The Hindu Business Line : `Geopolitical risks have become increasing concerns'

The global economy continues to face "significant" risks that could have an near term consequences "for both financial markets and the real economy more generally".

Washington , April 21

THE balance of risks has significantly improved against the backdrop of a sharp rise in global trade, buoyancy of financial markets and the rebounding of the US' economy.

While in the short-term, global economic growth may be higher than projected, geopolitical risks have become "increasing" concerns, says the World Economic Outlook of 2004 put out by the International Monetary Fund.

"In both advanced and developing countries it will be essential to take advantage of the recovery to press ahead with the structural reforms needed to improve growth potential, flexibility and resilience and to resist protectionist pressures," the IMF has said going on to make the point very early on that while recovery now appears to be under way in all regions "the pace and nature vary significantly."

The upturn, according to the IMF, is "most rapid" in emerging Asia particularly in China and the US and least well established in the euro-area.

With the global recovery proceeding more rapidly than anticipated, the IMF has revised its growth forecast markedly — global growth in 2003 is now estimated at 3.9 per cent and rising to 4.6 per cent in 2004 before slowly slightly to 4.4 per cent in 2004.

The IMF has stressed that the projected pace and nature of recovery in countries and regions will vary considerably "reflecting differing degrees of policy stimulus, exchange rate developments, progress in corporate restructuring, openness and therefore ability to benefit from rising global trade, especially in IT and region-specific developments."

For the emerging and developing countries, the Economic Outlook has said that the growth momentum has been particularly strong in "Emerging Asia" where the GDP growth is projected to remain at 7.2 per cent in 2004.

"GDP growth in India has also exceeded expectations aided by favourable rainfall and low domestic interest rates. With trade expanding rapidly, GDP growth and current account surpluses in Asia could both be higher than projected," the IMF says.

The fund has argued that further progress in addressing India's large fiscal imbalances is "urgent" because the recovery will increase the private sector's demand for financing thereby putting upward pressure on interest rates

"Given India's low revenue to GDP ratio the bulk of the adjustment will need to come from revenue enhancing measures" that would include improving tax administration, widening the tax base and simplifying the tax regime, the IMF notes.

On India, the report has also said that the appreciation of the rupee against the dollar under the managed float is welcome and even "greater flexibility" would be welcomed. "While progress has been made in strengthening the financial system, vigilance over credit quality will continue to be necessary to limit risks from rapid credit growth," the IMF points out.

Globally, there is the caution that while recovery is becoming increasingly well established and the balance of risks has significantly improved, there are two important "caveats" to this phenomenon — geopolitical uncertainties like the recent terror attacks in Madrid and oil prices; and in the fact that the global economy continues to face "significant" risks that could have an near term consequences "for both financial markets and the real economy more generally".

The World Economic Outlook for 2004 points to the concerns which would include the continued large current account deficit in the US which is matched by a fiscal deficit of similar size and the surpluses elsewhere particularly in Asia; the very low global interest rates which will have to rise eventually with the timing and speed of future moves remaining subject to considerable uncertainty; the medium term fiscal position across the globe remaining "very difficult"; and the Doha Round negotiations appearing to be regaining some momentum but where significant obstacles remain for getting any meaningful agreement.

The IMF has outlined four broad policy challenges even while making the point that in looking ahead policy makers will have to ensure that the recovery is sustained with the need of the focus to shift to medium-term issues and broader developmental challenges.

The policy challenges would be: Managing the monetary policy transition; facilitating an orderly resolution of global imbalances; using the recovery to address outstanding medium-term vulnerabilities and reducing poverty.