ISLAMABAD: Lowering global growth and inflation forecast for the current year due to trade tensions, the International Monetary Fund (IMF) has asked member countries to address their policy and structural imbalances and create fiscal buffers to withstand rising uncertainty.

At the outset of the IMF-World Bank spring meetings, the IMF reduced the global economic growth forecast to 2.8 per cent for 2025, down from 3pc, which was estimated in January. Based on information available as of April 4, “global growth is projected to drop to 2.8pc in 2025 and 3pc in 2026—down from 3.3pc for both years in the January 2025 World Economic Outlook (WEO) Update.

It advised members to “address domestic policy and structural imbalances, thereby ensuring their internal economic stability”. This will help rebalance growth-inflation trade-offs, rebuild buffers, reinvigorate medium-term growth prospects, and reduce global imbalances.

Restoring fiscal space and putting public debt on a sustainable path remain priorities while meeting critical spending needs to ensure national and economic security. This requires credible medium-term fiscal consolidation plans, the IMF said adding that structural reforms in labor, product, and financial markets would complement efforts to reduce debt and narrow cross-country disparities.

Slashes growth forecast to 2.8pc, warns of broader financial instability

Emerging markets and developing economies should continue efforts to deepen financial markets and maintain adequate fiscal policy space and international reserves to cushion against adverse geopolitical shocks. Given high levels of leverage in the financial system and growing interconnectedness between nonbank financial intermediaries and banks, sufficient levels of capital and liquidity in the banking sector remain the anchor of global financial stability.

The fund said the global growth was stable yet underwhelming through 2024 following an unprecedented series of shocks in the preceding years. However, the landscape has changed as governments worldwide reorder policy priorities. A series of new tariff measures by the United States and countermeasures by its trading partners have been announced and implemented, ending up in near-universal US tariffs on April 2 and bringing effective tariff rates to levels not seen in a century. This on its own is a major negative shock to growth.

The unpredictability with which these measures have been unfolding also has a negative impact on economic activity and the outlook and, at the same time, makes it more difficult than usual to make assumptions that would constitute a basis for an internally consistent and timely set of projections, the IMF said in its selective release of flagship World Economic Outlook.

The fund expected growth in emerging markets and developing economies to slow down to 3.7pc in 2025 and 3.9pc in 2026, with significant downgrades for countries affected most by recent trade measures, such as China. Global headline inflation is expected to decline at a pace that is slightly slower than what was expected in January, reaching 4.3pc in 2025 and 3.6pc in 2026, with notable upward revisions for advanced economies and slight downward revisions for emerging markets and developing economies in 2025.

Intensifying downside risks dominate the outlook. Ratcheting up a trade war and even more elevated trade policy uncertainty could further reduce near-and long-term growth, while eroded policy buffers weaken resilience to future shocks. Divergent and rapidly shifting policy stances or deteriorating sentiment could trigger additional repricing of assets beyond what took place after the announcement of sweeping US tariffs on April 2 and sharp adjustments in foreign exchange rates and capital flows, especially for economies already facing debt distress.

The IMF warned of an ensuing broader financial instability, including damage to the international monetary system. Demographic shifts and a shrinking foreign labour force may curb potential growth and threaten fiscal sustainability. The lingering effects of the recent cost-of-living crisis, coupled with depleted policy space and dim medium-term growth prospects, could reignite social unrest, it said.

It said the resilience shown by many large emerging market economies might be tested as servicing high debt levels becomes more challenging in unfavourable global financial conditions.

“More limited international development assistance may increase the pressure on low-income countries, pushing them deeper into debt or necessitating significant fiscal adjustments, with immediate consequences for growth and living standards”.

Published in Dawn, April 23rd, 2025