Tag Archives: international monetary funds

The world is in the ‘global liquidity trap’. What does this mean for Australia? | Instant News

Last week, something important happened.

Two days after the US presidential election, the International Monetary Fund’s chief economist issued a warning.

He said the global economy was in a “liquidity trap”.

“For the first time, in 60 percent of the global economy – including 97 percent of developed countries – central banks have pushed policy rates below 1 percent. In a fifth of the world, they are negative,” warned Gita Gopinath.

“With little room for further rate cuts, the central bank has adopted an unconventional method.

“Despite these efforts, persistently low inflation – and in some cases intermittent deflation – has raised the specter of further monetary easing to hit real negative levels should another shock strike.

“This has led to the inevitable conclusion that the world is in a global liquidity trap, in which monetary policy has limited influence.

“We have to agree on the right policy to get out,” he said.

Ms Gopinath’s memorial is published in the Financial Times, the 132-year-old organ of the world’s financial elite.

A day later, the Reserve Bank of Australia cut its target interest rate from 0.25 percent to 0.1 percent – the lowest in our history.

Too launched a $ 100 billion “quantitative easing” program to lower interest rates across the structure of the Australian economy, and to depress the value of the Australian dollar.

The day after that, the US presidential election took place and much of the world’s attention has been on the historic election results since then.

But we have to take Ms Gopinath’s warning to heart – because if she’s right, the implications for Australia could be huge.

So what is a ‘liquidity trap’? And how does this affect Australian households?

Basically, a liquidity trap is a situation where interest rates are so low that monetary policy has limited influence.

We have seen evidence of this phenomenon here.

Over the past nine years, the RBA has consistently cut interest rates.

The target interest rate was 4.75 percent in 2011, now 0.1 percent, but inflation has been weakening over the years.

And last week, the RBA announced it would start buying hundreds of billions of Government bonds to lower interest rates, and weaken the currency.

This is another sign of a liquidity trap.

“There is … a greater risk of currency wars in the global liquidity trap,” Ms. Gopinath warned in her Financial Times article.

“When interest rates approach zero, monetary policy works to some extent by weakening the currency to support domestic producers.

“[But] with a pandemic that has tested the boundaries of multilateralism, the world cannot bear the increasing tensions that competitive devaluation is likely to generate. “

How does the government get out of this situation?

Ms Gopinath said it would require a coordinated global effort.

He said governments must work together, use their purchasing power, to revive demand on a global scale. They must avoid currency wars.

“It’s time for a global synchronized fiscal push to lift the prospects of all,” he said.

Of course, he wasn’t the first to say that.

In October last year, in a speech to the IMF, the former Bank of England governor, Mervyn King, criticizes the current generation of policymakers for failing to acknowledge how much the world has changed since the global financial crisis.

He wanted them to recognize that the world’s developed economies (including Australia) had been caught in the “low growth trap” for at least a decade.

He said policymakers are sticking to certain models of how monetary policy operates, and that leads them to misdiagnose our current economic problems.

He believes the global economy is suffering from a continuing demand shortage, and countries must work together to reallocate resources around the world to revitalize demand.

“Escaping this low growth trap is a different proposition than getting out of the Keynesian slump and requires a different solution,” he said.

Other economists has also taken care of this problem.

In fact, Larry Summers, former secretary of the US Treasury, started the conversation in 2013 when he asked the public why developed countries have struggled to grow since the GFC, and why inflation is so low, when interest rates are near zero and the world is flooded with savings.

“All of this requires new thinking and new policies, much like the rapid inflation of the 1970s forced a reset at that time,” he later argued last year (also in the Financial Times).

“The core problems of the macro economy today are very different from the problems experienced by living policymakers before.

“What needs to be done? To begin with, it would be helpful if policymakers recognized … that policy problems do not fluctuate cycles or prevent waste.

“Rather, the fundamental issue is ensuring that global demand is sufficient and fairly distributed across countries.”

If their combined analysis is correct, there will be implications for Australia.

This means that interest rates will be closer to historical lows for many years, and the government will shoulder a greater part of the burden of inflating the economy – rather than the RBA.

