India gained from right targeting, digitalization: Kristalina Georgieva

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What are your biggest concerns regarding emerging market economies at this juncture, and what are the silver linings you are beginning to see?

The biggest concern for emerging market economies is that in a world hit by multiple exogenous shocks, there is a natural tendency for capital to seek safety in advanced economies. We also recognize that emerging market economies had less fiscal space, to begin with when the first shock of the pandemic hit. Advanced economies spent about the equivalent of 28% of their GDP on average to support their people and businesses, while emerging markets spent 6-7% (of GDP on average) and low-income countries around 2-3%. In addition, emerging markets during the pandemic and subsequently striving for recovery exhausted a lot of their fiscal space, placing them on a weak footing. Once Russia’s war on Ukraine started, stubborn inflation pressed for aggressive monetary policy action. Now, we see the increase in interest rate in the US leads to an appreciation of the dollar and depreciation of the currencies in emerging markets, which puts additional wind in the sail of capital being drawn to the US.

However, thank God, there are some silver linings. First, emerging markets have built some strong forex reserves and sound macroeconomic policies. This is a very valuable protection for them. They did not have it a decade or so ago. Second, many emerging markets quickly recognized that inflation may not be transitory and (they needed) to take policy action early. As a result, several emerging markets are better off in that regard.

I am full of admiration for what India has achieved in digitalization. I understand that the pandemic was a mixed blessing. It was terrible for people and the economy, but it put digitalization on steroids. The result is for everyone to see. We have in India better fiscal policy because taxation and public spending are placed on a digital platform. Tax collection improves, and the targeting of subsidies improves—meaning that limited fiscal space is better deployed. We see financial inclusion really working, and we see more attention to the quality of education.

Economies have taken different approaches to recover from the pandemic, with many preferring supply-side interventions and infrastructure spending as we have, while some focused on putting money in the hands of people directly. Which approach, in retrospect, has been more effective?

There is value in supply-side support, and there is value in demand-side support. Investing in infrastructure is a way in which there is prompt support for the recovery. We also have seen countries very successful with policy actions supported through fiscal means in job retention, protecting jobs, and giving employers subsidies to keep workers on the payroll. This is a recovery-friendly action. We have seen well-targeted support in some countries with very limited fiscal space—money going directly into the hands of people—being the right approach because taking longer-term measures like investment measures or job retention measures where jobs are primarily in the formal sector doesn’t give a helping hand to the most vulnerable people whereas this does.

In India, there was less support in the hands of people, but it was well targeted because of digitalization. India did indeed come back up with the speed generated by this investment in infrastructure in its recovery. It (India’s economy) shrank in 2020 (fiscal ending March 2021), but in the next year, India came back to 8.7% growth. India made this very significant swing from a contraction to growth partially because it felt this recovery mindset is how you use your fiscal space.

There is one universal lesson, though. Countries that built social safety nets are much better positioned at the time of shock because they immediately deploy these social safety nets for well-targeted support.

In India, there is the sense that our response to the crisis has been technically superior to those adopted by many other countries, including the large developed economies. Is that a view that resonates with you?

It does. India built an incredibly agile foundation for a time of shock through digital ID and digital public infrastructure. That is the biggest advantage India had at the outset of covid. I hope that during the G20 presidency, all the countries take this page from the Indian book for themselves. Also, we saw prudent fiscal policy at the time of covid in India. There was support, but it wasn’t oversized. When the time came to face another crisis, India was not completely out of the buffer. Also, India has sound foreign exchange reserves. There is a lot that India has done right; particularly impressive is the vaccination of the Indian population and how it has been done with the support of digital India. I can tell you; it suffered badly due to deaths. What it showed India was how health systems are not strong enough. A problem was identified, but it led to more investment in health systems, not just vaccines. What I found very encouraging is that India is very interested in learning from other countries. The Prime Minister told me that, especially in digitalization, India has a lot to share and also a lot to learn from other countries.

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There is a lot of concern that China has emerged as a lender to many distressed economies. For example, Pakistan owes three times as much to China as it does to the IMF. At the same time, it does not have an established debt resolution mechanism that the multilateral agencies have. Is that a cause for concern?

The answer is categorically yes because the share of countries in distress has doubled since 2015 among low-income countries from 30% to over 60%. Among emerging market economies, nations accounting for around 25% are in debt distress. These are very troubling numbers. What is even more troubling is that conditions are going to get harsher with interest rates going up and for those that have borrowed in dollars, with the dollar also appreciating.

