Transcript

Transcript of Asia Pacific Department April 2024 Press Briefing

April 18, 2024

MS. VU: Good morning, everyone. Thank you for attending the IMF's press briefing on the Regional Economic Outlook for Asia and Pacific. I'm Huong Lan (Pinky) Vu from the Communications Department at the IMF, and joining me today is Krishna Srinivasan, Director of the Asia and Pacific Department at the IMF. It's such a great pleasure to see so many of you here in Washington, D.C. during the Spring Meeting week. We are also delighted to welcome journalists joining us virtually from Asia and other parts of the world. To kick off the briefing today, Krishna will give some opening remarks and then we will take your questions. Krishna, the floor is yours.

MR. SRINIVASAN: Thank you, Pinky. Good morning to everyone here in Washington, D.C., and good evening to everyone in Asia. Thank you for joining our press briefing for Asia and the Pacific. Please allow me to make a few opening remarks before I take your questions.

Let me start with growth. Growth surprised on the upside in the second half of 2023 as robust domestic demand fueled activity, especially in emerging Asian economies. Malaysia, the Philippines, Vietnam, and most notably India, recorded sizable positive growth surprises. Growth for the region reached 5 percent in 2023, much stronger than a growth of 3.9 percent in 2022, and this represents a 0.4 percentage points higher than what we had projected in the October 2023 Regional Economic Outlook, and the momentum carries over into 2024. We now project the region to grow by 4.5 percent in 2024 and upward revision of 0.3 percentage points relative to October. With this, Asia would contribute about 60 percent of global growth. The region is projected to grow by 4.3 percent in 2025.

Now, what will drive growth? The answer depends on the country. In China and India, we expect investment to contribute disproportionately to growth, much of it public, especially in India. In emerging Asia, outside China and India, robust private consumption will remain the main growth engine. In some advanced economies, such as Korea, we expect a positive impulse from exports, driven in part by strong global demand for high end semiconductors. Domestic demand would strengthen only gradually.

And next, we turn to inflation, where Asia is ahead of the curve compared to most other regions. Three groups have emerged during the disinflation process. In one group of countries, notably Korea, Australia, and New Zealand, inflation is still above target, boosted by persistent price pressures from services. In a second group, most notably Asian emerging markets and Japan, headline and core inflation are contained. And finally, in countries like China and Thailand, inflation is low. This owes to both falling commodity prices and weak demand that puts downward pressure on coal prices. Going forward, we expect that inflation will converge to central bank targets, but this requires a differentiated policy approach. A tighter for longer stance on economies where inflation is elevated and accommodative macroeconomic policies economies with sizable slack.

U.S. monetary policy matters for Asia. IMF staff analysis shows that U.S. interest rates have a strong and immediate impact on Asian financial conditions and exchange rates. Expectations about Fed easing have fluctuated in recent months, driven by factors that are unrelated to Asian price stability needs. We recommend Asian Central Banks to focus on domestic inflation and avoid making their positive decisions overly dependent on anticipated moves by the Federal Reserve. If central banks follow the Fed too closely, they could undermine price stability in their own countries.

China's economy is critical for the region. Recent data have been mixed. GDP the first quarter surprised on the upside, and March readings for the manufacturing and PMI services were quite strong, while the property sector remains subdued. Amid weak domestic demand, inflation turned negative in late 2023 and early 2024, although it has returned to positive territory in February.

A more protracted slowdown in China would be bad news for the region for several reasons. One channel is shown in the right hand side. Chinese export prices fell in the second half of 2023. This not only puts pressure on the profit margin of China's competitors, but IMF staff analysis shows that their export volumes can also suffer, especially for countries that produce similar goods to China, such as Vietnam and Korea. But there's also an upside. Robust policy support in China can be good news for the region for this, not only the amount but also the nature of support matters. For example, measures that are aimed at addressing stresses in China's property sector can go a long way in restoring consumer confidence and boosting domestic demand.

