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Jaitley calls for enhanced IMF surveillance of global economy

24 April 2017

Union finance, defence and corporate affairs minister Arun Jaitley has called for enhanced surveillance by the International Monetary Fund (IMF) to address the rising vulnerabilities in the global monetary and financial systems.

He also stressed that the relevance of IMF would depend much on adhering to its commitment to increase the quotas of dynamic emerging economies, among others.

He said although the momentum in global growth is expected to strengthen in 2017, the confidence in global recovery remains weak owing to the risks associated with the future course of economic policies and monetary policy stance of AEs; resurgence of commodity price pressures; and the increasing recourse to protectionism.

''In these circumstances, it is imperative to fortify efforts to support global recovery by committing ourselves to growth friendly policies and ensuring free and fair trade practices as called for by G-20 leaders at the Hangzhou Summit in September last year,'' he said.

''Advanced economies have an important role in stimulating global demand with supportive fiscal and monetary policies and eschewing protectionism,'' he added.

He said the IMF should continue working on addressing gaps in the Global Financial Safety Net (GFSN), including improved integration of the different layers of the GFSN for the purpose of establishing a credible crisis prevention mechanism.

The IMF, he said, should also play a proactive role by productive engagement with regional financing arrangements (RFAs) by way of sharing information and joint mechanisms for surveillance and policy signalling to build confidence among creditors. Moreover, co-financing arrangements between the IMF and regional financing element(s) would help in mitigating stigma and delay in program financing, he said.

He was participating in the Restricted Session of the International Monetary and Finance Committee (IMFC) and the Plenary Session of World Economic Leaders (IMFC Plenary), an event attended by select finance ministers and central bank governors, in Washington DC on Saturday.

Emerging market and developing economies (EMDEs) are vulnerable to external shocks and must take ample caution to safeguard ongoing economic recovery, he said, adding that structural reforms and building buffers constitute the keystones of policy agenda in EMDEs that would ensure sustained growth.

He also called for improving the flexibility of labor markets and increasing competition in factor and product markets along with incentives for skill building and innovations which, he said, are important structural efforts required for boosting productivity and potential growth.

Welcoming the emphasis on inclusiveness in the Global Policy Agenda (GPA) as a positive development, the finance minister said that India firmly believes that finding ways to simultaneously accelerate growth and make it more inclusive is the right note to strike. However, as the voices against integration become louder across a range of countries, he said that it is critical that the multilateral institutions stand firm in their commitment to helping member countries consolidate on the gains from integration, while finding ways to achieve more equitable distributions of those gains.

He further added that the process of 15th General Review of Quotas should remain on track and that the commitments made in the IMFC communiqué to increase the quotas of dynamic emerging economies should be adhered to. The finance minister said that the emphasis on inclusiveness and governance reform should go together.

Given that there is broad agreement on maintaining the current overall lending capacity of the Fund and that the Fund's existing resource pool is excessively tilted toward borrowed resources, there is a dire need for increasing quotas, he said.

Jaitley, who represents the constituency consisting of Bangladesh, Bhutan, India and Sri Lanka at the International Monetary and Financial Committee (IMFC), also briefed the committee on the progress in the different constituencies.

On Bangladesh, Jaitley said the economy has demonstrated resilience amidst global headwinds and domestic challenges. The preliminary estimate of real GDP growth is 7.1 per cent in FY16 (ending in June 2016) and 7.2 per cent in FY17. Headline inflation eased further in FY16, with annual average CPI inflation reaching 5.9 per cent in June 2016, compared to 6.4 per cent in June 2015. In FY17 so far, inflation has further moderated to 5.4 per cent in February 2017 – a five-year low and well within the FY17 ceiling of 5.8 per cent.

Bangladesh's onetary policy stance will continue to remain prudent, and the authorities remain vigilant against upside risks to inflation. Excess liquidity in the banking system has been declining in recent months, as credit growth has picked up. Both food and non-food CPI inflation has moderated, aided by favorable agricultural production, modest rise in global commodity prices, and growth-focused yet cautious monetary policy stance. Projected rise in global commodity prices in 2017, however, may exert some upward pressure on domestic prices.

On the external front, the country's current account balance recorded a deficit of $1.12 billion during July-February FY17 against a surplus of $2.3 billion during the corresponding period in FY16, on account of strong import growth (10.15 per cent) coupled with a moderate growth in exports (3.31 per cent during July-February) and a slowdown in remittance inflows.

The recent decline in remittance reflects a combination of global and local factors, but mainly driven by weaker economic activity in the Middle East, which is expected to recover as oil prices stabilise and manpower exports from Bangladesh increase.

Bhutan's economy saw a steady acceleration in growth to 6.2 per cent in 2015-16 from 6.1 per cent in 2014-15 and 4 per cent in 2013-2014. As in the previous year, mainly driven by a pick-up in services, mining and hydropower-related construction. The medium-term outlook is also promising, with the commissioning of new hydropower projects expected to provide further impetus to output and exports, as well as to fiscal revenues.

Consumer price inflation fell further to 3.3 per cent in 2015-2016 from 5.2 per cent in 2014-15. On account of a gradual pick-up in capital spending, the 2015-2016 fiscal deficit was 1.3 per cent of GDP, in contrast to the fiscal surplus of 1.5 per cent of GDP in 2014-2015.