When we look at this problem, from the beginning, from 2020, together with the World Bank, we have been calling for much more attention to debt resolution. We led the debt standstill that took place, the so-called Debt Service Suspension Initiative. We have advocated for the G20 Common Framework for debt treatment to become more systematic and, most importantly, incentives for countries to step forward. For example, if a country requests treatment under the common framework, it should immediately be granted that debt standstill, so it has space to come to a resolution. We also strongly focus on debt transparency because debt is like an iceberg—you see the top, but you do not see what is underneath. Our appeal to large creditors is that because of their size, they must be a leading part of the solution, and we have been engaging both China and the private sector. Our cooperation on the topic is very important because, ultimately, we cannot easily lend to a country with unresolved debt issues.

I want to say that debt is not necessarily bad. If it turns into a productive growth-generating investment that leads to payment streams that cover the cost of debt. But that has not always been the case. We have seen quite a few—the jargon is white elephants—now turning into a huge liability for countries. There is a silver lining because we got the first country—Zambia—with an agreement of its creditor committee and trying to play a constructive role in getting to this agreement in one month from the establishment of the committee.

It is very important that creditors recognize that not only is (early debt resolution) their responsibility but also in their own interest because we know from past experience that when the longer it takes to reach a resolution, the more expensive it becomes for the debtors and creditors.

So we very much count on India during the G20 presidency to press for the common framework (for debt treatment) to come up with the rulebook—what are the steps in this process and the steps to be followed to include countries in distress like Sri Lanka and also to look for ways in which there are incentives for the early ‘knock on the door’ by countries needing that resolution. The more you wait, the worse the situation becomes.

During conversations with Indian leaders, what sense have you got that the themes India is keen to push for, advocate and champion during the G20 presidency?

The conversations I had here have been very inspiring because they show a country that is determined to take responsibility at a particularly complicated time, to bring the voice of emerging markets and developing economies more strongly to amplify the concerns of these countries in the context of the G20.

One topic on the top of the mind is macroeconomic policies—that is, how to secure macroeconomic and financial stability. 2023 will be a difficult year, and how to reduce the pain by collective action. That seems very encouraging. Second, clearly, there is a lot of interest in digitalization. This is a big benefit of the pandemic, and India is a leader here. In fact, we received requests to contribute more to both the digital public infrastructure and, more specifically, to regulating crypto assets. It is high time for regulation. Indeed we agree—the minister of finance (Nirmala Sitharaman) brought this point quite forcefully. There is also strong interest from India in advancing private finance. It is clear that unless the work is successful in bringing more private finance and more technology to emerging markets and the developing world, we will not be successful in the fight against climate change. It is paramount for our survival. It is actually existential for success in that area. Prime Minister Modi has been a very strong voice for more financing. I am proud that we at the IMF, during India’s G20 presidency, will demonstrate our commitment to bring more money to the emerging markets with the creation of our resilience and sustainability trust. It will start with $40-45 billion. We intend to build it up. Most importantly, our determination is to generate private capital flows with this money. In other words, (to let) countries use it to remove barriers for private finance both in mitigation and adaptation. One of the first countries we expect to become a beneficiary is Bangladesh. We also talked about debt sustainability; of course, India is right to consider this a concern. India is a partner to many developing countries. India has an interest in having early and effective debt resolution.

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On crypto assets and specifically cryptocurrencies, do you agree with India’s views, and are the views from around the world more mixed?

We have worked on this topic extensively. Our position is very clear. First, inevitably, there will be more digitalization in the financial world. It started quite some time ago. Both the central bank digital currencies and privately issued digital assets are going to be in existence, and they are going to expand their role. With regard to central bank digital currencies (CBDCs), we share the position of India that you cautiously go into wholesale CBDCs and explore whether retail CBDCs are necessary, beneficial or may be more detrimental to the country’s financial system. Third, we also share India’s view that unbacked crypto assets are volatile and risky. They categorically cannot be called money. Bitcoin may be called a coin, but it is not money, whereas stablecoins that are backed with assets have a role in settling transactions, but they are also more of an asset that one can invest in, similar to money market funds. They should be regulated. So should be, especially the unbacked crypto assets. Advancing regulation is a very pressing issue. Work is going on. Bank for International Settlements has been doing a lot of work. Where the IMF is essential is we have all-inclusive membership—we have 190 countries. We are not a standard setter, but we represent everybody’s interests, and for this reason, the minister of finance personally asked the Fund to take a leading role in working with the other institutions on this topic, and I hope that we will make significant progress during the G20 India presidency.

