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Cover IMF Working Papers
Commodity Shocks and Exchange Rate Regimes: Implications for the Caribbean Commodity Exporters
Mr. Ali J Al-Sadiq and Ms. Inci Ötker

Niger UAE Source: IMF Annual Report on Exchange arrangements and Exchange Restrictions. 15. A number of commodity exporters have adopted structural policy measures , with a view to limit the adverse effects of the price shock, and/or to enhance the absorptive capacity, or resilience, of their economies to future shocks. In particular, some countries introduced banking reforms and strategies to address the challenges faced by state-owned banks exposed to the commodity sector. Some countries introduced wage/hiring freezes as part of their

Keywords:
commodity-exporting country; event study; peg regime; a number of commodity exporter; a number of country
Cover Policy Papers
2015 External Sector Report
International Monetary Fund
After narrowing modestly in 2013, the global scale of current account imbalances, and of excess imbalances, held steady in 2014. Over the last several years, while the country composition of imbalances has rotated somewhat, overall there has been little progress on reducing excess imbalances. Excess deficits narrowed in some cases, but widened in others; progress on reducing excess surpluses has stalled. An unfinished policy agenda to reduce excess imbalances remains. Efforts by both surplus and deficit economies would be mutually reinforcing and support growth. Several significant recent developments will affect external positions in 2015: sharply lower oil prices, cyclical divergence and different monetary policies among the major economies, and related currency movements. Those developments do not overturn the previous pattern of excess imbalances and associated policy agenda, but they will have significant effects and raise new issues.
Keywords:
PP; exchange rate; current account gap; ESR economy; exchange rate movement; U.S. dollar; trade balance; terms of trade; Current account; Real effective exchange rates; Oil prices; Exchange rates; Global
Cover IMF Working Papers
Recognizing Reality—Unification of Official and Parallel Market Exchange Rates
Mr. Simon T Gray
Some central banks have maintained overvalued official exchange rates, while unable to ensure that supply of foreign exchange meets legitimate demand for current account transactions at that price. A parallel exchange rate market develops, in such circumstances; and when the spread between the official and parallel rates is both substantial and sustained, price levels in the economy typically reflect the parallel market exchange rate. “Recognizing reality” by allowing economic agents to use a market clearing rate benefits economic activity without necessarily leading to more inflation. But a unified, market-clearing exchange rate will not stabilize without a supportive fiscal and monetary context. A number of country case studies are included; my thanks to Jie Ren for pulling together all the data for the country case studies, and the production of the charts.
Keywords:
exchange rate unification; parallel markets; WP; market-clearing rate; market rate; exchange rate weakness; managed float; market-clearing exchange rate
Cover IMF Working Papers
Cyclical Fiscal Rules for Oil-Exporting Countries
Stephen Snudden
Structural budget-balance rules with countercyclical elements appear well suited to stabilize the macroeconomic volatility of oil-exporting countries and have been used successfully by other commodity exporters. Using a global DSGE model, the efficient design of such rules is found to depend on the source of oil price fluctuations and the oil exporters’ structural characteristics. The output-inflation tradeoff is of particular concern for oil exporters relative to non-oil exporters due to the pass through of oil prices into headline inflation. Fiscal rules are best when coordinated with inflation targeting monetary policy, but are still desirable for fixed exchange rate regimes.
Keywords:
WP; demand shock; exchange rate; Fiscal policy rules; automatic stabilizers; countercyclical fiscal policy; macroeconomic policy; oil price; headline inflation; oil-revenues gap; consumption basket; tax-revenue gap; core-inflation targeting monetary policy regime; commodity price uncertainty; structural surplus; fiscal policy stance; core inflation; oil-price shock; countercyclical monetary policy; fiscal policy behavior; Oil; Oil prices; Fiscal rules; Inflation; Global
Cover Policy Papers
Macroeconomic Developments and Prospects in Low-Income Developing Countries - 2016
International Monetary Fund
This paper is the third in a series assessing macroeconomic developments and prospects in low-income developing countries (LIDCs). The first of these papers (IMF, 2014a) examined trends during 2000–2014, a period of sustained strong growth across most LIDCs. The second paper (IMF, 2015a) focused on the impact of the drop in global commodity prices since mid-2014 on LIDCs—a story with losers (countries dependent on commodity exports, notably fuel) and winners (countries with a more diverse export base, where growth remained robust). The overarching theme in this paper’s assessment of the macroeconomic conjuncture among LIDCs is that of incomplete adjustment to the new world of “lower for long” commodity prices, with many commodity exporters still far from a sustainable macroeconomic trajectory (Chapter 1). The analysis of risks and vulnerabilities focuses on financial sector stresses and medium-term fiscal risks, pointing to the actions, including capacity building, needed to manage and contain these challenges over time (Chapter 2). With 2016 the first year of the march towards the 2030 development goals, the paper also looks at how infrastructure investment can be accelerated in LIDCs, given that weaknesses in public infrastructure (such as energy, transportation systems) in LIDCs are widely seen as a key constraint on medium-term growth potential (Chapter 3). With the sharp adjustment in commodity prices now into its third year, some of the key messages of the paper are familiar: a) many commodity exporters, notably fuel producers, remain under significant economic stress, with sluggish growth, large fiscal imbalances, and weakened foreign reserve positions; b) countries with a more diversified export base are generally doing well, although several have been hit by declines in remittances, conflict/natural disasters, and the contractionary impact of macroeconomic stabilization programs; c) widening fiscal imbalances, in both commodity and diversified exporters, have resulted in rising debt levels, with severe financing stress emerging in some cases; and d) financial sector stresses have emerged in many LIDCs, with expectations that these strains will increase in many commodity exporters over the next 12–18 months. Key messages on financial sector oversight, on medium-term fiscal risks, and on tackling infrastructure gaps are flagged below. Read Executive Summary in: Arabic; Chinese; French; Spanish