By contrast, policies that boost China's supply capacity would reinforce deflationary pressures and could provoke frictions. Frictions could also emerge through other channels. For example, global conflict can undermine trade. As you'll be aware, attacks on cargo ships in the Red Sea have forced a rerouting of vessels between Asia and Europe, driving up container prices. Shipping disruptions are particularly detrimental for Pacific Island countries, with which both depend heavily on imports and are poorly connected to global shipping networks. Such frictions reinforce the impact of trade restrictions that continue to be implemented at a rapid pace both in Asia and elsewhere. Few regions have benefited as much from trade integration as Asia. Hence, geoeconomic fragmentation continued to be a large risk.

Finally, let me add a word on policies. I have already described the monetary policy challenge. For fiscal policy, we recommend that government focus on consolidation to curb the rise in public debt and rebuild fiscal buffers. Our forecasts show that on current fiscal plans, debt ratio would stabilize for most economies, provided governments underpin these plans with concrete policies and follow through on them. But even then, debt would remain significantly higher than before the Pandemic. To reduce debt levels and curtail debt service costs, governments need to collect more revenue and streamline expenditure. Having to pay less on debt would eventually free up budgetary space for spending on developing needs, social safety nets, and climate mitigation adaptation.

Let me close with announcing that our Regional Economic Outlook will be launched on April 30th in Singapore. Now I look forward to your questions. Thank you.

MS. VU: Thank you, Krishna. And now we will now open the floor for your questions. For those with us in the room, if you wish to ask a question, please raise your hand and wait for me to call on you. One of my colleagues will give you a microphone. And for those who are joining us online, please raise your virtual hand and when you are given the floor, kindly turn on your microphone and your camera. And you also have an option to type in the questions in the chat, and I read it out loud for everybody here. When asking a question, please also introduce yourself and the news organization that you represent.

May I please ask you to limit your question to one to two at most, so that we can give the opportunity to as many journalists as possible. And if we have time, we'll come back in the next round. Why don't we start with some questions on regional issues? Anybody has questions on regional issues here? The lady in the first row here, please.

QUESTIONER: Hi, thank you so much for the opportunity. My name is Ray Zhou, 21st Century Business Herald, Guangdong, China. So we have two questions here. First one, given the observed divergence in economic growth rates you just mentioned, between different economies in Asia, which are advanced economies and emerging markets, what specific policies does IMF suggest for Asian countries to manage these disparities and therefore foster inclusive growth? Second question is related to debt levels. So with the rising debt levels in Asia and other economic pressures, what specific policies does IMF suggest for Asian countries to ensure debt sustainability and financial stability without sacrificing economic growth? Thank you.

MR. SRINIVASAN: Thank you. Very good questions. Let me take them one at a time. Now, as I noted in my presentation, growth has been better than expected in Asia. In fact, Asia will contribute 60 percent to global growth this year, and inflation also is coming down and much better than other regions. But there are large disparities within the region. And for example, if you take the second half of 2023, we had positive surprises, not just from countries like India, which are big, but also smaller economies such as Cambodia. On the other hand, you also had countries which didn't do as well as we expected, such as Thailand, and there are many reasons for that and that there are countries specific.

In terms of policies, how would we distinguish that, I think, let me just talk about monetary fiscal, before I get into the longer-term policies. In terms of monetary policy, as I mentioned, there are broadly three buckets of countries. In the first set of countries, you have where inflation is well above target, and that includes countries like Australia and New Zealand. And then you have a second bucket where inflation is either close to target or is at target. And finally, there are countries where inflation is low, what we call as low inflation or rising deflation risks. So, the policies, when it comes to monetary policy, it has to be differentiated across these three buckets. Countries where inflation is at or if close to target, you know, there's room to start easing later this year as long as policies are maintained and inflation is coming down durably. In countries where inflation is about target, such as in New Zealand and Australia, it's important to maintain the tight monetary policy stance, also supported by fiscal appropriately tight fiscal stance, so that inflation comes down to target. And in countries where inflation is low, notably China, there is room to support demand and to boost growth there further.