IMF has drawn some criticism for its handling of the Sri Lanka crisis—that it did not respond fast enough. What is your view on this?

We have engaged very early; at a technical level, we made a lot of progress. But there is a saying it takes two to tango. For quite some time, there was political instability in Sri Lanka. There was simply no partner to engage with. I must stress that the problems Sri Lanka has accumulated are profound. The solutions to these problems are quite dramatic. They require very strong commitment and engagement from society. So we had a staff-level agreement. We want to see that commitment demonstrably in place. Then we need the creditors to come together and provide financial assurance to take the issue to our board of directors. I would like to use the analogy of Lebanon. It breaks my heart that we have not been able to act on Lebanon. But if you do not have a creditor partner, you cannot bring a sustainable solution. That is not possible.

In Sri Lanka today, there is a committed government. However, it is a government that has to deal with a legacy from the past that is quite significant, and we want to see upfront that there is a determination to take the actions that are necessary. I am not saying this lightly. I have huge sympathy for the people of Sri Lanka. In the mid-90s, my own country Bulgaria went through a similar collapse because of hyperinflation. I saw my mother’s lifelong savings disappearing. I would get up at 4 O’clock in the morning to be in the queue to buy milk because goods also disappeared.

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I have huge empathy for the pain of the people. But I also know from that very experience that unless there is commitment and determination to act, we are not going to be able to help the people of Sri Lanka. So expect us to be very supportive and very engaged as we are but also very keen to protect the country from prolonged pain because of insufficient action.

You oversaw a historic expansion of assistance in the form of special drawing rights (SDRs) of $650 billion. Not a lot of it has been spent so far, and now there is a concern that instead of spending it on the intended causes, it will end up being used for settling bilateral debt, benefiting large creditors like China.

It was a historically large SDR allocation. It is a perfect allocation because it provides additional reserves to countries that need it and those that do not. It is done in a disproportionate manner because advanced economies have a majority of holding. They, therefore, received the majority of the SDRs.

When you look at the use of SDRs, in fact, low-income countries, as well as middle-income countries in debt distress or with limited fiscal space, have already deployed 90% of their SDRs.

An external evaluation was quite positive about the role of SDRs. What we came up with this time is a creative idea to address this disbalance in allocation by calling on countries with strong reserve positions to lend their newly allocated SDRs.

The broad agreement was to go for a 20% allocation. The majority of the countries indicated that they would provide this. We are in the process of collecting contributions. That requires parliamentary approval or other forms of government engagement in many countries. So it takes some time.

China is one of the countries that came up early with the large contribution announcement through the IMF. They made a big pledge for the resilience and sustainability trust, and we are working towards receiving their contribution.

This being said, your question on whether countries would be tempted to use SDRs from the allocation for that purpose is legitimate.

The issue there is if a country is to provide SDRs, then SDRs have to be converted to one of the five currencies that are in the basket.

Of which China is one?

Of which China is one. I would say I would not object to anything China can do to reduce the debt burden of countries because from our perspective, whether they use their reserves or they use their SDRs, which are part of their reserves, what matters is giving countries a big comfort.

At a time of supply-chain disruptions and a global food crisis, many countries, including India, have imposed curbs on the export of food items to safeguard local supplies. Do you have a view on this?

When countries impose restrictions, they basically give a licence to others to do the same. It is ultimately not in the interest of emerging markets and big economies. This being said, India has imposed restrictions on wheat and, as the situation became clearer, eased the restrictions. I very much hope that this will be the case now again because I also have a great deal of sympathy for a country with nearly 1.4 billion people that has experienced tough weather conditions this year and therefore is legitimately concerned.

I have confidence that India will show solidarity with the rest of the world the moment the situation becomes clearer about next year’s harvest, the availability of reserves and distribution.

We are in a very tough spot because mother nature has repeatedly told us we overstepped our rights to use nature’s resources, and especially we have abused the absorptive capacity of carbon emissions.

We pay a lot of attention to the impact of the war, but a great deal of the reason there is a food crisis are agricultural volatility and climate-related events.

If we are complacent and continue in our ways both by disrespecting the boundaries of our planet and not adjusting agriculture quickly to the new world we live in, then we are only going to see more misery being brought on people.

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