Fiscal and Monetary authorities have been challenged to collaborate and initiate complementary policies that will promote faster economic recovery rather than taking actions that could lead to unintended consequences amid markets uncertainty and fading optimism.
The two are called to take more specific actions targeted and tailored to country-specific circumstances such as introducing selected macro-prudential policies that will ensure the stability of the financial system and prevent disruptions in credit and services.
The International Monetary Fund (IMF), in a Blog posted on its website yesterday, noted that market sentiment has deteriorated since earlier this year amid still elevated financial vulnerabilities and mounting concerns about risks to inflation and worries over long term growth.
Titled, “Uncertainty Grips Markets as Optimism Wanes,” the writer, Tobias Adrian, the Financial Counsellor and Director, IMF Monetary and Capital Markets Department, stressed the need “for careful policy calibration” as economic optimism fades and financial vulnerabilities intensifying.
Adrian said: “To an unprecedented degree, the world’s central banks, finance ministries, and international financial institutions have asserted—for a year and a half—policy support for economic growth. Now they must craft strategies that safely approach the next stage of monetary and fiscal policy action.”
Therefore, while the Central Bank should guard against an unwarranted or abrupt tightening of financial conditions, fiscal support, he said, can appropriately shift toward more targeted measures and be tailored to country-specific characteristics to ensure a sustainable recovery.
Uncertainty is especially intense because of the persistent pandemic-stricken atmosphere where society confronts the challenges inherent in “the three Cs”: COVID-19, crypto, and climate change, as discussed in our latest Global Financial Stability Report.
Financial system stability
In particular, he urged policymakers in emerging and frontier markets to rebuild fiscal buffers and implement structural reforms. “While facing several domestic challenges (higher inflation and fiscal concerns), some of those economies remain exposed to the risk of a sudden tightening in external financial conditions.
“In a context of higher price pressures, investors are now pricing in a rapid and fairly sharp tightening cycle for many emerging markets, although the increase in inflation is expected to be temporary. Rebuilding buffers and implementing enduring reforms to boost economic growth prospects will be pivotal to protect against the risk of capital-flow reversals and an abrupt increase in financing costs.”
The IMFBlog insists that “Uncertainty is especially intense because of the persistent pandemic-stricken atmosphere where society confronts the challenges inherent in “the three Cs”: COVID-19, crypto, and climate change, as discussed in our latest Global Financial Stability Report.”
Harping on the fading optimism, Adrian admits that “Massive monetary and fiscal policy support for the economy in 2020 and 2021 helped limit the economic contraction that began at the start of the pandemic and that—for much of this year—supported a strong economic rebound,” especially in the advanced economies.
He however argued that “Investors have become increasingly worried about the economic outlook, amid ever-greater uncertainty about the strength of the recovery. Uneven vaccine access, along with the mutations of the COVID-19 virus, have led to a resurgence of infections—fuelling concerns about more divergent economic prospects across countries.
He therefore warned that “If investors, at some point, reassess abruptly the economic and policy outlook, financial markets could endure a sudden repricing of risk—and that repricing, if sustained, could interact with underlying vulnerabilities, leading to a tightening of financial conditions. This could put economic growth at risk.”
