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Published On: Mon, Oct 13th, 2014

Fiscal reforms and plummeting global economy

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ngozi-okonjo-iweala-11By Ese Awhotu

Against the backdrop of a fragile and uneven global economic recovery, the International Monetary Fund’s, IMF policy steering body, the International Monetary and Financial Committee has met to discuss ways to boost growth and to foster a sustainable, balanced, and job-rich global economy.

Bold action is needed, especially on structural reforms, said Singapore Finance Minister and IMFC Chair Tharman Shanmugaratnam, referring to changes to the fabric of an economy that can help to jump start growth.

“We all recognize that structural reforms have been too slow and we’ve got to pick up the pace,” he stated, speaking during a press conference on the heels of a recent IMFC meeting.

“Our single biggest focus is to be on the reforms that enable us to lift potential growth and build a better tomorrow,” Tharman said. “If we don’t focus with urgency on that, we won’t solve even today’s problems. We’ve got to bring the long term into the short term, and that has to be our whole way of thinking about how we complete this recovery process.”

IMF Managing Director Christine Lagarde emphasized the need for swift action on reforms, adding that reforms can spur growth in both the short term and over the long haul.

“Structural reforms and infrastructure investment can address the demand, short-term side, and the supply, medium-term issues,” said Lagarde.

According to her, “First, growth and jobs remain a priority. More infrastructure investment, appropriately designed and implemented, can also help increase growth and jobs.

“Second, spillovers and spillbacks. The membership acknowledged that the Fund is uniquely placed to analyze risks and policy spillovers in a multilaterally consistent manner.

“Finally, the IMF must push on to complete financial sector reform. There was strong support for the Fund’s work with the Financial Stability Board on global regulatory reforms, including on the risks arising from shadow banking, and on making banks better fit to support the recovery.”

In its communiqué, the IMFC also endorsed the IMF’s work on international taxation and on sovereign debt restructuring issues. Lagarde added that the IMF will be promoting the use of strengthened collective action clauses, which are already being used by some sovereign bond issuers.

Lagarde stressed the urgent situation in the countries affected by the Ebola crisis. Consequently, the Fund moved quickly to provide a total of $130 million in additional financing to Guinea, Liberia, and Sierra Leone to help them deal with the immediate economic consequences of the Ebola outbreak.

“The purpose is to eradicate Ebola but not isolate the countries themselves,” said Lagarde, noting that all three countries are under IMF financial support programs.

Presently,the three countries worst hit by the Ebola outbreak in West Africa are working on a post-Ebola recovery plan, Sierra Leone Finance Minister Kaifala Marah said.

He told an October 11 news conference during the 2014 IMF–World Bank Annual Meetings in Washington, D.C., that he had recently met with the finance ministers of Guinea and Liberia to explore a post-Ebola strategy.

“We have decided that we will come up with a holistic strategy that we will share with our partners, both bilateral and multilateral,” Marah said, adding that the three ministers had resolved to “use country strategies to be able to help our countries out.”

Marah recalled due to its strong mining sector, Sierra Leone had for the last few years been one of Africa’s fastest-growing economies with a 2014 growth rate of 11.3 percent, “We were doing well and our macroeconomic fundamentals were also strong. We were doing well on roads, on energy, on tourism, on agriculture.”

Foreign investment flows were also buoyant as the country attracted major companies, Marah stated. The government was even reviewing its 2035 target date for Sierra Leone attaining middle income country status, with a view to bringing the date forward. Then came Ebola, in May, and everything was reversed.

“Ebola has made me appreciate and begin to understand that fragility is self-reinforcing, because if we had had the right infrastructure, the right institutions, and the right human capacity to be able to confront Ebola, we would not have suffered as we have.”

Marah said mining companies were cutting back operations in Sierra Leone and manufacturing activity has declined. “Cocoa and coffee, which account for 90 percent of agricultural exports, is also at the bottom now, because people have abandoned their farms everybody is running away from Ebola. Construction also is bad, because many of the contractors have abandoned their sites.

“Tourism is down 50-60 percent. Air travel is about to stagnate and strangle the whole sub-region. We have been isolated. Whether that is a global best practice or strategy, someone has to advise us. But it really is killing our economies,” Marah said, adding that the isolation amounted to an “economic embargo” on the sub-region.

Marah welcomed the international response to the Ebola outbreak and seen as not only a sub-regional thing, but a global challenge to humanity.

Kenyan Treasury Secretary Henry Rotich said the Ebola outbreak is also having spillover effects in East Africa. “In Kenya we have had tourism cancellations which have affected our growth, and we have revised our growth down this year.” Kenya’s position as a regional hub means it has seen transportation being affected by Ebola effects, and this was affecting the overall growth outlook, Rotich added.

Rotich said the Kenyan government is worried about economic prospects in the euro area destination for most of Kenya’s exports. Strong growth in sub-Saharan Africa, another key Kenyan export market, could also weaken as a result of the Ebola outbreak, and this is also an area of potential vulnerability for the Kenyan economy.

Chad’s Minister of Finance and Budget, Bedoumra Kordje, highlighted security as a factor affecting economic growth in Africa. “Stability is an issue for much of Africa, and we must integrate this into our analysis and evaluations.”

Kordje said Chad, in particular, is ready to champion this cause because the country is in its longest period of stability since independence, and the country is reaping the rewards of its achievement.

But Chad is also surrounded by threats to its security, Kordje stated. “That means we must invest in security, because it is simply part of our reality if we wish to maintain the stability of our country.”

Kordje also stressed that there could be no development without infrastructure. “But infrastructure is expensive, and Africa cannot finance it with concessional financing. We need grants, without which we will stagnate or go backwards.”

He said low-income countries cannot fulfill their wider development ambitions either if the financial assistance offered is only on a concessional basis. Grants are the best way to finance the lasting growth of poor countries, Kordje said.

Lagarde also said that she was pleased with the IMFC’s support for the extension of the zero interest rate charged on loans to low-income countries and said she would put a proposal recommending extension forward to the IMF’s Executive Board in the very near future.

Lagarde said that approval and implementation of the 2010 quota reforms was urgently needed. She said she hoped that the U.S authorities would ratify the agreed governance reforms and the doubling of quotas by the end of the year.

Issues of economic growth and unemployment are of particular concern to Nigeria. Even with commendable efforts ongoing, the nation’s unemployment rate is frightening.

Recent data indicates that as at 2010, about 33.13 million Nigerians were unemployed, with more than 60 per cent of this figure being youths.

However.as at the first half of 2014, the economy has created over 500, 000 jobs but given that over one million persons enter the job market annually, there appears to be room for improvement.

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