By Omoh Gabriel, Business Editor

The International Monetary Fund IMF yesterday said that Exchange-rate devaluation which countries normally use during financial crisis could cause adverse effect on countries economy. In its World Economic Outlook released in Lima, Peru It said “Exchange-rate depreciation has generally been a useful buffer for countries experiencing growth slowdowns – and has already been substantial – but could cause adverse balance-sheet effects where there is foreign-currency borrowing”.

In his opening remark at the World Economic Outlook Press Conference Mr. Maurice Obstfeld
said “No single set of policy prescriptions is suitable for every country seeking to improve growth performance or build resilience. But some familiar general principles still apply. Emerging market and developing economies need to be ready for monetary policy normalisation by the United States. Advanced economies must continue to deal with crisis legacies where they persist. At the same time, monetary accommodation should continue where output gaps are negative, supplemented by fiscal measures where fiscal space permits. In particular, the case for infrastructure investment seems compelling at a time of very low long-term real interest rates.

“Higher investment is one way to enhance potential output growth, but targeted structural reforms can also play an important positive role. Such reforms help not only to enhance future growth, but to increase the resilience of growth. In all countries, continued strengthening of micro- and macro-prudential policy frameworks will also support resilience to economic shocks, whether originating domestically or from abroad”
Highlighting the issues confronting the global economy Obstfeld said “First, China’s economic transformation – away from export- and investment-led growth and manufacturing, in favour of a greater focus on consumption and services. This process, however necessary and healthy in the longer-term, has near-term implications for China’s growth and its relations with its trade partners.

“Second, and related, the fall in commodity prices. Years of high global demand drove prices upward and spurred investment in commodity sectors. But as China began to slow earlier during the present decade, many commodity prices turned downward, starting in the second half of 2011, and their fall has accelerated recently.

“Third, there is the impending normalisation of monetary policy in the United States. Relatively favourable output and price performance in the U.S. could soon justify an interest-rate increase, but the possible global repercussions, especially in emerging and developing economies, add to current uncertainties”.

He said “Amid these developments, we project that in the near term global growth will remain moderate and uneven, with higher downside risks than were apparent at our July update. The “holy grail” of robust and synchronised global expansion remains elusive.

“Broadly speaking, these reflect a reduction from our forecasts of last July. Global real GDP grew at 3.4 per cent last year, but will grow at only 3.1 per cent this year. But there is a silver lining. For 2016, we project a rebound to 3.6 per cent growth.

“These aggregate numbers reflect disparate fortunes as between the advanced and the emerging-market and developing economies. In advanced economies we project a moderate growth pick-up this year relative to last, notably in the United States and euro area. Unfortunately, Japanese growth seems to be faltering after a strong Q1. Advanced economies grew at a 1.8 percent rate last year but we see them growing at 2.0 percent this year, then accelerating to 2.2 percent in 2016.

“As always, the aggregate figures mask diverse prospects across countries. Major commodity producers, notably Canada but also Australia and Norway, are experiencing slowdowns. Along with the fall in real incomes due to poorer terms of trade, there are also negative investment effects in the commodity-producing sectors, which have proved a significant headwind to growth even in the United States. But the downward trend in commodity prices, which, as I have noted, has accelerated recently, is having its most dramatic effects in the emerging and developing commodity exporters. For this group of countries – which now represents well over half of world GDP and will still generate the lion’s share of world growth – 2015 growth is projected to fall to 4.0 percent from its 2014 level of 4.6 percent. This rate of growth is much lower than what we saw in the recovery from the global crisis, and represents the fifth straight year of falling GDP growth for emerging and developing economies.

“While commodities are a big part of the story, they are not the whole story: in some cases, political instability could be a bigger factor, or an overhang of debt after capital inflows and over-investment earlier this decade. We project a rebound for next year, with 4.5 per cent growth in emerging and developing economies, and a further pickup in subsequent years. This rebound mostly reflects a gradual normalisation of conditions in countries experiencing deep recessions this year—such as Brazil and Russia—as well as in some other economies that are currently growing much below trend, including in Latin America.

“With increased exchange rate flexibility, higher foreign exchange reserves, increased reliance on FDI flows and domestic-currency external financing, and generally stronger policy frameworks, many emerging markets have increased their resilience to external shocks. That said, we have recently become more worried about potential downside risks that may threaten this recovery – all the more so because some countries have limited policy space to respond. But some obvious concerns stand out.

In some economies, the risk of deflation remains. There is also the risk of a rapid decompression of bond risk premiums, leading to spikes in longer-term interest rates. Indeed, we have already seen some of this for some emerging and developing economies, especially commodity exporters. In conclusion, this WEO underlines the challenges all countries face; and it places even more importance on the policy upgrades that all require”.


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