Kristalina’s heat level: Promises have been made to heat up the economy

  • + Kristalina takes heated action to tackle the imminent economic slowdown. 
  • + Major central banks now plan to pursue expansionary monetary policies.
  • + She has renegotiated credit lines to reduce the IMF’s risk.
Kristalina Georgieva / REUTERS/GONZALO FUENTES

Since her arrival in October 2019, Kristalina Georgieva has stated, proclaimed and warned in innumerable occasions that the 2020 economic slowdown could be worse than that of 2008. The IMF is not hiding their main worry. In 2019, the IMF estimated that global growth had downgraded by 3%, its slowest pace since 2008.

Projections for 2020 have been revised down since April by 0.2%, partly due to the US-China Trade war. Despite de-escalation in tariffs, the Fund predicts that the war’s cumulative effect by 2020 will cost the world economy 0.8% of its GDP or $700 billion. “This is above the levels seen in during the financial crisis”, warns Georgieva.

Globalisation – the root of economic problems?

The advanced economies are on a greater fall as “growth has been downgraded to 1.7 per cent for 2019 (compared to 2.3 per cent in 2018) and it is projected to stay at this level in 2020”. Although growth in emerging markets and developing economies has also been revised down for 2019, it is expected that these countries will drive the 2020 economy. They will rebound with a 4.6% growth in comparison to 4.5% in 2018 and 3.9% in 2019.

The Fund predicts that this is a “Synchronised Slowdown” that will affect, directly or indirectly, all countries. This is the disadvantage of having internationally integrated economies. While they can all rise together, they also crash in a synchronized manner. Before the beginning of the trade war, 75% of the world economies were experiencing growth, and now a spiral effect of defaulting economies could arise. But the IMF and Georgieva cannot afford more bailouts.

Georgieva fights head-on

This is why Georgieva is ready to take action. She has called central banks around the world to maintain low interest rates and to push for monetary policies. Her words appear to have had an effect. Over October and November 2019, the European Central Bank (ECB), the US Federal Reserve and the Japanese Central Bank have announced to keep interest rates low and to increase monetary easing.

Additionally, she is calling out policymakers “to undertake structural reforms to boost productivity, improve resilience, and lower inequality”. For instance, she has warned Mexico directly, that it ought to radically change its policies to meet the fiscal targets, especially with regards to its taxing system in the strong energy sector. Georgieva has re-negotiated Mexico’s credit line with the IMF and considerably narrowed it down, with the added intention of warning others in a similar situation, like Colombia and Poland.

We are yet to see Georgieva’s policies succeed in the long-term, but her position is clear. She is ready to confront what’s coming, and this is great news for the IMF and should be for the world.

Luis J. Martinez

Team member of Project Development