About the blogThe BCC blog is a space of exchange among BCC stakeholders about topics of interest in the realm of central banking. It offers a space where latest trends can be discussed, practical experiences be shared, and a BCC community be developed. Archives
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The BCC programme, funded by SECO and implemented by The Graduate Institute, Geneva aims to support partner central banks in emerging countries in building the analytical and technical expertise to conduct effective monetary policy, promote stable and efficient financial sector, and be more operationally sustainable.
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Cédric Tille, Graduate Insitute of Intenational and Development Studies, Director, BCC programme  The Covid19 epidemic represents a major shock for the global economy. Early indicators of economic activity point to a contraction well above the 2008-2009 crisis, and on par with the Great Depression. While growth should resume in 2021, the pace will not be enough to offset the ground lost in 2020. In this blog I review the prospects for the next two years, as well as recent developments in international financial markets. I then consider the policy response, and outline some challenges for the medium run. The IMF forecasts released this week make for somber reading. Figure 1 illustrates the sharp revision of the forecast by showing the difference between the GDP level from the most recent April 2020 forecast and the previous October 2019 forecast (in percent of the GDP level in the earlier forecast), both for 2020 (stripped bars) and 2021 (solid bars).  The world economy is expected to contrast massively this year. While growth should resume in 2021, it will be too limited to make up for lost ground and world GDP will still stand 4 percentage points below the level that was expected in the October 2019 forecast (solid blue bar). In addition, the forecasts are characterized by a degree of uncertainty that is larger than usual and could be revised down further. The contraction should be larger in advanced economies (green bars) than in emerging and developing ones (red and orange bars). This offers cold comfort however, as emerging economies will still face a sizable contraction of activity, and this will be persistent as the GDP gap in 2021 (compared to the earlier forecast) won’t be so different from the one for advanced economies. In addition, the situation is quite heterogeneous: while emerging Asia should experience a smaller recession, emerging Europe and Latin America are faced with a sizable contraction and in 2021 are expected to have the worst GDP gaps. Emerging economies are affected both by the direct domestic impact of the epidemic and the required health measures and by the contraction through international linkages. Figure 2 shows the revisions in the export volumes forecasts, and is constructed in the same way as figure 1. Global trade should experience a contraction even larger than during the global financial crisis. While the impact is larger in advanced economies, it remains sizable in emerging ones.  In addition to the sudden stop in trade flows, emerging economies are experiencing a sharp sudden stop in capital flows as investors retreat to the relative safety of advanced economies’ markets. As a result, emerging economies have seen their currencies weaken and the spread on their bond yields increase substantially (Hofmann et al. 2020).
Historically, countries with higher levels of foreign exchange reserves and clearer policy frameworks have been better able to handle the fluctuations in global markets. The question remains whether these factors will be enough in the face of a shock of unprecedented magnitude. In addition, the international spillovers are substantial, which makes domestic policies alone hard-pressed to absorb them. Kohlscheen et al. (2020) estimate that about half the economic contraction in emerging economies reflects the spillovers from recessions in the rest of the world. Given this uncertainty, and the global nature of the shocks, several measures have been taken by multilateral institutions. These include suspending the scheduled debt repayments for the poorest countries, as well as activating the IMF support for several economies. The IMF has already granted support to several countries through the Rapid Credit Facility and the Rapid Financing Instrument, which can be activated without putting a full-fledged program in place. So far, the support totals 4.5 billion SDR (about $ 6.1 billion). In addition, the IMF put in place a new liquidity line specifically tailored to assist countries coping with the epidemic. Given the depth and the duration of the recession, it is likely that more help would have to be deployed, possibly stretching the resources of multilateral institutions. A proposal to alleviate the problem is an additional Standard Drawing Rights issuance that would allow for larger IMF support to affected countries. Such an issuance would requires the approval of the IMF largest shareholders, and is thus vulnerable to political considerations. In addition to its impact over the next two years, the epidemic could lead to persistent changes in the global economy. It has in particular highlighted the risks of relying on only a few countries as sources of goods that are in high demand in a crisis, such as