Now, on fiscal policy, I think there's more uniformity. What we have seen is that because of the multiplicity of shocks, starting from the Pandemic and into the war and to tensions now, deficits and debt levels have risen across many countries in Asia. And it's important for countries to actually wind back the support which they provided during the Pandemic and make it more targeted. But more generally to rein back fiscal spending and have more consolidation and bring debt levels back so that we build buffers for the future. So that's as far as near-term policies are concerned.

When it comes to structural policies, I think, again, there is differentiation. If you look at Asia, there are some countries where the population's aging, for example, in China, and there are other countries, other large economies, where the population is still growing and it's still young, like India. So in countries where population is aging, we also -- but the one common factor we see across many countries in Asia is productivity is declining. So going forward, and if you want to really leverage opportunities from AI and green growth, you have to start investing in and embarking reforms which can enhance productivity. And be that in terms of increasing access to schooling, education, opening up the economy to competition, business, all these are factors which will help increase productivity and anchor medium-term growth. And that's relevant for many countries in the region. Of course, the focus will differ in terms of what policies each country by country but the broad slew of policy is that.

Your second question was on debt, right? So, now, on the issue of debt sustainability, what we have seen is that in 2023, if you take for the region as a whole, what we saw was that the amount of fiscal consolidation was less than we had projected. And also, a lot of countries have issued new debt at higher interest rates. So a large part of your revenue collection is going towards servicing debt, which means you're effectively crowding out spending on priority areas, including, you know, social safety nets and protecting the poor and vulnerable. And so, it's important that countries start embarking fiscal consolidation. And in that context, I would say, that one factor which is quite common across the region is that revenues are pretty low in the region. So when you think in terms of fiscal consolidation, rather than embarking on massive expenditure cuts and so on, you want to put a lot more emphasis on revenue mobilization, which I think is critical for many countries in the region, including where we have IMF supported programs. I hope that answers your question.

MS. VU: Thank you. The lady on the third row here.

QUESTIONER: Hi, Leika Kihara from Reuters. I have two questions. The first one is about Asia. You talked about recommending Asian Central Banks not follow the Fed too closely. But the implication of changing expectations about the Fed rate timing is already happening in markets. How big is the risk of actual big capital outflows from Asia affecting the region, and what's your assessment on the near-term direct market and economic implications in the region? My second question is about the yen. The Japanese yen has lost roughly 10 percent against the dollar so far this year and now is at the lowest since 1990. It has also declined against many other currencies. Do the yen's recent declines reflect economic fundamentals, and would yen buying currency intervention by Japan be justified? Thank you.

MR. SRINIVASAN: Thank you, Leika. I think your two questions are, in some sense, related, so let me take them together in some ways. You know, first, let me say about the yen. Clearly the yen has depreciated large by about 9 percent. This is a common thing, there are many countries, many currencies in the region which have depreciated, and to a large extent, this reflects interest rate differentials between the U.S. and Asian economies. And why is that? And that reflects the inflation trends in Asia compared to rest of the region. What we saw is inflation in Asia, while it started rising the same time as in other parts of the world in 2020, it went up by much less and it's coming down faster, which means that central banks had to tighten that much less compared to central banks in other parts of the world, notably in the U.S. So what that means is that there is interest rate differentials have risen, and that has led to capital outflows, as you mentioned, and currencies have moved. And I would say, if you look at 2023, you saw similar things, and countries did allow the exchange rate to adjust, and it's partly to reflect that exchange rate movements are a buffer against shocks. So that's something which we saw. And I think we would encourage countries to allow the exchange rates to move, to be a shock absorber.

