Global current account balances to narrow in 2023 -IMF

Global current account balances increased for the third consecutive year in 2022 and are projected to narrow in 2023, the International Monetary Fund (IMF), has said. According to the Fund, the widening over the three years reflects several factors, including the unequal impact of the COVID-19 crisis in 2020–21 and the increase in commodity prices fueled by the economic recovery in 2021 and supply concerns following the Russia-Ukraine war.   In a report titled, ‘External rebalancing in turbulent times; the Fund stated that the absence of widespread sudden stops during the pandemic enabled deficit economies to avoid an abrupt contraction of their current account deficits. “Currency markets exhibited significant fluctuations in 2022, driven by changes in the terms of trade and monetary tightening,” the Fund stated.   The report stated that an accumulation of official foreign exchange reserves played a limited role in net capital outflows from emerging market and developing economies just as net creditor and debtor positions remained at historically high levels. “Over the medium term, global current account balances are expected to narrow as the impacts of the pandemic and Russia’s war in Ukraine recede. However, several risks surround this outlook, including a renewed increase in commodity prices, a slower-than-expected recovery in China, or a slower fiscal consolidation in economies with current account deficits. While the impact of geoeconomic fragmentation on global current account balances is unclear, it would unambiguously reduce global welfare. The excess global current account balances (defined as the sum of absolute values of current account surpluses and deficits in excess of their norms) have remained unchanged since 2021, after being on a declining trend for several years. While the widening of global current account balances is not necessarily a negative development, excess global current account balances can fuel trade tensions and protectionist measures or increase the risk of disruptive currency and capital flow movements. “Narrowing excess global current account balances would reduce the risk of financial crisis and improve welfare. Policy efforts, in both excess surplus and deficit economies, are required to promote external rebalancing. Where excess current account deficits in 2022 partly reflected larger-than-desired fiscal deficits, fiscal consolidation will help stabilize debt-to-GDP ratios and close current account gaps.” The Fund pointed out in the report that in economies where excess current account surpluses persist, higher fiscal spending in targeted areas will help them to meet their goals in climate, digital, and energy security, while reducing their excess surpluses. “Economies with lingering competitiveness challenges will need to address structural bottlenecks. Multilateral cooperation will help counter risks of geo-economic fragmentation, including efforts to strengthen the current rule-based trading system, and facilitate the green transition. Successfully completing the 16th General Review of Quota would ensure that the IMF is adequately resourced to serve as an anchor of the global financial safety net,” it further explained.