Coronavirus crisis to narrow global current account imbalances, IMF says

Global current account balance could narrow by 0.3% of global GDP in 2020, though the outlook remains highly uncertain

A second wave of Covid-19 infections may deepen the decline in global trade and supply chains and reduce investment appetite, according to the International Monetary Fund. AFP

A second wave of Covid-19 infections may deepen the decline in global trade and supply chains, reduce investment appetite, and limit financing of current account deficits for emerging market and developing economies, the International Monetary Fund (IMF) said.

The global current account balance declined 0.2 percentage points to 2.9 per cent of the world's gross domestic product in 2019 and is expected to narrow further by some 0.3 per cent of world GDP in 2020, due to coronavirus-related large fiscal expansions, the IMF said in its annual External Sector Report on Tuesday.

However, the outlook remains highly uncertain with substantial variations across countries as the world grapples with the Covid-19 pandemic.

Two thirds of governments globally have topped up their fiscal support to offset the effects of the pandemic, pumping about $11 trillion (Dh40tn) into their economies, compared with $8tn in April.

For economies dependent on severely affected sectors — such as oil and tourism, or those reliant on remittances — the impact of the crisis is "acute", with negative effects on external current account balances expected to exceed 2 per cent of GDP.

"A second wave of the crisis, with a renewed tightening in global financial conditions, could narrow the scope for emerging market and developing economies to run current account deficits, further reduce the current account balances of commodity exporters, and deepen the decline in global trade," the Washington-based lender said.

Another bout of global financial stress could trigger more capital flow reversals, currency pressures, and further raise the risk of an external crisis for economies with pre-existing vulnerabilities, such as large current account deficits, a high share of foreign currency debt, and limited international reserves.

Global current account balances in 2020 could be impacted by contracting economic activity, tightening in global financial conditions, lower commodity prices, the drop in tourism, and the decline in remittances.

The direct impact on current account balances for some tourism-reliant economies could exceed 2 per cent of GDP.

"The projected direct impact on tourism trade balances in 2020 will depend critically on the pace of tourism recovery, which is highly uncertain," the report said.

Remittances are particularly vulnerable to the Covid-19 crisis because migrant because migrant workers are more exposed to risk of unemployment and wage loss during recessions, it said. They also tend to work in sectors such as food and hospitality, retail and wholesale, and tourism and transportation, which have taken a hit from the crisis.

"The decline in remittance inflows in per cent of GDP is expected to be concentrated among a number of emerging market and developing economies," the IMF said.

Remittance flows are forecast to fall an average of 20 per cent in 2020, according to the World Bank.

This decline implies "significant hardship" for households and small businesses in economies where remittance inflows represent more than 5 per cent of GDP, such as Egypt, Guatemala, Pakistan, the Philippines, and Sri Lanka, according the report.

Depending on the pace of economic recovery and risks of a second wave of infections, effects on current account balances may continue, with remittances expected to rebound only partially by 5 per cent in 2021.

In the world's top five biggest economies, the expected changes in current account balances in 2020 compared with 2019 are modest—below 0.5 per cent of GDP, the IMF said.

In the US, the current account deficit is projected to narrow by 0.3 percentage points to about 2 per cent of GDP. In China, the current account surplus is expected to increase by 0.3 percentage points to 1.3 per cent of GDP.

In the near-term, policy makers should continue to focus on providing emergency lifelines, ensuring adequate liquidity, and promoting economic recovery while also building strong social safety nets, the IMF's executive board of directors said.

Countries with flexible exchange rates should allow them to adjust in response to external shocks, with the extent of adjustment depending on each economy, they said. Exchange rate intervention, where needed and where reserves are adequate, could help "alleviate disorderly market conditions."