International Monetary Fund Managing Director Kristalina Georgieva is seen participating in an online interview at the Fund in Washington, DC, last month. [Kim Haughton/IMF]
International Monetary Fund (IMF) Managing Director Kristalina Georgieva hails Greece for its rapid and successful response to the coronavirus crisis, but also believes that its reliance on tourism and shipping will put it among the harder-hit economies in the eurozone, forecasting a recession of 11.7% this year.
However, the IMF also foresees growth at a rate of 5% in 2021 and 2022, on the condition that the government implements the right policies to prevent any lasting damage to the economy, the former World Bank CEO tells Kathimerini.
To this end, she adds, the proposals being put forward by the government’s expert committee, headed by the Nobel Prize-winning economist Christopher Pissarides, could form the foundations for an overhaul of the Greek economy via digitization, innovation and investment in the green economy, as well as the targeted use of resources that will be made available from the European Union’s Recovery Fund.
Georgieva stresses the need for reforms over the coming months to focus on social protection, including on health coverage for vulnerable groups.
She says that the 2010-18 crisis was “traumatic” for Greece, but notes how the country was able to emerge from it with a steady growth rate, declining unemployment, more efficient fiscal management, improved investor confidence and a restructuring of the banking sector.
The IMF’s managing director describes the recent economic recovery agreement reached by European Union heads of state as a “bold and necessary step,” which “shows the EU at its very best in coming together in a crisis to support its members.”
On the course of the global economy, Georgieva salutes efforts by governments and central banks to the tune of 17 trillion US dollars but warns that a premature withdrawal of support could derail the recovery and cause long-term damage. She adds that the IMF has a critical role to play in dealing with the coronavirus-related crisis, having increased its “war chest” from $250 billion to $1 trillion.
What is the IMF’s global outlook?
We are now projecting a deeper recession in 2020 and a slower recovery in 2021 than we had anticipated. Global output is projected to decline by 4.9% in 2020, which is 1.9 percentage points below our previous forecast in April. This is truly a global crisis with virtually all countries downgraded in our forecast and – for the first time since the Great Depression – both advanced economies and emerging markets will be in recession at the same time. In fact, nearly 95% of countries will likely be worse off in 2020, with lower per capita income than last year. This is especially concerning in emerging markets and developing economies where recent development gains in reducing poverty and inequality are now in jeopardy.
The good news is that the unprecedented policy response has helped significantly to save lives and livelihoods. The Great Lockdown was accompanied by global fiscal actions amounting to nearly $11 trillion and major central banks helped prevent a credit crunch through interest rate cuts and other extraordinary measures amounting to over $6 trillion.
These measures helped put a floor under the global economy and we are predicting a partial and uneven recovery, with growth projected at 5.4% in 2021. It will be partial because – for most countries – 2021 GDP will remain below 2019 levels with a cumulative loss to the global economy over two years of over $12 trillion. And it will be uneven across countries, regions and sectors, especially contact-intensive industries like hospitality and retail.
So, we are not out of the woods and we must proceed with caution, as there is still considerable uncertainty hanging over our heads.
What is the International Monetary Fund’s role in managing the crisis? Is it using all the tools at its disposal?
The IMF is providing emergency financing on an unprecedented scale. We have already disbursed over $25 billion to 72 countries, and never in the history of the Fund have we done so much in such a short period of time.
Recently our board recognized the very strong economic fundamentals of Peru and Chile when it approved their requests for arrangements under the IMF’s Flexible Credit Line (FCL) that was created to protect economies with sound policies and institutions against external shocks. The new approvals – together with arrangements for Mexico and Colombia – take the total FCL financing to about $107 billion.
So, you can see that the Fund is playing its part at the center of the global financial safety net. The good news is that after the global financial crisis our shareholders had the wisdom to boost the financial strength of the IMF. Our resources increased from $250 billion to $1 trillion – four times as strong – giving us a solid war chest as we help the countries that need our support. As things stand, we have a total exposure of $250 billion and around one-third ($83bn) of this was approved since the start of the crisis.
Looking at IMF engagement in Europe, we have provided emergency support totaling around $1 billion to Albania, Bosnia and Herzegovina, Kosovo, Moldova, North Macedonia and Montenegro. We also committed an additional $5 billion to help Ukraine address Covid-19 challenges while preserving important gains and advancing key reforms that will position the country for recovery and growth.
