IMF urges countries to build strong fundamentals in good times to be more resilient in bad times

The most important lesson to be learnt from the COVID-19 crisis is to build strong fundamentals of the economy in good times, Managing Director of International Monetary Fund Kristalina Georgieva has said, asserting that this is how a country can be more resilient during the bad times.

Georgieva's remarks came while speaking to reporters at a news conference here on Wednesday at the start of the annual meetings of the IMF and the World Bank. "The most important lesson from this crisis is build strong fundamentals in good times; build your buffers in good times. When you get into bad times, this is how you can be more resilient," she said. There are countries where the situation is much more difficult because of very high debt levels, that are not able to access markets at all, or only at prohibitively high cost, Georgieva said.

"In this case, what we are saying to countries is: 'If you are in this category and your debt is not sustainable, act early, and act decisively'. We have seen two countries in Latin America doing exactly that: Argentina and Ecuador," she said.

The two cases are not exactly the same, but they are similar in the sense private sector participated. In the case of Ecuador, also bilateral creditors participated, she added. Georgieva said that for the coming months, the very important agenda for the IMF is how to improve international debt architecture so "we can have fair, quick, relatively simple, relatively low-cost resolution of cases when debt is not sustainable and how to make sure that the private sector participates actively". She said that the debt levels were going up everywhere: in advanced economies, in emerging market economies, and in low income countries.

"On the positive side, the fact that the world came together very quickly to provide fiscal and monetary policy support in a synchronised manner meant that after a drop in access to markets, in fact, markets froze in March, we have seen from April on emerging markets with strong fundamentals being able to go and issue debt at a very reasonable cost," she said.

"In other words, like the advanced economies, many emerging market economies are able to inject stimulus on the basis of low-cost debt issuance, and that, of course, helps," the IMF chief said.

Responding to a question, Georgieva said that she was worried about the scarring this crisis can cause—an increase in inequality, structural unemployment, workers that are not supported to move from the sectors of the economy that are contracting to sectors that are expanding.

"And therefore, we have to focus on thinking how to prevent the scarring, how to make sure that we come on the other side boosting employment in sectors that are growing and shifting our tax system for the 21st century so we have a more equitable world,” she said.

Georgieva welcomed the decision of G-20 countries of Debt Service Suspension Initiative for six months. Also there is very good progress on a common framework which would bring all bilateral creditors around the same principles and same approach to dealing with debt, she said. "There is a very strong call for private sector to participate. Unfortunately, we have not yet seen it happening. Out of the 44 countries that have subscribed, only three have reached out to private creditors, and as for now, nothing has happened yet,” Georgieva said.

"We have submitted to the G20 our view on international debt architecture, and you would see us engaging very strongly on making sure that when we deal with debt, we do it fairly with participation of all creditors and that we build up together with the World Bank more transparency on debt, and we build up a clear pathway for debt resolution for countries where debt is already not sustainable, that need debt restructuring,” she said. 

(Image Credits: AP)