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IMF: Countries need tough reforms to close production gap

production gap

Countries around the world need tough product and employment reforms to close the production gap left by the Coronavirus pandemic, International Monetary Fund (IMF) said.

Geoffrey Okamoto, the first deputy director general of the International Monetary Fund, said that the Coronavirus pandemic had left an estimated production gap of $15 trillion.

IMF First Deputy Managing Director Geoffrey Okamoto said in a blog posting on the IMF website that the Covid-19 pandemic delayed and reversed some pro-growth reforms and restoring these can help make up for output lost during the pandemic.

Reforms that allow for faster restructurings and resolution of unviable businesses and labour policies to help retrain workers and line them up with job openings can help shift workers and capital to more promising, dynamic parts of the economy, Mr Okamoto said.

Improved competition policy frameworks such as those being debated in Europe and the United States can reduce the concentration of market power among a few firms and create more dynamic competition and innovation.

“Using this moment for some of these difficult reforms means that the monetary and fiscal stimulus still flowing will serve as a springboard to a brighter and more sustainable future rather than a crutch to a weaker version of the pre-Covid-19 economy,” Mr Okamoto said.

“Seizing the opportunity could deliver years of solid post-Covid-19 growth and progress in living standards.”

The call for a renewed focus on reforms comes as the IMF is shifting from non-conditional emergency Covid-19 pandemic financing toward the negotiation of more traditional IMF loan programmes, which require recipient countries to meet policy reform benchmarks.

The fund last week approved a new, US$1.5 billion (S$2.05 billion), three-year Extended Credit Facility arrangement for the Democratic Republic of Congo, which includes reforms to boost revenue collections, improve natural resource management governance and strengthen the country’s monetary policy framework to ensure central bank independence.

The IMF is also negotiating a new Extended Fund Facility with Argentina, which has struggled under a US$57 billion IMF loan, arranged in 2018, the fund’s largest-ever.

The IMF estimates that comprehensive growth-enhancing reforms in product, labour and financial markets could lift annual GDP per capita growth by over 1 percentage point in emerging market and developing economies in the next decade.

Countries taking such steps would be able to double their speed of convergence with advanced economies’ living standards relative to pre-pandemic years, Mr Okamoto said.

For advanced economies, pro-growth reforms that target the supply side could guard against persistent inflationary risks caused by excess demand pressures.

These reforms can boost investor confidence in emerging market countries that have been able to maintain access to global capital markets during the pandemic and help these countries cope with any tightening of financial conditions, especially if inflation persists in advanced economies, prompting interest rate hikes.

The higher growth by reforms can help poorer countries avoid harsh fiscal austerity, allowing them to maintain social and health spending while investing in the future, Mr Okamoto said.

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