Much of what we have provided has been emergency financing. As this is provided in upfront, outright disbursements, there is no traditional IMF conditionality, However, we are very much focused on measures to promote transparency and accountability.
We are urging countries to spend what they need and to “keep the receipts” because we don’t want accountability to be lost. Many countries have made formal, written commitments to enhance reporting and implement independent audits of emergency spending. It is vital that emergency finance is used for its intended purpose – resolving the current crisis and helping vulnerable people and parts of the economy that are most at risk.
We have done a lot and are ready to do more.
Will the trade tensions between China and the United States impact the world economy and to what extent?
We are all better off in a world where trade and investment flows freely and supply chains adjust with the needs of the global economy.
Before the pandemic, trade tensions were among our main concerns related to the global economy and since the advent of the pandemic we have seen trade volumes collapse by 12% in 2020.
We are concerned by three trends. First, some governments have taken measures to limit the movement of key items like drugs, protective gear and ventilators. Second, curbs on some food supply lines are also starting to appear, despite strong overall supply. Third, we see a decline of trade finance, which is important to ensure that food and essential medical equipment reach the economies where they are most needed.
It is critical that borders remain open for trade and foreign direct investment. This is the best way to preserve people’s access to food supplies and critical medicines, especially for the most vulnerable.
The pandemic is a powerful reminder of the need for solidarity in an interconnected world. Today, more than ever, the global economy would benefit from a more open, stable and transparent, rules-based international trade system.
With central banks printing huge amounts of money, are you worried about skyrocketing debt? What is the best way to deal with this increasing debt?
Both fiscal and monetary policies have helped cushion the economic fallout from the Covid-19 pandemic. But the steep economic contraction has led to a fall in government revenues and – taken with the large fiscal support – has further stretched public finances, with global public debt projected to reach more than 100% of GDP this year. Premature withdrawal of this fiscal support could derail the recovery and incur larger costs. So, we must remain vigilant about rising debt levels.
We have also seen that the swift and bold support by central banks – in particular, purchasing large quantities of government bonds – has helped stabilize financing conditions and kept borrowing costs low. We expect interest rates and inflation rates to remain low in advanced economies, and this will help governments stabilize debt at a higher level in the near term. But interest rates can increase fast – and we saw that in March in several countries, as well as in the past.
In emerging markets, we have seen a significant increase in debt vulnerabilities of many countries. In some cases, the IMF is advising countries to take steps to ensure that their debt remains sustainable, such as fiscal consolidation in the years after the pandemic. Of course, there are some cases where a deeper debt restructuring will be needed to enable a country to recover from this crisis and their number will rise if the global slump is deeper and more prolonged. Currently, our main goal is to support the international community in working together to avoid such a scenario.
All this underlines the importance for governments to adopt credible medium-term fiscal frameworks to ensure debt sustainability in the post-Covid world. The pace and appropriate mix of adjustments will be country specific, including the cautious unwinding of temporary fiscal lifelines as the recovery takes hold, while safeguarding public investment and key social spending.
What is the Fund’s response to the European recovery package?
We applaud EU leaders for their determination to reach an agreement on the 750-billion-euro recovery package. This package will deliver a macroeconomically significant stimulus to help get EU members’ economies back on track. It is also a historical expression of solidarity between EU countries.
What are the main economic and human costs of this “worst economic crisis” in the eurozone? What is your outlook for the euro area?
I have been saying that this is a crisis like no other. No country has been spared from the health, economic and social impacts of the pandemic. Above all, this is a human crisis that is having a profound impact on lives and economies around the world.
The human costs are immeasurable, and we all need to work together to protect people and limit the damage. The degree of uncertainty remains very high and we don’t know whether there will be a second wave. Although we remain optimistic about vaccines and treatment, I expect the crisis to be very deep, but relatively short and – as I said earlier – we expect the recovery to start gradually, as early as this year.
We forecast real GDP to fall by around 10% in Europe’s advanced economies and by around 6% in the continent’s emerging economies this year.
Advanced Europe experienced a worse-than-expected first quarter downturn and a longer de facto closing of the economy. While the pandemic has taken a heavy toll in Central and Eastern Europe, the impact has been less severe than in Western Europe – this has translated into a lower downward revision to our 2020 projections.
