Kristalina Georgieva, the Managing Director of the IMF, warned on Wednesday during the annual meetings of the IMF and World Bank in Bangkok that the United States would not be able to reduce its growing public debt without making changes to its fiscal and tax policies. She also emphasized the need for a shift in China's growth model towards domestic consumption.
Emphasis on Financial Reforms in the Two Largest Economies
Georgieva pointed out the necessity of painful reforms in fiscal policies to reduce increasing financial and trade imbalances, noting that advanced economies, particularly the United States and European countries, have been identified as the "worst offenders" in terms of excessive debt. She added that rising bond yields have put additional pressure on low-income countries, forcing them to limit their debts.
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The IMF Managing Director announced in a press conference that Steven Mnuchin, the U.S. Treasury Secretary, acknowledged that the levels of deficit and debt in the United States are very high and need to be made more sustainable. Georgieva stated, "Officials have heavily relied on strong U.S. growth to reduce debt. However, the Fund believes that while growth helps, it cannot alone provide the necessary reforms quickly, and some fiscal measures will be essential."
Need for a Shift in China's Approach to Domestic Consumption
Georgieva continued by addressing the situation in China, saying, "Countries with trade surpluses need to increase domestic consumption. This clearly relates to China's growth model. China needs to shift from more exports towards domestic consumption." She also advised countries with trade deficits to save more and spend less, emphasizing that Europe needs to invest more in competitiveness.
She stated, "To put it simply, China needs to spend more, the United States needs to save more, and Europe needs to invest more." This week, the meetings have been accompanied by increasing concerns about rising debts and increasing bond yields, as well as risks arising from the AI boom.
Georgieva also referred to the growing divide between advanced countries and those that have not benefited from investments in AI, urging IMF member countries to fully finance the Fund's facilities for low-income and vulnerable countries. She mentioned two funds: the Poverty Reduction and Growth Trust, which provides low and zero-interest loans to low-income countries, and the Catastrophe Containment and Relief Trust, which provides financial assistance for debt reduction and cancellation to poor and vulnerable countries.
Georgieva concluded by stating that these countries are also under pressure from high bond yields, with the average cost of debt service rising to 14 percent of income from 6 percent a decade ago. She added, "The risk of fragmentation for countries that are already lagging behind is very dangerous."
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