23 April 2018

Ghana: IMF Warns Ghana Over Financial Crises

The International Monetary Fund (IMF) is warning Ghana and other countries across the globe to be prepared for future financial crises.

Should this happens, there shall be cutbacks in business, trade and government spending. This will compel many businesses in the country to collapse and thereby lead to huge job losses, with young people disproportionately affected.

"IMF sees continued economic growth, but it's warning that continued growth is short lived," Executive Director of Jubilee USA, Eric LeCompte, has stated during the 2018 Spring Meetings of the IMF and the World Bank Group in Washington DC, USA.

He continued: "Rising debt levels are a growing risk around the world. Now is the time for countries to get their houses in order to prevent and be prepared for future financial crises."

A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution. The 2008 financial crisis for instance, was the worst economic disaster since the Great Depression of 1929, which led to near collapse of the banking system.

It has been argued that the seeds of the crisis were sown as far back as the 1970s with Community Development Act, which forced banks to loosen their credit requirements for lower-income minorities, creating a market for subprime mortgages.

During that time, many banks incurred substantial losses, and some were even forced into bankruptcy, like Lehman Brothers. In addition, banks lost a large amount of capital as consumers lost faith in the entire system.

As consumer deposits are one of the sources of funds for banks, a fall in consumer confidence translated in a shortage of funds. In addition, it affected banks' future profits, as regulatory and capital requirements became stricter, thus reducing some previously profitable opportunities.

Recently the Fund released analysis focusing on specific concerns with rising, unsustainable debt levels in Africa. While the Fund's 2018 economic outlook report predicts short-term global growth to 3.9%, it highlights debt levels, trade policies, decreased labor participation and aging populations as risks to long-term growth.

Mr LeCompte said countries need to rebuild fiscal buffers, enact structural reforms, and steer monetary policy cautiously in an environment that is already complex and challenging in order to prevent any future financial crises.

Three months ago, IMF updated its global growth forecast for this year to 3.9 percent. The forecast is being borne out by continuing strong performance in the euro area, Japan, China, and the United States, all of which grew above expectations last year.

Looking at the largest economies, the Fund said its 2018 growth projections, compared with its earlier October 2017 projections, are 2.4 percent for the euro area (up by 0.5 percentage point), 1.2 percent for Japan (up by 0.5 percentage point), 6.6 percent for China (up by 0.1 percentage point), and 2.9 percent for the United States (up by 0.6 percentage point).

Despite the good near-term news, longer-term prospects are more sobering. Advanced economies--facing aging populations, falling rates of labor force participation, and low productivity growth--will likely not regain the per capita growth rates they enjoyed before the global financial crisis.

Many commodity exporters, according to the Fund, will not be so lucky, despite some improvement in the outlook for commodity prices, stressing that, those countries will need to diversify their economies to boost future growth and resilience.

Escalating risks

Looking past the next few quarters, there are notable risks to the 2018 outlook. Global debt levels--both private and public--are very high, threatening repayment problems as monetary policies normalize in an environment where many economies face lower medium-term growth rates.

According to IMF's new Global Financial Stability Report, global financial conditions remain generally loose despite the approach of higher monetary policy interest rates, enabling a further buildup of asset-market vulnerabilities.

Perceptions of these risks could already be taking a toll. For example, while global purchasing managers' indexes remain in expansionary territory, they have recently softened--in advanced and emerging market economies alike--owing in part to weakening export orders. Financial conditions remain easy, as just noted, but have tightened somewhat since the start of the year.

IMF believes the current cyclical upswing offers policymakers an ideal opportunity to make longer-term growth stronger, more resilient, and more inclusive.

"The present good times will not last for long, but sound policies can extend the upswing while reducing the risks of a disruptive unwinding," the Fund has stated in its 2018 World Economic Outlook Report.

Trade tensions

The new report further stated that the prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely.

"That major economies are flirting with a trade war at a time of widespread economic expansion may seem paradoxical--especially when the expansion is so reliant on investment and trade."

Particularly in advanced economies, however, public optimism about the benefits of economic integration has been eroded over time by long-standing trends of job and wage polarization, coupled with persistent sub-par growth in median wages. Many households have seen little or no benefit from growth.

These trends, according to the report, are more due to technology change than to trade, and even in countries where trade backlash is not prominent, public skepticism about policymakers' ability to generate robust and inclusive growth has spread.

The report tasked governments across the globe to rise to the challenges of strengthening growth, spreading its benefits more widely, broadening economic opportunity through investments in people, and increasing workers' sense of security in the face of impending technological changes that could radically transform the nature of work.

The recent intensification of trade tensions started in early March with the United States' announcement of its intent to levy steel and aluminum tariffs for national security reasons. The announcement has fed into several bilateral negotiations aimed at reducing U.S. trade deficits with individual trading partners.

Felix Dela Klutse, Washington DC, USA

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