Supplementing measures taken by member-states, at the EU level an ambitious recovery fund proposal has been rapidly put together by the European Commission. This proposal would provide 750 billion euros – around 5.5% of EU-27 GDP at 2019 levels. While it would be financed by borrowing at the EU level, more than half the proceeds will be distributed to member-states as grants. We welcome this bold and necessary step and it shows the EU at its very best in coming together in a crisis to support its members. Bravo!
That said, it is vital that strong incentives are put in place to encourage essential structural reforms. Prudent fiscal policies should also be pursued where performance has lagged over time. Taken together with the recovery plan, this package of measures would mark a major step forward in EU solidarity.
Dealing with the health crisis in Greece
What is your opinion of Greece’s handling of the Covid-19 crisis and what are your predictions for the Greek economy in 2020?
First, I would like to compliment the authorities and the Greek people for their handling of the Covid-19 crisis. Following early adoption of strict containment measures, Greece has experienced low infection and mortality rates relative to most European countries and is now well on its way toward normalization of economic activity and international travel, while a forceful fiscal package has provided support to workers and firms.
Notwithstanding this well-organized response, Greece is expected to be among the euro-area countries hardest hit economically by the pandemic, because of its dependence on tourism and shipping, which have been particularly affected by the crisis. We therefore project GDP to contract by 11.7% in 2020.
Like elsewhere in Europe, unemployment, government debt and non-performing loans will all go up markedly from already elevated levels. While uncertainty prevails, we do expect an economic rebound from next year with growth around 5% in 2021 and 2022. Even during the upturn, however, policies will need to play an important role to ensure that the crisis does not leave lasting damage to the economy.
Greece is heavily dependent on tourism. How bad do you foresee the situation being in this sector, and more specifically with respect to Greece?
The growth forecasts for Greece this year, which I mentioned earlier, are based on a 70% decline in tourism receipts, with knock-on effects on business and consumer confidence through job losses and lower demand for goods and services from firms that are closely linked to the hospitality sector.
However, the situation is clearly highly uncertain – not just for this year’s tourism season, but also for the coming years. We don’t know yet whether there will be further waves of the pandemic either in Greece or in its major tourism origination countries. And we don’t know whether the protocols put in place will reassure travelers and when we might have a vaccine.
Is this the right time for Greece to develop a new production model, moving away from an over-dependence on the extremely vulnerable tourism sector?
As I have said before: “A crisis should never be missed as an opportunity to do better.” I know that the government of Greece has commissioned Nobel Laureate Sir Christopher Pissarides to prepare a new growth strategy and that this could provide the basis from which to access the European recovery fund once this is finalized and approved. The authorities’ focus remains on rebalancing growth through digitalization, regional development, innovation and transitioning to green growth. A key challenge will be to transform such ambitious goals into reality, but from my perspective these are all excellent priorities and in line with my call to build a greener and more resilient world where the benefits of growth are more broadly shared.
The IMF played a big role in Greece during the 2010-2018 crisis. Can you assess the performance of Greece during that period?
We have published several evaluations of our assistance during this period. While the 2010-18 crisis was traumatic, Greece emerged with solid growth, falling unemployment and investors taking another look at the country amid improved fiscal management and some momentum with cleaning up the banking sector.
Now, reform efforts should be redoubled to lay the foundations for strong, sustainable and inclusive growth including by increasing funding for well-targeted social protection, including healthcare for the most vulnerable citizens. Strong social cohesion allowed Greece to cope well with the Covid-19 shock and hopefully this can be maintained to deal with its aftermath.
Women in the boardroom
On a more personal note, there are so many women leading global institutions including the IMF, the ECB, the European Commission and the largest economy in Europe, not to mention many other countries. What are your thoughts on this?
Yes. It is encouraging to see women at the helm of important institutions, but the fact remains that there are simply too few women in leadership positions all over the world. IMF staff research from a wide array of perspectives clearly shows the economic benefits of promoting gender equality policies. And the bottom line is this – more women in the workforce and in more senior positions is good news for women, good news for businesses and good news for their countries’ economies.
Look at the financial system. Women are missing at all levels, from depositors and borrowers to bank board members and regulators. Women also account for less than 2% of financial institutions’ chief executive officers and less than 20% of executive board members. Mounting evidence suggests, however, that narrowing the gender gap in leadership does pay off.
We must remember that including women in the global economy requires action. We can continue to push harder and do more. The next time someone asks, “Where are all the women?” we should be able to proudly say “in the boardroom.”