medical supplies. Production capacities can then be stretched when they are most needed, and disruptions in trade can hinder the shipment of goods. The pattern of global trade could then be altered. One possibility is that countries decide to produce a larger share of goods deemed important domestically, which would weigh on trade at the expense of emerging economies. Another possibility is that countries continue to import, but do so from a broader range of sources. While this would be detrimental to countries that had a prominent position as global suppliers before the crisis, it could raise demand from other emerging economies, as short-term production efficiency is traded off against diversification. Another potential change in the medium run is that consumers could perceive some goods and services to be riskier and re-orient their purchases towards other goods. Tourism is a sector that could face a persistent reduction of demand due to such concerns. Hofmann, Boris, Ilhyock Shim, and Hyun Song Shin (2020). “Emerging market economy exchange rates and local currency bond markets amid the Covid-19 pandemic”, BIS bulleting 5 https://www.bis.org/publ/bisbull05.htm Kohlscheen, Emanuel, Benoit Mojon, and Daniel Rees (2020). “The macroeconomic spillover effects of the pandemic on the global economy” BIS bulletin 4 https://www.bis.org/publ/bisbull04.htm
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Andres Murcia, Director of the International Affairs Unit, Central Bank of Colombia The importance and nature of the International Financial Institutions (IFI’s) and the type of interactions that national authorities have with them are constantly evolving, and central banks have to adjust to those changes. Indeed, one of the key objectives of the recently created Unit of International Affairs at the Central Bank of Colombia is precisely to manage the relations with IFI’s. This one of the key initiatives in the strategic plan of the Bank.
Against this background, I truly recommend BCC’s online course “Interaction with IFI’s” to anyone involved in managing such relations. The course covers both economic analysis and negotiation techniques. The potential impact of enhancing the analytical and technical expertise is quite significant. I want to highlight particularly four features of the course: the negotiation techniques, the lessons about effective communication, the simulation exercise and the online nature of the course. The lessons about negotiation techniques were extremely valuable and I was able to apply them shortly after the course. Colombia is currently closing the negotiations for a renewal of the IMF Flexible Credit Line. This negotiation had many complex elements and actors, and I found that to achieve the best agreement it was necessary to apply some of the negotiation techniques we covered in the course. As part of the team of the Central Bank that negotiated with the IMF, I saw that the technical aspects must go hand in hand with effective negotiation skills. Being able to put into practice the lessons learned proved the importance of this kind of technical assistance to strengthen the capacity of the Central Bank in these types of interactions. The effective communication skills are key for addressing and achieving the objectives proposed. In my day-by-day duties I have to communicate to audiences with different technical and cultural backgrounds. When presenting to different types of audiences I used to focus on the message that I wanted to deliver, but not in the best way to do so. However, through the course I learned the importance of identifying the type of audience, in order to use the best techniques for engaging with them. For instance, using a top down or a bottom up structure with different types of audience has helped me to achieve my objectives in a much easier way. During the course, a simulation of a negotiation with the IMF took place. The exercise was a situation where a country had to negotiate a credit facility with the IMF, some were part of the central bank of the country and the others of the IMF. In this sense, we had to build a view of the economic and financial situation of the country, identify the macroeconomic variables that were useful and determine which information was important. The most valuable aspect of this process was working with people from other backgrounds and learn from the different perspectives. It was necessary to identify which kind of policies (e.g. fiscal, monetary, financial) were more appropriate to apply. Finally, it is necessary to highlight the online nature of the course. This allows greater flexibility especially for people with high constraints on their time availability. The videos, documents and presentations were prepared for a vast public with different types of backgrounds and are particularly interesting and of an outstanding quality. These materials were designed in a good way, taking into account the time restrictions that a person who takes an online course has. I would like to highlight the feedback and attention received by the BCC staff. A friendly platform and the high-level comments on the essays that we prepared are aspects that made the course unique and especially valuable. I consider that it is crucial to develop the skills needed to interact in a higher degree through digital channels. |
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