Success of central banks’ policies to tackle inflation key for global economic growth: IMF chief

SINGAPORE: Central banks around the world have done a good job in tackling rising inflation, which slows down growth and affects poorer parts of the population more disproportionately, the head of the International Monetary Fund (IMF) said on Wednesday (Nov 15).

Speaking to CNA at this year’s Singapore FinTech Festival (SFF), IMF managing director Kristalina Georgieva said that even as growth in Asian economies slows, the region as a whole is still doing better than most other parts of the world.

China, meanwhile, needs to create conditions that favour consumer-led growth if it wants to achieve a quick and sustainable economic recovery, she said.

The three-day SFF, held at the Singapore EXPO, brings together policy, finance and technology players from around the world to discuss cutting-edge financial solutions, evolving regulatory landscapes and the latest technological innovations.

CENTRAL BANKS' EFFORTS

Ms Georgieva said the world’s central banks are relying on data and responding to market conditions.

“In one year, inflation has dropped to half of what it was. It was about 11 per cent, now it's slightly over 5 per cent. And that is because actions have been taken,” she added.

“Central banks watch data carefully, and if data tells them you have to stay put, inflation is not where it should be, they need to follow. If data tells them that conditions are changing, they, of course, would respond to it.”

She said that inflation is bad for growth, as it worsens investors’ confidence and consumers’ ability to participate actively in the economy.

Hence, it is the role of central banks to stabilise prices, and bring them back to a point which is good for growth as well as help the poorer segments of the population.

“It is the job of finance authorities to pay attention to who is most severely impacted, and they also have done a fairly good job providing support to vulnerable parts of the population,” said Ms Georgieva.

The multi-pronged impact from the COVID-19 pandemic and the war in Ukraine driving up the costs of living, along with the fight against climate change, has pushed many countries to exhaust their fiscal buffers, she said.

“But I know that there is a good understanding that monetary policy and fiscal policy have to help each other,” she added.

“In other words, fiscal policy has to be careful not to throw too much money because then inflation may go up, and monetary policy has to watch when conditions are right to start moderating what has been a necessity to fight inflation.”

To address the heavier financial burdens, governments need to make sure that they collect revenue, said Ms Georgieva.

Some countries have more space to increase revenues to meet those needs, because of tax avoidance, she noted.

“And then they need to prioritise public spending, and be very efficient in how public money is being used,” she said.

“It’s also very important to recognise that when the economy grows, then there is more in tax revenue. So this is why winning the fight against inflation as quickly as possible is so important.”

Ms Georgieva called for policy coherence by central banks and the “responsible behaviour of all policymakers in this very difficult time”, along with the public’s support and understanding that broad change across society is needed to address this problem. 

CHINA NEEDS STRUCTURAL REFORMS

For China to secure a quicker and more sustainable recovery for its economy, it needs to pursue structural reforms, said Ms Georgieva.

“I'm very pleased to see that China is now using more of this space, both in terms of expanding the budget deficit space and in terms of providing more support to the real estate sector,” she said.

The country’s property sales fell at a faster pace last month while investment in real estate slumped, according to official data, suggesting that the sector is still on a decline despite Beijing's support measures.

Ms Georgieva said reforms are needed for China’s state-owned enterprises, along with encouraging consumer spending in the country by addressing its ageing population.

“Make sure that there is more tightness on the fiscal side for local governments, and create better conditions for consumer-led growth by just improving the pension system in China, so people are not worried about their old age and they don't save so much that they spend less,” she said.

She added that Asia on the whole is performing better than most other parts of the world.

“We look at this year, the Asia Pacific is going to deliver three-quarters of global growth, but it is slowing down understandably with high interest rates,” said Ms Georgieva.

She said the region needs to continue investing in education and ensuring that people adjust to a world of rapidly changing technology, such as artificial intelligence (AI).

“That can be a big boost of productivity, but only if there is attention to how the labour market adjusts to this new world by continuing to pursue a strong attention to the financial sector. That has been a good practice in Asia,” she said.

She added that Asia has what it takes to embrace new drivers of growth, such as green growth from addressing climate change, and technology-driven digital enhanced growth.

IMPACT OF ISRAEL-HAMAS WAR

Ms Georgieva said the most dramatic impact of the war between Israel and Hamas has been on the civilians who have lost their lives in both Israel and the Gaza Strip.

She said that in terms of economic impact, the epicentre of the war has borne the most direct impact.

“Neighbouring (countries in the region) – Lebanon, Jordan, Egypt – already feel the impact of this war, in terms of tourism slowing down (and) in terms of risks for investors being now perceived as higher,” said Ms Georgieva.

At the moment, there is still no spillover effect for the rest of the world economically, she said, noting that there was a small impact on oil prices initially which came down fairly quickly.

However, the world is “anxious” as it is recovering from the pandemic, said Ms Georgieva.

Apart from the United States and a few countries, including Singapore, which have returned to pre-pandemic levels, most of the world is still lagging, she said.

“The longer this war goes, the higher the risk of spillover. And the sooner it can be brought to an end for the sake of people and also for the sake of the world economy, the better,” she said.