But again, this also is an important point there, in the sense that when exchanges move a lot, it does lead to some volatility in both prices. But our advice, when I talked about my presentation, is that when you see such kind of volatility, central bank should focus on fundamentals. And this is something which we elaborate further in our Regional Economic Outlook, that countries should not alter their policies rigidly to what they expect the Fed to do, or what they expect the dollar to do. And it's better for Asian countries to focus on what are the domestic inflationary pressures, to address those, rather than be very tightly linked to what the Fed does. And I would say, and in many ways, Asian countries are much more fortunate now, because domestic conditions are much better than there was ten years ago. And both, in terms of the economies are much more resilient and in terms of the balance sheet mismatches which you saw ten years ago. So to the extent that those frictions have reduced, you can allow both exchange rates to move and focus your monetary policy on how you see domestic inflationary pressures, rather than being too linked to the U.S. Fed.

Now, you had a question specifically on the Japanese yen. I think the Japanese authorities are committed to a flexible exchange rate regime which allows the exchange rate to act as a shock absorber and support the monetary policy objective of price stability, as well as help maintain an external position, which is in line with fundamentals, right? And yesterday's G7 Finance Minister's and Central Bank Governor's statement also reaffirmed the G7’s commitment to a market determined exchange rate. And as you noted, the yen has depreciated by about 9 percent against the U.S. dollar so far this year, which is quite significant. And like I said, like other countries in the region, this to a large extent reflects interest rate differentials, but we will continue to monitor the data as more information comes through. Thank you.

MS. VU: Thank you. Let's move to this side. The lady over here.

QUESTIONER: Thank you, Pinky, for taking my question. It's Maoling Xiong with Xinhua News Agency

MR. SRINIVASAN: Sorry, I didn't hear your name. Sorry, can you repeat it?

QUESTIONER: Maoling Xiong with Xinhua News Agency. I want to ask about the Chinese economy. You said in your opening remarks that this more slowdown in China would be bad news for Asia. And China's official data was just released earlier this week about the first quarter's 5.3 year-on-year growth. Does that give you a little bit more confidence about China's growth this year? And also, can you talk about what does it mean for the broader development trajectory for Asia? Thanks.

MR. SRINIVASAN: Thank you. Thank you, Maoling. Now, you're right. China's GDP grew by 5.3 percent in the first quarter of 2024 amid a broad-based expansion. The outturn was higher than what staff had projected and also what market had projected, and it clearly poses upside to what staff projections of 4.6 percent were. At the same time, you know, we also see that data from the real estate sector continues to remain weak. So you have, you know, offsetting news here. The quarter one GDP came out better. If you look at other high frequency data like PMI for services and manufacturing, they were pretty good. But on the other hand, the lingering weakness from the property sector continues. So we have to take those factors together to assess what it means for the Chinese economy. And as you may know, we have the Article IV with China coming up soon, and that will be a good opportunity for the team to look at all sets of factors put together and look at what it means for Chinese growth.

In terms of spillovers, as I've mentioned many times in the past, Asia is one region where intraregional growth is very important and China is a key player there. And so, anything which affects Chinese growth, either on the up or the down, has a bearing on what happens in the rest of Asia. We have presented a number in the past where we say a one percentage point increase in Chinese growth has a 0.3 percent point effect on growth in other countries in the region or the medium-term. So I think that's something to keep in mind. So any upside to Chinese growth will have a bearing on countries in Asia. Some countries, notably Korea, which have closer trade links with China, will benefit more, but in general, the region will continue to do better when China grows faster.

MS. VU: There is a lot of interest in China. Do we have any other questions on China here? The gentleman on the third row over there.

QUESTIONER: Thank you very much, Pinky. My name is Shuichiro Takaoka from JiJi Press, Japanese news agency, and my question is overproduction of China. Recently you -- not only U.S. authority but also European concerning about overproduction of China. And what is your analysis on that problem, especially spillover effect to other Asian countries? Regarding especially, is it something effect like differential export to other countries? Thank you.

MR. SRINIVASAN: Let me answer that question in two ways. So when you think about the issue you pose, I think it is important to distinguish between the macroeconomic aspects and the sectoral aspects.

