Overhanging debt and financial vulnerabilities jeopardize recovery

LONDON – Policymakers and central banks must be “very selective” with stimulus measures to avoid endangering global economic growth in the medium term, said a top official at the International Monetary Fund, with overhanging debt and financial vulnerabilities identified as potential risks. identified.

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

The Washington DC-based institute has praised the US for providing extraordinary stimulus measures amid the ongoing coronavirus crisis to accelerate a global economic recovery, while also warning of the potential of these measures to do longer-term structural damage. focus on global economies. .

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

“I wouldn’t describe it as a crutch. This is a tailwind, right, that countries should be able to use or take advantage of to try and drive the remaining time until they can poke all their citizens and reopen their economies. he added.

The IMF said in its World Economic Outlook on Tuesday that the global economy is on track to grow by 6% this year, revising 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 Director Kristalina Georgieva said the brighter outlook was supported by the introduction of coronavirus vaccines and economic stimulus packages, “especially in the United States.”

In a move expected to spur the US economic recovery, President Joe Biden’s $ 1.9 trillion stimulus package was passed last month. The White House has since sought to draft a $ 2 trillion infrastructure plan for the government’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, “In both fiscal and monetary policy, keeping accommodation in place for too long carries risks. “

‘Risks to growth’

“On monetary policy, maintaining monetary policy for too long invites certain vulnerabilities to get into the financial sector,” Okamoto said, adding that the institute had said in its Global Financial Stability Report that regulators would avoid these risks. must master. .

The IMF’s GFSR report, released Tuesday, states that while there is an urgent need to avoid a legacy of vulnerabilities, actions taken during the coronavirus pandemic “could have unintended consequences, such as overvaluation and increasing financial vulnerabilities. “

It also points to a strong divergence between a small number of advanced and emerging market economies, with low-income countries at risk of falling further behind during a multi-speed recovery.

An employee works on a production line to produce electrical products for domestic and Southeast Asian markets in Hai ‘a city, China’s eastern Jiangsu province, March 29, 2021.

Costfoto | Barcroft Media | Getty Images

“On the tax 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 continued.

“We want people to spend their resources prudently to get through the pandemic and make the right investments to put themselves on a growth trajectory coming out of the crisis. finances with the highest economic returns. “

Okamoto said failure to be selective with these projects would lead to overhanging debt, “and both overhanging debt and financial vulnerabilities could pose medium-term risks to growth.”