IMF warns that debt overhang and financial vulnerabilities pose double threat to economic recovery

PUBLISHED: Fri, 09 Apr 2021 11:10:53 GMT
Sam Meredith
Key Points
  • The IMF is praising the U.S. for extraordinary stimulus but is warning that these measures can cause longer-term damage to worldwide economies.
  • “There’s no question that stimulus in the United States presents a very favorable backdrop to the growth projections that we have made,” said the IMF’s Geoffrey Okamoto.

LONDON — Policymakers and central banks need to be “very selective” with stimulus measures to avoid endangering global economic growth over the medium term, according to a top official at the International Monetary Fund, with a debt overhang and financial vulnerabilities identified as possible risks.

The warning comes as the IMF appears to be trying to orchestrate a delicate balancing act at its spring meetings this week.

The Washington-based institute has singled out the U.S. for praise in enacting extraordinary stimulus amid the coronavirus crisis to fast-track a global economic recovery, while also warning about the potential for these measures to cause longer-term structural damage to worldwide economies.

“There’s no question that stimulus in the United States presents a very favorable backdrop to the growth projections that we have made,” Geoffrey Okamoto, first deputy managing director of the IMF, told CNBC’s Joumanna Bercetche on Wednesday.

“I wouldn’t characterize it as a crutch. This is a tailwind, right, that countries should be able to use or capitalize on to try and ride through the remaining amount of time until they can get all of their citizens jabbed and their economies reopen,” he added.

The IMF said in its World Economic Outlook on Tuesday that the global economy was on track to expand 6% this year, upgrading its forecast for the second time in three months. It comes after an estimated 3.3% contraction in 2020 and the worst global recession since World War II.

IMF managing director Kristalina Georgieva said the brighter outlook was underpinned by the rollout of coronavirus vaccines and economic stimulus measures, “especially in the United States.”

In a move expected to supercharge the U.S. economic recovery, President Joe Biden’s $1.9 trillion stimulus package passed last month. The White House has since sought to make a $2 trillion infrastructure plan the administration’s next legislative priority.

When asked whether policymakers and central banks were at risk of overeating economies as a result of ultra-accommodative measures, Okamoto replied: “Both on fiscal and monetary policy posture, keeping accommodation in place for too long does invite risks.”

‘Risks to growth’

“On the monetary policy side, keeping monetary policy accommodation in place for too long does invite certain vulnerabilities to come into the financial sector,” Okamoto said, adding the institute had said in its Global Financial Stability Report that regulators would need to contain these risks.

The IMF report, published Tuesday, said that while there is a pressing need to avoid a legacy of vulnerabilities, actions taken during the coronavirus pandemic “may have unintended consequences such as stretched valuations and rising financial vulnerabilities.”

It also highlights a stark divergence between a small number of advanced economies and emerging market economies, with low-income countries seen to be at risk of falling further behind during a multispeed recovery.

A worker works on a production line to produce electrical products for domestic and Southeast Asian markets in Hai ’an city, east China’s Jiangsu province, March 29, 2021.
Costfoto | Barcroft Media | Getty Images

“On the fiscal side, just because rates remain low and your borrowing capacity is there doesn’t mean you can borrow unlimited amounts of money for any purpose,” Okamoto said.

“We want people to spend resources prudently both to get through the pandemic and to make the proper investments to set themselves on a growth trajectory coming out of the crisis. But that requires being very selective and making sure that you’re funding the projects with the highest economic rates of return.”

Okamoto said a failure to be selective with these projects would invite a debt overhang, “and both the debt overhang or the financial vulnerabilities could invite risks to growth over the medium term.”

Sign Up for Our Newsletter Daily Update
Get the best of CNBC Africa sent straight to your inbox with breaking business news, insights and updates from experts across the continent.
Get this delivered to your inbox, and more info about about our products and services. By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.