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A Leap Forward on Cross-Border Payments

By Tobias Adrian and Kristalina Georgieva

When paying for coffee, we swipe, tap, wave, and soon may wink—a quick and painless exchange of coffee for money. But when paying for imports or sending remittances, we often fill-out forms, wait for days, and pay—too much.

Progress to improve cross-border payments has been slow, but is just about to take off. That is how history evolves—one small step at a time, until it suddenly leaps forward. The confluence of new technologies and renewed determination among policymakers are making significant improvements possible. Meanwhile, households and firms have come to expect (and demand) better services.

Reforms have the potential to be transformative by making cross-border payments cheaper, faster, more transparent, and more widely accessible.

The stakes are high. Changes to cross-border payments have a bearing on the stability of the international monetary system, on financial inclusion, and on the efficiency of trade and financial markets. And reforms may unlock innovation and much needed growth, particularly following the COVID-19 crisis. But a leap forward will only be possible if the world works together.

And it has—in an exceptional manner. A roadmap to decisively enhance cross-border payments, led by the Financial Stability Board along with a wide set of institutions including the IMF, has just been endorsed by the G20. This is not simply one more report, but a set of concrete reforms, practical steps, and milestones that specific institutions will be held accountable to implement. Meanwhile, the IMF just published a staff paper on the macro-financial implications of new forms of digital money available across borders. Together, these papers provide a clear path forward, mindful of the challenges that lie ahead. If implemented, reforms have the potential to be transformative by making cross-border payments cheaper, faster, more transparent, and more widely accessible.

The next step

While international cooperation has gotten us this far, it will be all the more important to implement, and potentially even surpass, the G20 roadmap. Specifically, we need cooperation in four broad areas to ensure improvements to cross-border payments are effective, sustainable, safe, and equitable.

First, solutions to cross-border payments must be designed and pursued with all countries in mind. Countries differ considerably in implementation capacity, existing infrastructure, and financial sector development. And with different countries come different users. These cover large companies operating in less liquid markets, cost-conscious small- and medium-sized enterprises, and the 1 billion people sending and receiving remittances (which at an average cost of 7 percent are still double the target set by United Nations’ Development Goals).

The G20 roadmap is appropriately flexible given this diversity of needs. Some solutions involve improvements to existing systems, such as devising trustworthy digital identities essential for financial inclusion. Others are more exploratory and consider a world in which we can freely trade digital currencies across borders, much like we send emails today. It is essential that all these solutions continue to be pursued, discussed, tested, and some discarded—with an open mind.

Second, cooperation is essential to overcome countries’ “inaction bias,” and ensure solutions are widely applicable. A simple example is the operating hours of countries’ settlement systems: only when two countries extend hours so they overlap can cross-border transactions be settled in real time. No country will want to act alone. Even then, the two systems must talk to each other. But interoperability is not a given. It requires basic technological, design, legal, and regulatory standards. Cooperation will ensure these satisfy the needs of a wide community, which the IMF can help congregate.

Third, cooperation is critical to build solutions that benefit from the experience and perspective of all relevant actors—such as central banks, regulators, finance ministries, anti-trust agencies, data protection agencies, and international organizations. The Financial Stability Board report was exemplary in this respect. Moreover, the public and private sectors must cooperate, recognizing each other’s strengths: private companies to innovate and interact with users, and the public sector to regulate, supervise, and ultimately provide trust to the system. Where possible, public-private solutions should be explored.

Lastly, cooperation means recognizing the macro-financial effects that one country’s policies can have on others. For instance, new forms of digital money issued in major reserve currencies could improve domestic as well as cross-border payments. But they could also induce citizens abroad to forego their domestic currency, especially in countries with high inflation and volatile exchange rates. And digital money could potentially facilitate bank runs out of these countries. Meanwhile, source countries could see more volatile capital inflows and central bank balance sheets. Moreover, it is unclear if capital account restrictions, which many countries adopt, can be redesigned so they are not circumvented by digital money. Finally, the use of digital money could raise significant risks to financial integrity. These and other scenarios are detailed in our new paper.

Global links

Monetary policy, financial stability, capital flows, international reserves—all could be affected by transformations in cross-border payments, with implications for the international monetary system. The IMF’s founding members understood this link, which to some extent lies behind the vision to “assist in the establishment of a multilateral system of payments,” as stated in the Articles of Agreement.

Today, the IMF continues to play an active role in this space, working hand-in-hand with other international organizations. Our near-universal membership can help ensure that the digital revolution benefits people in all countries. And our global perspective can help recognize spillover effects, as well as provide a common forum to address the underlying policy dilemmas. Let’s engage on this promising path together.

