Trade war could cost global economy $700bn - Georgieva
In an interview for CNN Business, Kristalina Georgieva, managing director of the International Monetary Fund, discusses the rapid growth occurring on the African continent, lays out the three things countries can do to combat the economic slowdown, and tells CNN that the trade war could cost the global economy $700 billion in 2020- a situation in which she claims, “everybody loses”.
Can we keep our promises around the sustainable development goals?
We must, and we can. But we have to focus. Focus on the countries that are falling behind and focus on the issues that are more difficult to wrestle with. Of those falling behind, the attention ought to be on Africa. Today, Africa is only half way to reaching these sustainable development goals, and what we see here is tremendous progress over the last decades- the scale of poverty has dropped dramatically, life expectancy has increased, but the absolute number of poor people in Africa, because of rapid population growth, has increased. At the same time Africa offers the most dynamic economies today. Twenty-five of the African countries outperform in terms of growth, the rest of the world. So, it is not just out of our goodness to invest in Africa, it is also because it is a winning proposition in many places”
Are you worried we could get a scenario of the 1990s, where you’ve got unsustainable debt and need bailouts?
“For a number of countries in Africa, debt levels are unsuitable. There are a total of sixteen countries where they are either in debt distress already, or they are close to debt distress. We need to look carefully why, and the answer is: conflicts, climate, shocks and bad governance. We do need to concentrate on helping these countries to improve their ability to handle that, to be more transparent. We also need to call on the lenders- what happened in Africa is a very significant increase in private commercial debt. Two thirds of the debt in Africa is now in the hands of private lenders. We need to urge countries to manage their debt and be transparent, but we also have to call on commercial lenders to be a bit more careful as they increase their lending in Africa. But we have to do more, and we have three very straightforward recommendations. Beef up domestic resource mobilisation, use money more effectively, invest it well.
Will the IMF’S involvement adjust the perception of risk on the continent and take out the risk in terms of the accumulation of debt that we see?
It is very important to focus on the countries in Africa that are doing the right thing and are doing it well. Egypt is a very good example. Very brave reforms, from getting their exchange rate to float, not an easy decision but they took it and they did it. There is also a need to bring down subsidies for the energy sector. Imagine all over the world you see protests because of energy prices going up, Egypt brought down energy subsidies the smart way. They took the advice we gave to identify who is most vulnerable and put in place social protection programmes to help the woman and poor families, so they can handle that price shock. What is the outcome? From six percent of GDP energy subsidies shrunk to around three percent. So, Egypt has three percent more to spend on education or on roads and the image of Egypt and the energy sector attractiveness significantly rose. So, we have seen somewhere around 15bn dollars of private sector investment in energy.
What’s it like leading the IMF in such a time of volatility?
I’m very privileged to have a professional team, what we do is to provide objective analysis and then present it to policy makers. First, we have been very clear what the cost of trade war is- by next year, we as a planet would lose 700bn dollars. This is 0.8 percent of the global GDP. Everybody loses. Second, we have also been very clear what can be done so this slow down in a synchronised manner we have seen, can be stopped and reversed. And we say to countries three things 1) if you have monetary space, if you can cut interest rates, please do it- very few countries now have that space. If you have fiscal space please use it. Some countries do have fiscal space and we’re seeing even more reluctant players like Germany, the Netherlands, South Korea, they’re coming up with stimulus packages. Most important, everyone can do it- structural reforms. Labour market reforms eliminate red tapes, so the private sector can boom, and jobs can be created.
Does the IMF have enough resources to step in during trade wars?
Our shareholders committed to provide the IMF with fiscal financial capacity of 1trillion dollars. So, we do have sufficient firing power to step up but we tell countries do the right thing so you don’t need to come and knock on our door for money, and yes just to say on fiscal capacity yes in many countries it is quite limited, but it can be built up. If you take structural reforms, you can build more capacity so there can be a stimulus in economies that are slowing down.
Do Trump’s tariffs on Argentina and Brazil harm the efforts of the IMF in that region?
We have been repeating that very simple message on tariffs that they are not going to be helpful because trade is good for growth, good for jobs, good for the poor people. So, we are very keen to see that that historical message, that trade helps us all to do better and retreating from trade hurts everybody is going to be heard.