Keywords:
PP; commodity exporter; commodity; donor grant disbursement; low-income developing country; price; commodity-exporting LIDCs; IMF desk survey; IMF staff estimate; Public investment and public-private partnerships (PPP); Infrastructure; Commodity prices; Global; Sub-Saharan Africa
Cover Policy Papers
2016 External Sector Report
International Monetary Fund
After narrowing in the aftermath of the global financial crisis and remaining broadly unchanged in recent years, global imbalances increased moderately in 2015, amid a reconfiguration of current accounts and exchange rates. Shifts in 2015 were driven primarily by the uneven strength of the recovery in advanced economies, the redistributive effects of the sharp fall in commodity prices, and tighter external financing conditions for emerging markets (EMs). A relatively stronger U.S. outlook led to a further appreciation of the USD and a depreciation of the yen and the euro. The sharp decline in commodity prices, reflecting both supply shocks and concerns about rebalancing and growth in China, brought about a significant redistribution of income from commodity exporters to importers, and a weakening of commodity exporters’ currencies. Meanwhile, heightened global risk aversion, contributed to softer capital inflows and depreciation pressures in many EMs. This moderate widening of current account imbalances was largely driven by systemic economies. Surpluses in Japan, the euro area and China grew, supported by improved terms of trade and currency depreciation, while the current account deficit in the U.S. widened amid the steep appreciation of the USD. These widening imbalances were only partially offset by narrowing surpluses in large oil exporters and smaller deficits in vulnerable EMs and some euro area debtor countries. Similarly, excess imbalances expanded in 2015. External positions in the U.S. and Japan moved from being broadly in line with fundamentals to being “moderately weaker” and “moderately stronger”, respectively. This was partly offset by a further narrowing of excess deficits in vulnerable EMs and euro area debtor countries. Meanwhile, excess surpluses persisted among the larger surplus countries, some of which remain “substantially stronger” than fundamentals (Germany, Korea). Currency movements since end-2015 helped to partially reverse the trends observed last year, although market volatility following the result of the U.K. referendum to leave the European Union have led to a strengthening of the USD and yen along with a weakening of the sterling, euro, and EM currencies. The implications for external assessments going forward, especially for the U.K. and the euro area, remains uncertain and will likely depend on how the transition is managed and on what new arrangements are adopted. With output below potential in most countries, and limited policy space in many, balancing internal and external objectives will require careful policy calibration. In general, a more balanced policy mix that avoids excessive reliance on policies with significant demanddiverting effects is necessary, with greater emphasis on demand-supportive measures and structural reforms. Surplus countries with fiscal space have a greater role to play in supporting global demand while reducing external imbalances. Global collective policy action, especially if downside risks materialize, would also help address global demand weakness while mitigating its effects on external imbalances.
Keywords:
PP; monetary policy; commodity exporter; current account gap; fiscal policy; CA regression; foreign exchange; TOT index; regression policy gap contribution; commodity terms of trade; foreign currency; EBA CA; current account balance; reserve currency; output gap; Current account; Exchange rates; Current account imbalances; Currencies; Global; Africa
Cover IMF Working Papers
Commodity Shocks and Exchange Rate Regimes: Implications for the Caribbean Commodity Exporters
Mr. Ali J Al-Sadiq and Ms. Inci Ötker
Declining commodity prices during mid-2014-2016 posed significant challenges to commodity-exporting economies. The severe terms of trade shock associated with a sharp fall in world commodity prices have raised anew questions about the viability of pegged exchange rate regimes. More recently, the COVID-19 pandemic and the measures needed to contain its spread have been associated with a significant disruption in several economic sectors, in particular, travel, tourism, and hospitality industry, adding to the downward pressure on commodity prices, a sharp fall in foreign exchange earnings, and depressed economic activity in most commodity exporters. This paper reviews country experiences with different exchange rate regimes in coping with commodity price shocks and explores the role of flexible exchange rates as a shock absorber, analyzing the macroeconomic impact of adverse term-of-trade shocks under different regimes using event study and panel vector autoregression techniques. It also analyzes, conceptually and empirically, policy and technical considerations in making exchange rate regime choices and discusses the supporting policies that should accompany a given regime choice to make that choice sustainable. It offers lessons that could be helpful to the Caribbean commodity-exporters.
Keywords:
commodity shock; commodity exporter; regime choice; Caribbean commodity-exporter; I. commodity terms-of-trade Index; Exchange rate arrangements; Exchange rate flexibility; Exchange rates; Exchange rate adjustments; Caribbean; Global; Africa
Cover Policy Papers
2015 External Sector Report
International Monetary Fund

