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IMF: Stubborn Inflation, Financial Sector Turmoil Holding World Economy to Ransom



IMF Article IV Consultation with Nigeria

Tentative signs in early 2023 that the world economy could achieve a soft landing, with inflation coming down and growth steady, have receded amid stubbornly high inflation and recent financial sector turmoil, according to the International Monetary Fund (IMF).

The international financial institution disclosed this in its ‘World Economic Outlook April 2023’ report which it tagged ‘a Rocky Recovery’, released on Tuesday.

It said the outlook is uncertain again amid financial sector turmoil, high inflation, ongoing effects of Russia’s invasion of Ukraine, and three years of COVID.

Thus, it said global growth will bottom out at 2.8 per cent in 2023 before rising modestly to 3.0 per cent in 2024.

It said, “The baseline forecast, which assumes that the recent financial sector stresses are contained, is for growth to fall from 3.4 percent in 2022 to 2.8 percent in 2023, before rising slowly and settling at 3.0 percent five years out––the lowest medium-term forecast in decades.

“Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023––the weakest growth since the global downturn,” the IMF said.

It expressed concerns that while inflation has declined as central banks across the world have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labour markets tight in a number of economies.

Side effects from the fast rise in policy rates are becoming apparent, as banking sector vulnerabilities have come into focus and fears of contagion have risen across the broader financial sector, including nonbank financial institutions, it said.

The IMF admitted that policymakers have taken forceful actions to stabilize the banking system, and now, financial conditions are fluctuating with the shifts in sentiment.

It further said, “In parallel, the other major forces that shaped the world economy in 2022 seem set to continue into this year, but with changed intensities.

“Debt levels remain high, limiting the ability of fiscal policymakers to respond to new challenges. Commodity prices that rose sharply following Russia’s invasion of Ukraine have moderated, but the war continues, and geopolitical tensions are high.

“Infectious COVID-19 strains caused widespread outbreaks last year, but economies that were hit hard, most notably China, appear to be recovering, easing supply-chain disruptions.

“Despite the fillips from lower food and energy prices and improved supply-chain functioning, risks are firmly to the downside with the increased uncertainty from the recent financial sector turmoil.”

A word for policymakers

The IMF hinted policymakers that with the current situation, they have a narrow path to walk to improve prospects and minimize risks.

Specifically, it said Central banks need to remain steady with their tighter anti-inflation stance, but also be ready to adjust and use their full set of policy instruments, including to address financial stability concerns, ass developments demand.

“Fiscal policymakers should buttress monetary and financial policymakers’ actions in getting inflation back to target while maintaining financial stability.

“In most cases, governments should aim for an overall tight stance while providing targeted support to those struggling most with the cost-of-living crisis.

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