BASSETERRE, St. Kitts – PROGRESS made by policymakers in response to the financial and economic crisis has been commendable, but according to International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn, policymakers must remain committed to collaboration in order to effectively face the challenges ahead.
In an address to the Confederation of British Industries (CBI) in London this morning (Nov. 23), Strauss-Kahn expressed that although the global economy has made significant progress in responding to the crisis, it still remains “highly vulnerable to shocks and policy missteps”.
He therefore underscored the critical role that policymakers play in returning the world’s economies to a state of recovery, noting that sustainability of recovery would heavily depend on the decisions they make in the upcoming months.
“Today the storm has passed, the worst has been averted and yet the economy remains very much in holding pattern-stable, and getting better, but still highly vulnerable,” Strauss-Kahn said.
“The challenges are great. During the crisis, everyone was united by a common purpose. Going forward, this might dissolve. So the road ahead will be less clear cut. We will need some deft manoeuvring and, perhaps, some out-of-the-box thinking. We will certainly need continued collaboration,” he added.
The IMF official identified four main challenges that policymakers would face in their continued crisis-response: exiting from accommodative policies; adapting to increasing capital flows to emerging markets; developing a new global growth model; and designing and implementing financial sector reforms.
Much concern has been raised in relation to appropriate exit strategies for struggling economies, but Strauss-Kahn stated that it is important to wait for indications of stability in financial sectors before accommodative measures are withdrawn.
“It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late,” he stated in a November 23 press release, adding that fiscal consolidation should be the “top priority”.
Another challenge cited was managing capital flows to emerging markets. He informed that appreciation should be the key policy response, and outlined other responses including lower interest rates, reserves accumulation and tighter fiscal policies.
Finally, the IMF Managing Director highlighted the need to develop a new global growth model and stressed that it is necessary to make a number of reforms ensuring the stability of the financial sector.
“The challenge posed to policymakers [is] increasing risk-taking in the financial sector while financial institutions are still in poor shape [and] while regulators seek to impose tough new standards. That may jeopardise recovery,” he cautioned.
Policymakers of the Eastern Caribbean Currency Union (ECCU) have been working assiduously to ensure smooth transition into recovery by advancing their eight-point stabilisation programme. Much work has been done in improving regulatory frameworks in the region in order to prevent similar economic recurrences.