The federal and state and territory governments will be able to borrow at the lowest interest rates in history, but they still have to spend wisely, otherwise they could do more damage to the economy in the long run.

“Fiscal policy must play a major role in the recovery,” said Gopinath.

“The importance of fiscal stimulus may never be greater because the spending multiplier – the result in economic growth from increased public investment – is much bigger in the lingering liquidity trap.”

But there is a problem here.

See how the government deals with the problem of collective action?

We have the chief economist of the IMF, the former governor of the Bank of England, and the former US Treasury Secretary who all say that global leaders need to work together to pull the world economy out of this low growth, low interest rate, high debt trap.

But last week, the RBA initiated a multi-billion dollar bond purchase program to drag Australian interest rates lower, to keep the Australian dollar’s value down.

It pursues the same strategy as other countries: competitive currency devaluation.

That’s the opposite of what was suggested.

But there is no choice (at this time).

In a world of open trade and interest rates are close to zero or negative, if other countries drag their interest rates lower and Australia doesn’t follow them, the Australian dollar will strengthen and that will hurt our domestic producers.

So what’s the end game?

Australian policymakers haven’t made it clear.


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Pakistan Coronavirus News: Locked up, Pakistan coronavirus deaths, infections are getting higher | Instant News

ISLAMABAD: COVID-19 infection in Pakistan the trend has tended to be higher in recent days and approaching 50,000, official data show, with total deaths exceeding 1,000, because the government remains unsure of the consequences of its decision to end state lockdowns.

Fear of economic and financial impacts, and tossed about by the acute difficulties suffered by millions of poor families, PM Imran Khan had defended the lockdown last week, saying the spread of the virus had been far below projections.

Education is the only major sector that remains closed.

“The end of the closure does not mean the threat is over,” Yasmeen Rashid, Punjab’s health minister, the country’s largest province, said in an interview on Pakistani television on Wednesday, adding that people need to take security measures themselves.

How most Muslim countries with a population of 207 million behave when the fasting month of Ramadan ends and the Eid celebration begins, which is expected on Sunday or Monday, can influence the course of transmission.

Usually Eid al-Fitr attracts many people to malls and shops, and people travel in droves to reach their home town. While the government has advised people to act responsibly, and avoid going out for unimportant reasons, there is little mention of special precautions needed during the festival period.

For a country the size of Pakistan, testing rates remain low around 14,000 a day. But Reuters calculations, using official data, show infection rates have so far remained relatively stable, with total infections doubling every 9 to 11 days from April 1.

Doctors and experts fear Pakistan’s health system is underfunded and creaks if transmission is accelerating.

In the first 20 days of May, more than 630 people had died, compared to around 380 in the whole of April, data tabulated by Reuters showed. There were less than 10 deaths in March.

32 deaths reported on Wednesday brought the total to 1,017, a government website showed, making Pakistan the 25th country worldwide where the number of victims has exceeded a thousand. On Tuesday, Pakistan reported the most deaths for one day at 46.

Wednesday’s infection was reported to be 2,193 – the second highest for one day – bringing the total number of COVID-19 cases in Pakistan to 48,091.

Regardless of the latest death toll, Pakistan expects to suffer terrible human costs, because the government expects millions of its people to fall into poverty.

That International Monetary Fund has forecast that Pakistan’s economy will shrink by 1.5% this year, and the government is expected to lose its main revenue target and deficit, making it more dependent on loans from multilateral lenders.


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ADB, Pakistan completed an emergency COVID-19 loan worth USD 305 million | Instant News

Islamabad: ADB and cash-strapped Pakistan have completed a $ 305 million COVID-19 emergency loan to help the country buy medical equipment and distribute money to poor women, according to media reports on Wednesday. That Asian Development Bank will extend loans on commercial terms, The Express Tribune reports.

Last month, Pakistan received an emergency loan of US $ 1.39 billion International Monetary Fund (The IMF) and USD 200 million from The World Bank (WB).

While the IMF loan is to increase Pakistan’s foreign exchange reserves after the coronavirus crisis, the World Bank’s assistance is focused on supporting emergency preparedness and response in the health sector.

