Union ‘Brexit’ as one of the main risks to its outlook, noting that such a development would pose major challenges not just for the UK but the rest of Europe. Among the challenges highlighted would be disruption of trade and investment flows, while also increasing financial market volatility due to uncertainty during any post exit negotiations. Brexit is a development which the Region should monitor closely as any negative fall-out the UK’s exit from the EU has on the UK economy could affect countries like Barbados which depend heavily on the British market for tourist arrivals and real estate foreign direct investment inflows.

IMF Recommendations

Stressing that the “current diminished outlook and associated downside possibilities warrant an immediate response”, the IMF has made several recommendations, which are also applicable to the Caribbean. Though citing the importance of accommodative monetary policies, the IMF also stressed the immediate need for such policies to be supported by “other policies that directly boost demand and supply”, including infrastructure investment, public action to encourage of research and development activity, structural reforms in product and labour markets, tax reform and financial reforms.

The full report may be viewed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

Is the World Bank finally committed to an open and merit-based selection process? Only time will tell…

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Alicia Nicholls

The current president of the Washington DC-based World Bank, Robert Zoellick, a former executive with Goldman Sachs, will be stepping down from the post in June of this year.  Per a tacit agreement between the US and European countries, all eleven presidents of the World Bank since the Bank’s founding in 1944 have been American. Concomitantly, a European has always headed its sister institution the International Monetary Fund (IMF).  This present World Bank selection cycle has seen an unprecedented challenge to US monopoly of the World Bank’s leadership to date. The US’ nominee, Dr. Jim Yong Kim, faces stiff competition from two nominees from the global South, Dr. Ngozi Okonjo-Iweala from Nigeria and the Brazil-nominated Mr. Jose Antonio Ocampo from Colombia.  Coming on the heels of the IMF’s managing director selection process last year when Europe retained its perennial grip on that institution’s leadership position, the question on everyone’s mind is whether this World Bank selection cycle will see a continuation of the status quo or whether either candidate from the global South will stand a decent chance of assuming the reins of this important international financial institution (IFI).

The contemporary geopolitical and economic configuration of the world is much different from that which existed in the immediate post-World War II era in which the Bretton Woods institutions were born. The US, while still the world’s largest economy by GDP, now shares the world stage with several increasingly important poles of growth, notably emerging economies which have been the main engines of economic recovery. Yet the World Bank’s governance structure does not reflect this multipolar reality. Tired of the iniquitous status quo, the BRICS have been pushing for reform of the Bretton Woods institutions to reflect present-day economic realities and to allow developing countries a greater say in the international financial and economic system. While the BRICS have been successful in increasing their voting power in the World Bank, securing the top post has been a different story. Will this time be different?

Brazil has nominated former Colombian Minister of Finance, Jose Antonio Ocampo, a US-trained economist who is currently a Professor at the Ivy-League Columbia University in New York City. In its communiqué of March 26th, the African Union  endorsed the candidacy of renowned Nigerian economist, diplomat and former government minister, Dr. Ngozi Okonjo-Iweala. Perhaps in an attempt to diffuse the calls for change, the Obama administration shied away from the usual choices of bank executives and bureaucrats and instead nominated the Korean-born US national Dr. Jim Yong Kim.  A medical doctor, Dr. Kim is the President of the prestigious Dartmouth College and is well-known for his work in fighting tuberculosis and HIV-AIDS throughout the developing world.

It should be noted that all three candidates being considered are highly educated and tremendously qualified in their respective fields. All three were born in developing countries and educated at Ivy League universities in the US. That being said, Dr. Okonjo-Iweala’s impeccable qualifications and her vast experience should make her rise to the top of the pack.  Dr. Okonjo-Iweala is an internationally respected economist with a wealth of expertise in development issues at both the national and global levels.  She has spent more than twenty years at the World Bank until ascending to the post of Managing Director in 2007. She has also served twice as Minister of Finance and Minister of Foreign Affairs in her home country of Nigeria. It is therefore no surprise that Dr. Okonjo-Iweala was named as one of the 100 most powerful women by Forbes Magazine.

Dr. Okonjo-Iweala as the World Bank’s new president would be a powerful symbol for gender rights. It would be the first time a woman, far less a woman from the global South, would be at the helm of this powerful but traditionally male-dominated global financial institution. A wife and mother of four, Dr. Okonjo-Iweala has been outspoken on gender equality and on the macroeconomic and social benefits of providing finance to women and of encouraging women entrepreneurship. In this regard, it is hoped that she would push for more gender-sensitive bank lending programmes.

Perhaps, even more critically, it would be the first time a person from a developing country and an African nation, will be at the head of this institution. The World Bank is an important lender to developing countries and has the twin goals of reducing poverty and promoting development. Despite some of its good work, the World Bank, like its twin sister the IMF, has not always had the best reputation in the developing world, including right here in the Caribbean. During the 1990s, its structural adjustment programmes under the so-called Washington Consensus foisted austere market reforms and other neo-liberal policies on cash-strapped countries as conditionalities for loans. These policies included deregulation, privatization, cuts in Government expenditure (especially in social welfare) and liberalization of capital markets, which if introduced too quickly and/or without the supporting institutional framework could lead and have led to devastating consequences in the countries concerned and have had a disproportionate impact on the livelihoods of women and the poor. For a case in point, just watch the documentary Life and Debt for a vivid look at Jamaica’s experience with IMF-World Bank sponsored structural adjustment. Under a Okonjo-Iweala presidency, it would be hoped that there will be the genesis of a new era in the Bank’s dealings with the South, marked by less focus on free market ideology and a greater sensitivity towards the impact of policies on vulnerable groups in society such as women and the poor.

However, Dr. Okonjo-Iweala’s candidacy faces two big hurdles. Chief among them is the Bank’s ‘democratic deficit’. It is the Bank’s 25-member Board of Executive directors which will ultimately decide the successful candidate.  As the largest economy among the 187 countries in the World Bank, the US has the majority of votes. By choosing a nominee, the US has shown that it will not go against its own strategic interests by supporting a non-American for such a key post.  Moreover, European countries, which hold the second largest block of votes, are unlikely to support a non-US candidate, especially given the US’ support for their IMF nominee last year. Additionally, Japan has already signalled its intention to support the US nominee.

The only alternative would be for Dr. Okonjo-Iweala to garner unanimous developing country support. Therein lies the second problem.  The BRICS have been reticent about throwing their support behind a single nominee from the South and have so far not endorsed any of the three candidates. Last year the BRICS missed their opportunity to block the ascension of yet another European to the post of IMF managing director by their inability to unanimously agree on an alternative candidate, even though there were well-qualified non-European candidates.

This crop of candidates will make unanimous developing country support behind a single candidate even more elusive. The Brazil-nominated Mr. Ocampo will probably enjoy significant support from Latin American countries. But as the US nominee, Dr. Kim is the clear front-runner for the job. Moreover, by choosing an Asian-American, a non-banker and a public health professional,  the US has picked a candidate who will undoubtedly garner support from many developing countries, including some Asian countries which have criticised the US’ monopoly of the World Bank leadership position. Despite being the best candidate, Dr. Okonjo-Iweala will have a tough, and some say, futile battle for the World Bank presidency.

As the countries which rely the most on IFIs and arguably stand the most to lose from any turmoil in the international financial system, developing countries need to have a greater say in these global financial institutions. Is the World Bank truly committed to an open and merit-based process irrespective of nationality? Only time will tell.

Alicia Nicholls is a trade policy specialist and law student at the University of the West Indies – Cave Hill. You can contact her here or follow her on Twitter at @LicyLaw.