A global recession can be avoided with the right fiscal policy: IMF’s Georgieva

RIYADH — A global recession could be avoided if governments’ fiscal policies were matched by tightening monetary policy, but some countries are likely to slip into recession next year, says the managing director of the International Monetary Fund said on Monday.

Kristalina Georgieva said fiscal policy cannot stand idle in relation to monetary policy tightening as the cost of living crisis has hit parts of society so dramatically.

“Central banks need to act decisively because inflation is so stubborn … it hurts growth and is very bad for the poor. Inflation is a tax on the poor. ‘” said Georgieva in an interview with Reuters during a visit to Saudi Arabia.

She added that fiscal policy that curbs energy prices and indiscriminately supports everyone by providing subsidies is against the purpose of monetary policy.

“Monetary policy is hitting the brakes, fiscal policy is stepping on the accelerator,” she said after attending a conference on food security in the Saudi capital Riyadh.

Governments around the world have stepped in to help their citizens amid high inflation and food shortages, shocking financial markets and economies in the wake of the US Federal Reserve’s interest rate hikes.

Earlier on Monday, a United Nations agency warned of the severe implications for developing countries of a global recession driven by monetary policy. It called for new strategies, including a corporate windfall tax, supply-side efforts, and regulation of commodity speculation.

Georgieva urged the Federal Reserve to be very cautious in its policies and be mindful of global spillovers, adding that its responsibility is “very high.”

The Federal Reserve Board of Governors in Washington, Sept. 1, 2015 (Kevin Lamarque/Reuters)

Agreements with Tunisia and Egypt

The IMF believes the US labor market is still very tight, demand for goods and services is still very strong, and the Fed must continue to tighten in that environment, she said.

“We are likely to see the unemployment rate go up and that’s when the Fed has to say we’ve done our job. We can ease in the future. We’re still there. not here.”

On Friday, the IMF approved a new food shock borrowing facility under existing emergency financing instruments to help vulnerable countries cope with inflation-induced food shortages and high costs.

Georgieva said anywhere between 10 and 20 countries, mostly in Africa, are likely to seek window access and are eligible to receive funding.

Emphasizing the IMF’s mission in Malawi, she said the country could sign a full IMF loan deal after receiving an emergency loan.

Georgieva said the fund is also in advanced consultations with Egypt and Tunisia, which are suffering from economic crises that have strained their finances.

“I can confirm that we are in a very advanced stage of discussing a staff-level agreement between the two countries. she said.

“We are looking at a large program. The exact size is always negotiated and finalized with the authorities.”

Aziz El Jacobi