Follow Us on Google
•Says high debt, energy costs, AI threatening global economy
The International Monetary Fund (IMF) has strongly advised central banks around the world to ensure they win the fight against inflation, as high public debt, rising long-term interest rates, energy supply disruptions and the rapid expansion of artificial intelligence are creating a new and more difficult environment for monetary policy.
IMF Managing Director, Kristalina Georgieva, gave the warning in remarks at the Bank for International Settlements (BIS), where she said central banks would need to respond forcefully to future shocks to protect their independence, credibility and responsibility for maintaining price stability.
Georgieva said the global economy had moved from the relatively stable period before the 2008 global financial crisis to years of exceptionally low interest rates, followed by the COVID-19 pandemic and the war in the Middle East.
According to her, each of these shocks has complicated the work of central banks, which are now required to simultaneously protect price stability, financial stability and the smooth functioning of payment systems.
She said the latest energy shock, particularly the effective closure of the Strait of Hormuz, remained a major threat despite the global economy proving more resilient than initially expected.
“Six months into the war the global economy has not fallen off a cliff,” she said, noting that oil prices had not reached the feared $150 per barrel and that the global economy was still on track to grow by about three per cent this year.
She attributed the resilience partly to steps taken by major oil-producing and consuming countries.
Saudi Arabia and the United Arab Emirates have rerouted oil shipments, while the United States and Norway have increased oil and gas exports. China has reduced its oil imports, while Nigeria and India have increased refining activities. Members of the International Energy Agency have also released oil from strategic reserves.
“These steps and others, including gas-to-coal switching in some countries, diversification away from hydrocarbons in many, and demand reduction in all, have helped us get through this shock—so far,” Georgieva said.
However, she warned that the pressure was far from over, pointing to high oil, gas and petroleum product prices and the sharp fall in shipping through the Strait of Hormuz.
Shipping through the strategic waterway, she said, was now at about one-tenth of its pre-war level, while strategic reserve releases could not continue indefinitely because depleted reserves would eventually have to be replenished.
Georgieva also warned that the growing energy requirements of artificial intelligence could add another layer of pressure to an already strained global energy market.
For central banks, the key question is how much they should tighten monetary policy if the energy outlook deteriorates further.
The IMF chief said policymakers would have to determine whether higher energy prices would remain a temporary increase in the general price level or trigger a wider inflationary process through wages, consumer expectations and other prices.
She said central banks would need to watch output, capacity utilisation, labour-market conditions, financial conditions, underlying inflation and inflation expectations closely before deciding how to respond.
The IMF’s assessment is that the current energy shock is less severe than Europe’s 2022 gas supply crisis and that spare capacity in the global economy could help prevent the shock from spreading into a broader inflationary cycle.
But Georgieva cautioned that the global energy crisis could still worsen.
She also identified artificial intelligence as a major new challenge for monetary policymakers, describing it as a demand shock in the short term and potentially a supply shock in the longer term.
She explained that the huge investments being made in AI infrastructure, combined with rising equity prices and their impact on household wealth, could boost demand and inflation in the short term.
Over time, however, increased productivity from AI could expand the supply of goods and services, reduce production costs and eventually put downward pressure on inflation.
The outcome, she said, would depend on the size and timing of the two effects.
Georgieva also raised concerns about the impact of AI on jobs and income distribution, particularly if the technology weakens employment in the middle of the labour market.
“If AI hollows out the middle of the job market,” she said, governments would need to begin thinking about how personal income taxation should work in an economy where technological change could significantly alter employment patterns.
For now, she said, there was little reason to expect a return to the era of ultra-low inflation and ultra-low interest rates that followed the global financial crisis.
“The question of whether the recent bout of high inflation would be followed by a return to ultra-low inflation and interest rates has been answered. In the short run, no,” she said.
The bigger concern, however, is public debt.
Other News
Georgieva said governments had accumulated substantial debt after deploying huge fiscal support during the COVID-19 pandemic and the subsequent cost-of-living crisis.
But many countries failed to rebuild their fiscal buffers after the crises eased.
The result, she said, was a global public debt burden at its highest level since World War II, with debt projected to exceed 100 per cent of global economic output within the next decade.
“Big upward jumps in debt when shocks strike, little or no reduction afterward. Rinse and repeat,” she said, describing what she called a “stairway-not-to-heaven” pattern of debt accumulation.
At the same time, inflation remains stubborn in several major economies.
In the United States, for instance, inflation has remained above the central bank’s target for five and a half years, while the IMF has pushed back by two years its projection of when inflation will return to target.
Georgieva said investors were increasingly demanding higher returns to hold government debt, with 10-year sovereign bond yields in the United States, France and Japan at their highest levels since 2007, 2008 and 1996 respectively.
Rising borrowing costs in these major economies can also push up financing costs across emerging and developing economies, potentially offsetting gains made through lower risk premiums.
She said many governments were now facing high and rising debt-service costs, with heavy reliance on short-term borrowing increasing the amount of debt that has to be refinanced.
In the United States, she said, gross financing needs were approaching 40 per cent of GDP, making the government’s finances particularly sensitive to interest-rate changes.
The IMF chief warned that the combination of high debt and persistent inflation could create a situation known as “fiscal dominance,” in which pressure to finance government debt begins to undermine the independence of central banks and their ability to keep inflation under control.
“Fears of lower-than-optimal policy rates or future monetization may lurk in the background, pushing bond yields and inflation expectations upward,” she said.
Georgieva said central banks therefore needed to be prepared to respond strongly to future shocks, particularly while governments had yet to put credible medium-term plans in place to reduce debt.
She said fiscal consolidation—the process of bringing government spending, revenue and borrowing onto a more sustainable path—was not receiving enough attention in several major economies.
“Until such time as credible medium-term fiscal plans are put in place, it is important to stand firm with a rock-solid commitment to that most critical purpose of central banking: to ensure inflation is low and stable,” she said.
Georgieva said emerging markets had made significant progress in recent years by strengthening central bank independence and improving their monetary policy frameworks, describing this as encouraging at a time of heightened global uncertainty.
She urged central banks to adopt five principles in navigating the new environment: vigilance, agility, communication, credibility and humility.
She said policymakers must scrutinise economic data more carefully because the interaction of multiple shocks could make traditional economic models less reliable.
They must also be ready to adjust policy as conditions change, communicate clearly with markets without giving up policy flexibility, and protect the independence and credibility of monetary institutions.
With public debt high, she said, central banks might need to maintain a bias towards tighter monetary policy to prevent inflation expectations from becoming unanchored.
She also urged policymakers to remain humble and be willing to change course when economic conditions or new evidence demand it.
For developing economies such as Nigeria, the IMF’s warning carries particular significance because higher global benchmark interest rates can raise the cost of external borrowing, weaken capital flows and put pressure on domestic financial markets.
Higher international yields can also make emerging-market assets relatively less attractive to global investors, increasing the cost of raising funds and complicating efforts by governments and businesses to finance investment.
The IMF’s broader message is that central banks cannot solve the debt problem alone. Governments must complement monetary policy with credible fiscal reforms, while central banks must retain the independence needed to fight inflation.
Georgieva said the combination of supply shocks, technological disruption, high borrowing costs and heavy public debt meant that policymakers could no longer rely on the relatively benign economic conditions that characterised much of the period before the global financial crisis.
She said the task ahead would require central banks to remain alert, flexible and credible while governments take greater responsibility for putting public finances on a sustainable path.