Malaysia took the opportunity of lower oil prices to pare fuel subsidies and build fiscal space). 1 Of the many ESR economies experiencing depreciation against the U.S. dollar after mid-2014, available data suggest that most chose not to use FX intervention on a large scale to dampen such depreciation . Currency depreciation was allowed to play an important shock-absorbing role in a number of commodity exporters (those with flexible exchange rates) and in others facing country-specific stresses. Another aspect was that many experiencing depreciation against the dollar

Keywords:
PP; exchange rate; current account gap; ESR economy; exchange rate movement; gap of the U.K.; oil price; aggregate demand; REER gap; REER appreciation
Cover IMF World Economic Outlook (WEO) Update, January 2016: Subdued Demand, Diminished Prospects
IMF World Economic Outlook (WEO) Update, January 2016: Subdued Demand, Diminished Prospects
International Monetary Fund. Research Dept.

accompanying reduced capital inflows could limit the scope for monetary policy easing to support demand. In a number of commodity exporters, reducing public expenditures while raising their efficiency, strengthening fiscal institutions, and increasing noncommodity revenues would facilitate the adjustment to lower fiscal revenues. In general, allowing for exchange rate flexibility will be an important means for cushioning the impact of adverse external shocks in emerging market and developing economies, especially commodity exporters, though the effects of exchange rate

Cover Policy Papers
Macroeconomic Developments and Prospects in Low-Income Developing Countries—2016
International Monetary Fund

action. It also requires improving capacity, and enhancing the financial safety nets—mainly banking crisis preparedness and resolution frameworks. Countries whose banking systems face high pressures (as is the case presently in a number of commodity exporters) should give priority to enhancing supervisory risk assessment and stress testing skills, and developing bank resolution and crisis management frameworks. In contrast, countries whose financial systems are facing fewer strains could benefit most from strengthening the foundation for supervision, which relate to

Keywords:
PP; commodity exporter; commodity; donor grant disbursement; low-income developing country; price; private sector; exchange rate; infrastructure investment; terms of trade; Public investment and public-private partnerships (PPP); Infrastructure; Commodity prices; Global