Related links:
October 19, 2020 Conference on Cross-Border Payments

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Building an Inclusive Recovery in the Middle East and Central Asia

By Jihad Azour and Joyce Wong

Countries in the Middle East and Central Asia face with COVID-19 a public health emergency unlike any seen in our lifetime, along with an unprecedented economic downturn. The pandemic is exacerbating existing economic and social challenges, calling for urgent action to mitigate the threat of long-term damage to incomes and growth.

As analyzed in our new Regional Economic Outlook, while the region responded resolutely and swiftly to save lives and stepped in with unprecedented policies to cushion the negative economic impact of containment policies, challenges abound.

While these challenges are stark and the period ahead highly uncertain, we see a path forward.

Think of the precipitous declines in oil demand and prices, which underlie our -6.6 percent growth projection in 2020 for oil exporters in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region. Or consider the damage to trade and tourism, which is mostly offsetting the benefits from lower oil prices in MENAP’s oil importers—leading to projected growth of -1 percent for these countries. The Caucasus and Central Asia (CCA) is also impacted, with a projected contraction of -2.1 percent in 2020, driven by a significant slowdown among the region’s oil importers.

While geopolitical tensions are elevated, countries in the region are encountering falling fiscal revenues, increasing debt, higher unemployment, and rising poverty and inequality.

Looking ahead to 2021, while growth should resume in most countries, the outlook will continue to be challenging.

  • Weak oil demand and large inventories are likely to remain concerns for oil exporters, and while OPEC+ agreements helped stabilize oil prices, these are expected to remain 25 percent below their 2019 average.

  • The threat of economic scarring—long-term losses to growth, employment, and incomes—is a key concern. In particular, we estimate that five years from now countries could be 12 percent below the GDP level expected by pre-crisis trends. What’s more, for countries that depend heavily on the battered tourism sector, both baseline GDP and employment could go down by 5 percentage points this year, with effects lingering over the next 2-5 years, while poverty could rise by more than 3½ percent in 2020 if remittances do not rebound.

  • The pandemic will exacerbate the daunting challenges faced by fragile and conflict-affected states and could increase social unrest. Poor living conditions among refugees and internally displaced persons could also increase the risk of COVID-19 outbreaks.

  • In many countries fiscal deficits and debt have increased by amounts not seen in two decades (see chart), leaving the region vulnerable to a resurgence of the virus given the likely increased spending needs and lower tax revenues. Rising deficits will also boost financing needs in the region by a median increase of 4.3 percent of GDP.

  • The crisis has also heightened corporate default risk and credit risk for banks in the region, with potential losses that could amount to $190 billion or 5 percent of GDP. If unaddressed, these developments may threaten financial stability and constrain the endeavor for greater financial inclusion.

While these challenges are stark and the period ahead highly uncertain, we see a path forward. As countries continue to contain the pandemic’s toll, policymakers must increasingly turn their attention to planning and financing the recovery ahead, with a renewed focus on building greener, more inclusive, and more resilient economies.

In the immediate future, containing the pandemic and limiting income losses remain top priorities. As the public health threat begins to wane, countries should shift their focus to strengthening inclusion and addressing vulnerabilities by supporting economic activity without incurring undue risks, through well-calibrated approaches. For those with space in their budgets, such as some oil exporters, broader stimulus packages can boost demand. In countries with less space, which includes most oil importers, governments should reallocate expenditures to ensure that health, education, and social spending are protected. As the recovery gains momentum, countries should rebuild buffers and explore ways to better ensure that the tax burden is distributed fairly and that every cent of public spending delivers the best outcomes.

Ensuring all workers in the region have adequate access to health care is a critical need, particularly in oil-exporting countries with large expatriate populations. Oil exporters should also prioritize widening support for small and medium-sized enterprises and startups so that future economic prosperity is more inclusive. Accelerating economic diversification and investing in the well-educated young population will be vital, as the current crisis has illustrated. This will require fostering an institutional environment that is conducive to private sector growth—one with clear rules of the game as well as less red tape and corruption, with the public sector serving as an enabler.

Meanwhile, oil importers should permanently strengthen social safety nets and work to improve their coverage and targeting including through digital solutions. Addressing the legacies of the crisis, particularly elevated debt and weakened buffers, would underpin the recovery. Additionally, reducing many countries’ high dependence on tourism (for example, Georgia, Jordan, and Lebanon) and remittances (such as the Kyrgyz Republic, Tajikistan, Egypt, and Pakistan) will help bolster resilience to future economic shocks.

Finally, the threat posed by climate change remains the existential challenge of our time with stark implications for the region, particularly for oil exporters who will face a transformational moment for their economies. Green infrastructure investments and innovation, together with steadily rising carbon prices, will allow the region to not just fulfil its role in reducing global emissions but also to create jobs and growth for a new era.

As we face the difficult and uncertain road ahead, multilateral cooperation will be more important than ever. Working together, policymakers, nongovernmental organizations, international institutions, and citizens can build a better future.