In 2016-17, because of further acceleration in capital expenditures toward the end of the 11th Five Year Plan, the deficit is projected to reach 5 per cent of GDP.

The 2015-16 current account deficit increased by about one per cent of GDP to 29.1 per cent of GDP. The large deficit in 2015-16 and previous years is a result of the imports for the construction of hydropower projects. It is expected to decline after 2017-18 with the commissioning of new power plants and the resultant export of power. In the longer run, the current account balance is likely to return a surplus.

India continues to be the fastest-growing major economy in the world. As per provisional estimates, real GDP grew by 7.9 per cent in 2015-16 compared with 7.2 per cent in 2014-15. The second advance estimate for GDP growth for 2016-17 is placed at 7.1 per cent.

The currency reform initiative will move the Indian economy to a less cash trajectory, increase tax compliance and reduce the threats from counterfeit currency, which acts as a source of terror funding. Growth is expected to gain strength in the following years due to externalities derived from deep structural reforms implemented by the government and robust aggregate demand.

CPI inflation which has been easing since August 2016 increased modestly to 3.65 per cent in February 2017 against 3.17 per cent in January 2017. Though it has marginally risen to 3.81 per cent in March 2017, it is well within the medium term CPI inflation target of 4 per cent, Jaitley pointed out.

At the system level, Jaitley said, while banks are adequately capitalised, the government is deeply aware of the problem of non-performing loans (NPLs) which are in the process of being effectively resolved. Policies for resolution of NPLs, including optimal structuring of credit facilities, change in ownership / management, deep restructuring of stressed assets and facilitation of speedy exit from unviable accounts have been put in place.

Additionally, the amendments to debt recovery laws as well as the enactment of Insolvency and Bankruptcy Code 2016 would provide enabling infrastructure to deal effectively with the recovery of non-performing assets (NPAs) in a time bound manner, he said.

He said the prime minister's plans to provide cost-effective credit to farmers and housing loans to the poor, including enhanced access of credit for MSMEs would enlarge the scope of institutional credit delivery to the hitherto under-banked segments of the economy.

The progress of our financial inclusion efforts has been remarkable with 282 million accounts opened by banks under the no-frills PMJDY so far. The objective of the scheme is to provide all households in the country with financial services, with special focus on empowering the weaker sections of society, including women, small and marginal farmers and laborers, both rural and urban.

Supported by AADHAR, the biometric based unique identity system for individuals, the ongoing rapid expansion of digital payment mechanisms will provide large push to our financial inclusion efforts, he added.

Jaitley said the wide ranging liberalisation of the FDI policy in recent years is expected to provide major impetus to employment and job creation. Most of the sectors, except a small negative list, are now under the automatic approval route.

India is now the most open economy in the world for FDI. Net FDI inflows during April-December 2016-17 increased to $31.18 billion from $27.22 billion during the same period in the previous year.

Sri Lanka
On the regional economy, Jaitley pointed out that the Sri Lankan economy grew at a slower rate of 4.4 per cent in 2016 compared to the 4.8 per cent growth in 2015. During the year, the highest growth of 6.7 per cent was recorded in the industrial sector supported by the increase in construction related activities.

Sri Lanka's service sector grew 4.2 per cent with the expansion of financial services, insurance, and telecommunications. However, agriculture-related activities contracted by 4.2 per cent impacted by supply side disruptions due to floods in the second quarter and drought conditions during the final quarter of 2016. GDP is projected to grow by around 5.5 per cent in 2017.

Consumer price inflation remained at 4.2 per cent at end 2016. However, it showed an upward trend recording 8.2 per cent in February 2017, which was largely due to the impact of prevailing drought conditions and adjustments to the tax structure.

Despite the monetary policy tightening in 2016, the decline in monetary and credit aggregates was slower than expected. The central bank further increased its policy interest rate by 25 basis points in March 2017, to contain the buildup of adverse inflation expectations and the possible acceleration of demand side inflationary pressures through excessive monetary and credit expansion.

The fiscal deficit of the government was reduced to 5.4 per cent of GDP in 2016, from a deficit of 7 per cent in 2015 through a bolstering of tax revenues and containing recurrent and capital expending. Accordingly, the fiscal sector performance was largely on track of the IMF's 3-year extended arrangement under the Extended Fund Facility (EFF) of $1.5 billion which was entered in to in 2016.

Sri Lanka's deficit in the trade account of the balance of payments (BOP) increased with expenditure on imports increasing and earnings from exports declining in 2016. The declines in export commodity prices, particularly tea and rubber prices as well as low external demand for export commodities lowered the earnings from exports. Earnings from tourism and workers' remittances continued to cushion the adverse impact of trade deficit on the BOP.

Sri Lanka's gross official reserves were estimated at $6.0 billion by end-December 2016, which is equivalent to 3.7 months of imports. The rupee, which depreciated against the dollar by 3.8 per cent in 2016, recorded a further depreciation of 1.1 per cent by end March 2017. The financial sector stability and soundness improved, supported by adequate capital and liquidity levels and contained non-performing loan ratios.

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