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IMF leader calls for bold policies to aid recovery

April 2, 2014

WASHINGTON (AP) — The head of the International Monetary Fund warned Wednesday that leading nations need to embrace bold policy steps to accelerate a still-modest and fragile global economic recovery.

IMF Managing Director Christine Lagarde said that as the world still struggles to emerge from the 2008 financial crisis, economies are under threat from tensions involving Ukraine and Russia to inaction in countries that should be driving growth.

Lagarde said the European Central Bank, for example, should consider lowering interest rates further and using unconventional policies to support growth and fight inflation that is too low.

Her comments came in a speech previewing next week’s meetings of global finance officials in Washington. The 188-nation IMF and its sister lending organization, the World Bank, will hold their spring policy meetings.

In advance of those discussions, finance ministers and central bank governors from the Group of 20 leading economic powers will also meet. The United States will be represented by Treasury Secretary Jacob Lew and Federal Reserve Chair Janet Yellen.

In her remarks, Lagarde noted that the G-20 finance officials in a February meeting in Australia had committed to pursuing policies that could boost global GDP by more than $2 trillion over the coming five years.

Lagarde said that if the G-20 countries can do so, it would “place the global economy on a substantially different and better trajectory from today.”

Lagarde said she thinks the global economy is turning the corner from the Great Recession of 2007-2009, but she said overall growth remains too slow and weak.

She warned that the recovery could be put at risk by the wrong policy decisions and by rising geopolitical tensions.

“The situation in Ukraine is one which, if not well managed, could have broader spillover effects,” Lagarde said.

The IMF has pledged up to $18 billion in loans to Ukraine, linked to the country undertaking economic reforms, with other nations including the United States providing support. Congress on Tuesday gave final approval to $1 billion in loan guarantees in legislation that would also punish Russia for its annexation of part of Ukraine.

While acknowledging the support from other nations, Lagarde said the IMF will need to bear most of the burden of providing support to Ukraine. She said it would be up to Ukraine to bolster its economy and said she was confident it could do so.

The IMF is demanding that Ukraine adopt reforms, including raising taxes, freezing the minimum wage and raising energy taxes, to get its finances on a sounder footing.

“The economy of Ukraine was going in the wall and was heading for disaster. It’s an economy that needed reform,” Lagarde said in a later “PBS Newshour” interview. “IMF money does not come free. The IMF lends financing to countries, provided that countries do for themselves what they need to do to restore the economy to be able to finance themselves without our support.”

In her speech, Lagarde said both developed and emerging economies need to pursue policies that would fuel stronger global growth.

“Unless countries come together to take the right kind of policy measures, we could be facing years of slow and sub-par growth, well below the solid, sustainable growth that is needed to create enough jobs and improving living standards in the future.”

She noted that among major industrial countries, growth is strongest in the United States. But she said it would be critical for the Fed to “carefully manage the gradual withdrawal” of its support for growth.

The Fed last month approved a third reduction in its monthly bond purchases, which have been aimed at keeping long-term rates low. This week, Yellen said she thought a key short-term rate would need to remain low for a considerable period to bolster growth.

Lagarde said Europe’s central bank, which handles rate policies for countries that use the euro currency, should further lower rates to make sure ultra-low inflation doesn’t hold back economic growth.

She also urged Japan, the world’s third-largest economy, to pursue structural reforms for its economy to help lift the country from two decades of sub-par growth.

In emerging markets, Lagarde said there’s a risk of heightened market volatility associated with the moves by the Fed to cut back on bond purchases. The U.S. effort, by increasing rates in America, could trigger flows of capital out of emerging market countries — something that resulted in a period of market volatility last year.

“Countries with weaker fundamentals ... are likely to be more affected,” Lagarde said, urging nations with high budget and trade deficits to work to close those gaps.

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