On the macroeconomic aspects of what you just said, China's economy is experiencing weak domestic demand, something which we've highlighted, and this emanates from two factors. One, of course, is a real estate, the continued weakness in the real estate sector and the legacies of the pandemic. So in that context, we have advocated for two things. One, of course, is policies that would help address the problem in the property sector and other than that, trying to boost consumption demand by improving social safety nets in the case of China and again, improving the pension system in a fiscally prudent way and investing in people, education, and health. So that's as far as once on the domestic demand side, if you pursue these policies, you will see domestic demand rising and deflation risks coming down. And by the way, let me make very clear that even though we see low inflation right now, the number for March was 0.1 percent in our baseline. We have inflation going up to 0.8 percent to 1 percent. So it's, again, I'm calling this low inflation.

Now, when it comes to sectoral, there are sectoral dimension to what you said. And, you know, we have mentioned this as we discussed this issue in our Article IV staff reports. And clearly, China provides a wide-ranging support to priority sectors. This includes preferential access to credit research funds and incentives for certain firms, particularly in the areas of strategic manufacturing and science and technology. And what we have said in our Article IV reports, you can read that, that this could lead to two things. One is misallocation of resources within China, and it also affect trading partners. And we are seeing some effect of that. In fact, in our regional economic outlook, we'll show how some of this thing is affecting the exports of some countries and regions, such as Vietnam and Korea, which have similar export structure to China.

But in terms of what China can do, on the first issue of misallocation of resources, we have talked about the fact that it is important to address SOE reform quite urgently, scaling back of industrial policies, which provide implicit or explicit guarantees for SOEs. So in other words, try to make it have ensure competitive neutrality between SOEs and the private sector so that there's no misallocation of resources doesn't happen. That's one thing. And again, we also said that SOE reforms, some SOEs are clearly unprofitable. And the more support you provide, you keep them in business for longer than they should be. So that's something which we've called for in terms of SOE reforms. And so those are the policies which we're advocating for China both to address, to address the issue of what you talked about as overproduction. I hope that answers your question.

MS. VU: Thank you, Krishna. Let's move to Webex for a moment. Thank you for waiting patiently. Sriram Laskhman, please go ahead.

QUESTIONER: Thank you. Thank you for your comments, Dr. Srinivasan. My first question, there's a sentence in your opening remarks about India, about how public investment is going to contribute disproportionality to growth, especially in India. I was hoping you could provide some more granularity on that view. And the second is the IMF has projected a high growth rate for India. What are some of the downside risks to this? And I'm specifically hoping you can talk about private consumption, the outlook for private consumption, which is impacted by food inflation, and also employment. The World Bank has talked about the demographic dividend alluded to a young population in India. So private consumption and employment, your view and policy recommendations.

MR. SRINIVASAN: Thank you, Sriram. As I noted in my opening remarks, India is one country which has registered very strong growth of 6.8 percent, we project for FY ‘24, ‘25. India has successfully navigated multiple shocks in recent years and it's now one of the fastest growing major economies in the world. And to a large extent, the 6.8 percent of what we project is led by private consumption and public investment. Now, as you are aware, India has put a lot of emphasis on CapEx spending in terms of building infrastructure; be it airports, roads, railroads and so on. And that's clearly had a very beneficial impact on growth. The issue there is whether it has crowded in private investment. And what we have seen is until recently that wasn't happening much. So private investment is on the weaker side. But of late, we've seen some uptick in private investment, which augurs well going forward.

In terms of consumption. We also see consumption picking up with inflation coming down right now, inflation about 4.7 percent in India, you know, it's close to the mid target of 4 percent. So inflation is coming down. We expect that to come down even further. That should provide a fill up to consumption going forward.

Now, what are the downside risks? Again, in the case of India, I would identify some short term and some medium-term risks. In the short term, I would say volatile global commodity prices can have a significant bearing on prospects in India. Especially if oil prices rise a lot of then it can have an impact on India because India is a large oil importer, but goes beyond oil. But these food price shocks would also have an impact on economic prospects. Beyond the near term, you could have weather related shocks. You could have risks from geo economic fragmentation, which could provide both an up and down for India. And also any kind of trade frictions could also have bearing on in this prospects.

