The global economy has stepped back from the brink of danger and signs of stabilization are emerging from the eurozone and the US, but high debt levels in developed markets and rising oil prices are key risks ahead, the IMF said yesterday.
“The global economy may be on a path to recovery, but there is not a great deal of room for maneuver and no room for policy mistakes,” IMF Managing Director Christine Lagarde said in a speech in Beijing.
In a separate talk on the same day, Lagarde said that China’s yuan could become a reserve currency in the future, adding that the country needed a roadmap for a stronger, more flexible exchange rate system.
She said signs of stabilization were emerging, showing that policy actions taken in the wake of the global financial crisis were paying off, that US economic indicators were looking a little more upbeat and that Europe had taken an important step forward in solving its crisis with the latest efforts on Greece.
“On the back of these collective efforts, the world economy has stepped back from the brink and we have cause to be more optimistic. Still, optimism must not lull us into a false sense of security. There are still major economic and financial vulnerabilities we must confront,” Lagarde said.
The IMF chief cited still fragile financial systems burdened by high public and private debt in advanced economies as the first of three major risks. She said eurozone public sector and bank rollover funding needs this year were equivalent to about 23 percent of GDP.
“Second, the rising price of oil is becoming a threat to global growth, and, third, there is a growing risk that activity in emerging economies will slow over the medium term,” she added.
Lagarde also said youth unemployment should be tackled and that all countries must persevere with their policy efforts if the progress made in stabilizing the global economy is to pay off with better prospects ahead.
She said advanced economies must continue with macroeconomic support and a balanced fiscal policy, together with financial sector reforms, and structural and institutional reforms to repair the damage done by the crisis and to improve competitiveness.
Meanwhile, emerging market economies need to calibrate macro-economic policies, both to guard against fallout from the advanced economies and to keep overheating pressures in check.
Lagarde’s comments on the yuan as a reserve currency were the most direct endorsement to date by an IMF official of China’s ambitions for its currency.
“What is needed is a roadmap with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well--developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account,” she told a gathering of leading Chinese policymakers and global business leaders.
“If all that happens, there is no reason why the renminbi [yuan] will not reach the status of a reserve currency occupying a -position on par with China’s economic status,” Lagarde said.
China operates a closed capital account system and its currency is tightly controlled, although Beijing has said it wants to increase the international use of the yuan to settle cross border trade and it has undertaken a series of reforms in recent years to that end.