At the IMF, we stand with the Middle East and Central Asia as it continues to save lives and begin the recovery. In addition to policy advice and technical assistance, $17 billion of new financing has been extended since the beginning of the year, including $6 billion in emergency support to 10 countries spanning both the MENAP and CCA regions. As a result, IMF’s credit outstanding to the region increased by nearly 50 percent. Our support will continue during these challenging times.

We will undoubtedly look back on 2020 as a year of suffering for far too many. But let us also remember it as a time when our region recommitted itself to building a stronger, greener, and more inclusive future.

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Fiscal Policy for an Unprecedented Crisis

By Vitor Gaspar, Paulo Medas, John Ralyea, and Elif Ture

中文, Français, 日本語, Русский 

The COVID-19 crisis has devastated people’s lives, jobs, and businesses. Governments have taken forceful measures to cushion the blow, totaling a staggering $12 trillion globally. These lifelines have saved lives and livelihoods. But they are costly and, together with sharp falls in tax revenues owing to the recession, they have pushed global public debt to an all-time high of close to 100 percent of GDP.

With many workers still unemployed, small businesses struggling, and 80‑90 million people likely to fall into extreme poverty in 2020 as a result of the pandemic—even after additional social assistance—it is too early for governments to remove the exceptional support. Yet many countries will need to do more with less, given increasingly tight budget constraints.

Many countries will need to do more with less, given increasingly tight budget constraints.

The October 2020 Fiscal Monitor examines countries’ experiences managing the crisis and discusses what governments can do in the different phases of the pandemic to save lives, reduce the impact of the recession, and revive growth and job creation.

Policies during the lockdown phase

Since the start of the COVID-19 crisis, governments have focused on doing whatever it takes to limit its consequences. The massive fiscal support provided since the start of the COVID-19 crisis has succeeded in protecting people and preserving jobs.

Public health measures that have contained the spread of the virus—such as large-scale testing, tracing, and public information campaigns—have helped restore confidence and created the conditions for the safe reopening of businesses.

Unemployment benefits and wages subsidies (as in most European economies) have helped preserve jobs or living standards. Cash transfers have been especially useful to support the poor and informal workers and self-employed who lost jobs. Liquidity support to firms have prevented a wave of defaults and mass layoffs. This is especially important for small-and medium-sized firms that represent a large share of employment.

Although the global fiscal response to the crisis has been unprecedented, responses by individual countries have been shaped by their access to borrowing as well as their public and private debt levels heading into the crisis.

In advanced economies and some emerging market economies, central bank purchases of government debt have helped keep interest rates at historic lows and supported government borrowing. In these economies, the fiscal response to the crisis has been massive.

In many highly indebted emerging market and low-income economies, however, governments have had limited space to increase borrowing, which has hampered their ability to scale up support to those most affected by the crisis. These governments face tough choices.

A fiscal roadmap for the recovery

As economies tentatively reopen, but uncertainty about the course of the pandemic remains, governments should ensure that fiscal support is not withdrawn too rapidly. However, it should become more selective and avoid standing in the way of necessary sectoral reallocations as activity resumes. Support should shift gradually from protecting old jobs to getting people back to work—for example, by reducing job retention programs (wage subsidies), reintroducing job search requirements, and training new skills—and helping viable but still-vulnerable firms safely reopen. With low interest rates and high unemployment, boosting public investment—starting with maintenance and ramping up projects—can create jobs and spur economic growth.

Emerging market and low-income economies facing tight financing constraints will need to deliver more with less, by reprioritizing spending and enhancing its efficiency. Some may need further official financial support and debt relief.

Governments should also adopt measures to improve tax compliance and consider higher taxes for the more affluent groups and highly profitable firms. The ensuing revenues would help pay for critical services, such as health and social safety nets, during a crisis that has disproportionately hurt the poorer segments of society.

Once the pandemic is under control, governments will need to foster the recovery while addressing the legacies of the crisis—including the large fiscal deficits and high public debt levels.

  • Countries with fiscal space and major scarring from the crisis, such as large long-term unemployment, should provide temporary fiscal stimulus while planning for an adjustment over the medium term.
  • Countries with high debt levels and less access to financing will also need to adjust over the medium term, striving to protect public investment and transfers to lower-income households.

The post-pandemic reset

Looking ahead, countries will need to make it a priority to invest in healthcare systems and education. They should also strengthen social safety nets to ensure that all people have access to food and other basic goods and services.

As economies begin to recover, governments should seize this moment to move away from the pre-crisis growth model and accelerate the transition to a low-carbon and digital economy. Carbon pricing should be a key feature of this transition, because it encourages people to reduce energy use and shift to cleaner alternatives—and, moreover, it generates revenue that can be used in part to support the most vulnerable.

As governments ramp up their public investment and other fiscal measures to foster the recovery, their policy choices will have long-lasting effects. They should make a decisive push to make economies more inclusive and resilient, and to curb global warming through green measures that also boost growth and employment.

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