In terms of what India could do to address the young population. Clearly, we have 15 million people being added to the labor force every year. If you want to really benefit, if India really wants to benefit from this population adding to the labor force, it has to invest big time in both education and health. Because it's not just about population coming and you need the right kind of skills, you're going to face competition from AI and so on. So this labor force needs to be really equipped to deal with that challenge. I think investment in education and health, I would prioritize that much more so than other kind of spending for addressing this issue.

MS. VU: I'm seeing a couple more hands on Webex. Let's continue there. Soo Kim, Dong-a Ilbo, please.

QUESTIONER: Hi, thank you for taking my question. I'm Soo from The Dong-a Ilbo, Korean newspaper. You already mentioned about yen depreciation, but I'm also curious whether the Korean won could depreciate further against the US dollar. Even though warnings from financial chiefs of Korea, Japan and the US yesterday. If so, what's your advice for the Bank of Korea to preserve financial and economic stability?

MR. SRINIVASAN: Very good. Thank you, Soo. As I mentioned both in my remarks and in the response to previous questions, many currencies in Asia have moved, and they largely reflect interest rate differentials, right? And I told you why. There's a relative -- in terms of relative term, interest rates move much less in Asia compared to advanced economies, notably the US. So in that context, you do see interesting differentials. And also, every time markets adapt to what new information comes in, there's an impact on what happens to the exchange rate. Be the yen or be the won. Now the question, of course, is what should a country like Korea do? And as I mentioned in the past, in the case of Korea, I would say the exchange rate volatility does not pose significant economic challenges given limited currency mismatches and manageable pass through to inflation.

So compared to the past, you don't have the kind of balance sheet mismatches. So which would kind of, if the exchange moves too much, you'd be worried about that. And similarly, password inflation is also that much more muted. So in that sense, I would say that monetary policy, for the focus of monetary policy in Korea should be on inflation, what's happening there. And it's still about target. So it should be firmly on the tightening mode until inflation comes back to target. So again, I said focus on what are the pressures, domestic pressures, and don't be overly focused on what other central banks are doing and notably the Fed. Thank you.

MS. VU: We'll take one more question on Webex and then we'll come back to the room. I see Zulfick Farzan, please go ahead.

QUESTIONER: Thank you, Mr. Krishna Srinivasan, for your presentation and also thank you for the opportunity for this question. My name is Zulfick Farzan representing News 1st from Sri Lanka. My question is, it's been two years since Sri Lanka suspended servicing its external debt. And what is the IMF's projection for Sri Lanka on its path to recovery, given the fact that the that agreements in principle with bilateral creditors are yet to be realized into actual agreements and the agreements with the private creditors are yet to be achieved as negotiations have hit a roadblock? Thank you.

MR. SRINIVASAN: Thank you. Thank you, Zulfick, again, very good question. Let me give you some numbers just to tell you how the program is bearing fruit. I mean, when Sri Lanka embarked on this adjustment program, it was clearly, it had its back to the wall. Things were really not in very good shape. But you do see signs of early signs of recovery. I would call them green shoots. Real GDP expanded by 3 percent year on year in the second half of 2023. March inflation was 0.9 percent versus 70 percent peak in September 2022. Reserves increased by 2.5 billion in 2023 and the primary balance reaches surplus of 0.6 percent of GDP in 2023. Why am I giving you these numbers? The reason I'm giving you these numbers is to show that the program on which Sri Lanka embarked upon was ambitious, much needed, but now it's delivering results. I don't want to jinx it because the road ahead is going to be harder, but there is progress being made and both in terms of growth. You talked about recovery and in terms of inflation.