Explaining the need for ADB loans, Deputy Chairman of the Pakistan Planning Commission Jahanzeb Khan told The Express Tribune that the government was looking for ways to help those directly affected by the virus but until now could not ask for financial assistance. Pakistan sent an official loan request to ADB in March.

The USD 305 million package will be combined under the Pakistan National Emergency Preparedness and Response Plan (NEPRP) for COVID-19 which is under the Planning Commission.

NEPRP is valued at USD 588 million, which includes a World Bank loan of 238 million USD.

Of the USD 305 million loan, USD 200 million for social protection for vulnerable parts – cash transfers and unconditional cash transfer installments – and USD 105 million for health emergencies such as caring for shops.

The new corona virus that first appeared in the Chinese city of Wuhan has claimed more than 250,000 lives and infected 3.6 million people worldwide.

In Pakistan, this virus has killed 526 people with 22,413 confirmed infections.

This virus also has a negative impact on the country’s economy. On Tuesday, Pakistan called on G-20 member states to ease debt with a commitment not to contract new non-concessional loans except those permitted under IMF and World Bank guidelines.

The country’s foreign currency reserves have dropped to a four-month low of USD 10.97 billion on April 10, 2020.

Reserves have been partially depleted due to the withdrawal of around US $ 2.69 billion in capital by short-term foreign investors from the Pakistan debt market over the past five to six weeks.


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The IMF postponed the review of the two USD 6 billion bailout packages for Pakistan | Instant News

ISLAMABAD: The IMF has postponed the review of the two USD 6 billion bailout packages for lack of money Pakistan was scheduled on Friday, citing delays by the state in implementing agreed upon actions, a media report said on Tuesday.

That International Monetary Fund The executive board approved a three-year loan package worth USD 6 billion for Pakistan in July last year to curb rising debt and prevent a looming balance of payments crisis, in return for difficult austerity measures.

Pakistan approached the IMF in August 2018 for a bailout package after the Prime Minister Imran KhanThe government takes over.

Although a loan from China, Saudi Arabia and the UAE, Prime Minister Khan’s government was forced to turn to the IMF due to increasing economic problems.

The IMF has confirmed the delay in reviewing the two bailout packages but said its priorities have now shifted to the approval of a $ 1.4 billion fast financing facility.

The Ministry of Finance told The Express Tribune that the IMF did not notify him of the delay in approval of the second review of the 10-month loan program.

In February, Pakistan and the IMF agreed that the fund’s executive board would approve a second review for the release of a third loan phase of USD 450 million on April 10, subject to the fulfillment of all conditions by the Pakistani government.

Sources said the IMF board would not accept Pakistan’s request for approval of a second review for the October-December 2019 period under the Extended Fund Facility (EFF) on April 10.

“The priority now is to move forward with the Rapid Financing Instrument (RFI). The IMF team and Pakistani authorities are working hard for approval and immediate disbursement,” IMF Resident Representative Teresa Daban Sanchez said.

The initial agreed tentative date, as provided in the IMF document, for the approval of the second review was March 6, which the IMF extended to April 10.

The IMF has not yet given a new date for approval of the second review. But USD 1.4 billion in additional facilities for assistance with COVID-19 can be approved this month.

Pakistan has requested a USD 1.4 billion emergency facility from the IMF to offset the impact of COVID-19 on the external sector.

Sanchez said about the EFF, when IMF Managing Director Kristalina Georgieva stated in the announcement of Pakistan’s RFI request, the Pakistani authorities remained committed to the policies and reforms outlined under the EFF-supported program.

“The priority now is to run the RFI and there will soon be a board meeting that will discuss, assess and provide guidance on the next steps,” Sanchez said.

But the delay in agreeing to the second review could create more problems for the government because of its implications for Pakistan’s market and financial relations with other multilateral lenders.

The final agreement was the 22nd bailout package since Pakistan became a member of the IMF in 1950.

Previously, China gave USD 4.6 billion in commercial deposits and loans and Saudi Arabia provided USD 3 billion in cash and USD 3.2 billion in oil facilities for deferred payments. That United Arab Emirates also provided a USD 2 billion cash deposit to Pakistan.


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