The First Deputy Managing Director of the International Monetary Fund (IMF), Gita Gopinath, will take part in a panel entitled “How Should Central Banks Fight High Inflation?”. at the World Bank Group and International Monetary Fund Spring Meetings 2023 in Washington, U.S., April 14, 2023. REUTERS/Elizabeth Frantz/File Photo Acquire License Rights
WASHINGTON, Sept 1 (Reuters) – Facing a more volatile and uncertain future, emerging markets need to rebuild fiscal buffers, boost revenues, diversify trade and meet trillions of dollars in annual costs of climate change, the International Monetary Fund’s second-largest official has said on Friday.
Speaking at the South African Reserve Bank’s biennial conference, IMF First Deputy Managing Director Gita Gopinath said external conditions for emerging economies had become more difficult due to increasing geopolitical fragmentation, difficult financial conditions and the growing costs of climate change .
“The pandemic and Russia’s war in Ukraine have raised legitimate concerns about supply chain security and overall national security,” she said in remarks prepared for the conference. Extreme weather events associated with climate change could also result in huge long-term costs, at a time when debt payments are already rising sharply. Some studies predict $2 trillion in annual mitigation needs by 2030.
In South Africa, for example, interest payments on government debt were expected to rise to about 27% of sales by fiscal 2028/29, from about 19% this fiscal year.
Gopinath said the IMF expects global interest rates to remain high “for quite a while”, adding that rates may never return to the “long-term low” era due to the possibility of more frequent negative supply shocks.
She said the IMF is also closely monitoring the “worrying” increase in global trade fragmentation and warned that it could plunge the gross domestic product of most emerging economies, including South Africa, which could see losses of around 5% of GDP.
Some countries could suffer losses of up to 10% of GDP, she said.
FDI fragmentation would increase these costs and could hit emerging markets hardest, limiting access to better technology and know-how.
She said the adoption of large-scale industrial policies that curbed trade — especially in advanced economies — has increased nearly six-fold in 2023 alone. Almost 3,000 trade restrictions were imposed in 2022, three times the number in 2019.
With risks ahead, including China’s structural rebalancing, there could be greater turmoil in emerging markets, she said, underscoring the need for countries to further strengthen their monetary policy frameworks and protect the financial sector by incorporating climate-related financial risks.
Gopinath said emerging economies should work to mobilize higher domestic revenues by increasing tax collection rates, revitalizing structural reforms and working to diversify trade flows, while pursuing a fiscally and socially sustainable climate strategy that includes carbon pricing measures.
“The challenges may be daunting. But the chances are huge,” she said. “Emerging markets have demonstrated considerable resilience in recent years, and their potential to accelerate growth and raise living standards remains promising.”
She said South Africa embodies this potential and, given its natural gifts and strong institutions, is poised for a “growth spurt” if reforms are implemented to tackle structural obstacles with determination and courage.
Reporting by Andrea Shalal
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