September 20, 2023
Finance International

IMF warns of financial stability risks, urges vigilance after banking sector turmoil

IMF warns of financial stability risks, urges vigilance after banking sector turmoil

IMF Managing Director Kristalina Georgieva has cautioned that there are increased risks to financial stability and the need for constant vigilance following recent turmoil in the banking sector in advanced economies. Speaking at a conference in Beijing, Georgieva stated that uncertainties in the world economy remain “exceptionally high” with global economic growth expected to dip below 3% this year due to the Ukraine war, scarring from the Covid-19 pandemic, and monetary tightening. Georgieva further warned that risks to financial stability have surged at a time of higher debt levels. She stated that the rapid transition from a prolonged period of low interest rates to much higher rates needed to combat inflation inevitably generates stresses and vulnerabilities, as seen in the recent developments in the banking sector.

The IMF head acknowledged the actions of policymakers in response to financial stability risks and central banks of advanced economies enhancing the provision of US dollar liquidity. However, she emphasized that uncertainty remains high, which underscores the need for vigilance. Georgieva also echoed several other speakers at the conference about the dangers of the world fragmenting into economic blocs, stating that this would be “a dangerous division that will leave everyone poorer and less secure.”

The IMF had estimated in January that global growth would slow from 3.4% in 2022 to 2.9% in 2023, followed by an increase to 3.1% in 2024. “Even with a better outlook for 2024, global growth will remain below last decade’s average of 3.8%,” Georgieva told the forum.

She also hailed the anticipated strong economic rebound in China, which is the most positive development in the world economy this year, after it relaxed its strict Covid controls at the end of 2022. The IMF forecasts growth of 5.2% in China in 2023 compared with 3% a year earlier, which would account for about one-third of global growth this year, Georgieva said. “A 1 percentage point increase in GDP growth in China leads to 0.3 percentage growth in other Asian economies,” she said.

Several global business chiefs attended the conference in Beijing despite rising trade and geopolitical tensions between the US and China. Tharman Shanmugaratnam, the chair of the Monetary Authority of Singapore, called the recent macroeconomic challenges the “early consequences” of instability caused by a long period of low and negative real interest rates in advanced economies, which he described as the “largest mistake in macroeconomic policy in 70 years” and called for co-operation between the US and China as well as competition. China’s finance minister Liu Kun said the world situation was challenging, with “unprecedented changes unfolding,” including more political tension.

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