WASHINGTON: If the world’s largest economies took steps to reduce excess external imbalances, they could improve prospects for sustained global growth and financial stability, says a report released on Tuesday.

The International Monetary Fund’s External Sector Report for 2015 covers 28 of the world’s largest economies and the eurozone. It analyses recent developments and provides updated assessments of these economies’ external positions, including current account balances, real exchange rates, external balance sheets, capital flows, and international reserves.

“There has been some progress but also some setbacks,” says the IMF’s First Deputy Managing Director David Lipton. “The too-large deficit of the United States has narrowed, but that of the United Kingdom and some emerging markets have widened. From a global perspective, such a rotation of deficits replaces one problem with another.”

The report includes an overview paper that emphasises multilateral issues, showing how individual economies fit into the global picture and the need for policies to reduce global imbalances.

The report shows that after narrowing modestly in 2013, the global scale of current account imbalances, and of excess imbalances, held steady in 2014.

Over the last several years, while the country composition of imbalances has rotated somewhat, overall there has been little progress on reducing excess imbalances.

It says several significant recent developments will affect external positions in 2015: lower oil prices, cyclical divergence and different monetary policies among the major economies, and related currency movements.

The report notes that the effects of the oil price drop dominate the pattern of projected near-term changes in current accounts. But these will be partly offset by related currency movements and by eventual expenditure responses. Recent changes in real effective exchange rates, near 10 per cent in some cases, also will affect current accounts in 2015, along with other influences.

The currency shifts associated with economic and monetary policy divergence among the major economies are reflections of an incomplete recovery and the need for broader policy action to support demand and growth.

Implementation of the full policy agenda would likely affect exchange rates but more importantly would improve prospects for sustained global growth.

As discussed in other recent IMF’s reports, the global financial environment will be complicated by the diverse risks associated with especially accommodative monetary policies, and by the process of exit from those policies, with the potential to disrupt markets.

Emerging markets and those with excess current account deficits may be most vulnerable. The report urges policymakers to aim at steady external adjustment but also to strengthen frameworks. Policymakers should also be prepared to respond flexibly to changing financial conditions using a range of tools.

India India’s net international investment position deteriorated to -17pc of GDP in 2013-14 from -12pc in 2010-11. The country’s current account deficit narrowed from 1.7pc of GDP in 2013-14 to 1.3pc of GDP in 2014-15, helped by lower oil import prices.

Published in Dawn, July 29th, 2015

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