Now, you talked about, again, let me just note that, as I said, that there's still much more work to be done, both in terms of the fiscal policy, in terms of building reserves, in terms of becoming resilient. You talked about debt restructuring negotiations. I think they're progressing well. In terms of, with the official creditors, there's been good progress. You know, it's been quite encouraging the news there with private creditors. The discussions are ongoing. You know this for a fact, that we don't get involved in these negotiations at all. We just watch to see what's happening. We provide, you know, input to the partners who are in the negotiation, both on the macro framework and what's falling ahead. So my sense is that there are some setbacks on the private sector restructuring, but again, the both parties are talking. So I'm hopeful that there will be some conclusions down the road. But again, the program is delivering on what's expected to do. Growth is picking up, inflation is coming down, reserves are going up, but the road ahead is still difficult. So you have to keep pursuing those reforms both on the fiscal side and in terms of the structural reform side, including on governance and reducing corruption. Those are areas which are very, very important.

MS. VU: Okay. We'll come back to the room. The gentleman on the first row here.

QUESTIONER: Good morning. I am Janardan Baral, I am from Nepal. I work for online cover. Some low-income countries allocate more budget to debt repayment than to capital expenditure due to significant domestic and external debt they have. They tend to allocate a minimal budget for capital spending, which has also been decreasing in recent years. What is your comment on this scenario? How can these countries improve allocative efficiency? Thank you.

MR. SRINIVASAN: Thank you, Janardan. A very good question. This is an issue which we have been concerned about for some time, and this was highlighted even in our regional economic outlook from two years ago. And what we have seen, as I mentioned in my response to one of the questions, we see new debt being issued at high interest rates. And what that means is that a growing share of what you collect in revenues are being used for interest payments, and this risk crowding out critical investments and priority sectors for economic growth. So what does it mean? It means that countries have to embark on fiscal consolidation, and you can do that in terms, in a growth-friendly way. And this is an advice we're providing to countries both in the context of the Fund supported programs and in the context of our surveillance, because it's imperative to reduce both deficit and debt. And you do that in many of these countries through an emphasis on revenues, not necessarily on -- you talked about expenditures.

We have been quite cognizant of the fact that it's often easy for countries to meet their fiscal targets by slashing expenditures. But that really undermines growth, it undermines the welfare of people. So what we have been emphasizing in many of the countries is to focus on mobilizing revenues, tax revenues, either through reducing exemptions, looking at the efficiency of the tax system. So these are the areas where you need to -- where countries, including Nepal, you said, right, need to do work. And once you do that, you will slowly build the space you need to spend on development, on critical investment. But if you don't raise revenues, you can't do much. So it's important one, to consolidate the fiscal, but do it in a way which is growth friendly by placing more emphasis on revenue mobilization.

MS. VU: The gentleman in white shirt over there on the third row, I can see your hand raised.

QUESTIONER: Okay. My name is Thanh Nguyen from the Vietnam television, as one question relating to Vietnam, I'd like to ask you what is your assessment in Vietnam growth potential in this year 2024 and in the midterm? Thank you.

MR. SRINIVASAN: Thank you for the question, Thanh. We project the Vietnamese economy will grow close to 6 percent in 2024 as it rebounds from a challenging 2023. In 2023, it was pretty difficult, but in 2024 we see a pickup in growth to 6 percent, which will be both driven by relatively strong external demand and supportive policy stance. Now, in the case of Vietnam, I would say that there's an issue about policy mix, whether you could get more support from the fiscal and rely less on monetary. So there is an issue of policy mix which we're talking, which we've been engaging the authorities with. So I would say that policy support should be more favorable and that should, and along with external demand, help raise growth to 6 percent.

Over the medium term, we expect growth at about 6.5 percent in Vietnam, and there are opportunities from digitalization, from green transition. But we also have an issue with, you know, where the business environment is not fully supportive. So I think for countries like Vietnam, where there is a lot of potential and you do see a lot of FDI coming in, efforts being made to improve the business environment, improving infrastructure, all that will take you a long way towards securing the 6.5 percent growth over the medium term.

MS. VU: We’ll move to this side. The gentleman on the first row here.

QUESTIONER: This is Syful Islam from Bangladesh. We know Bangladesh is on an IMF loan program now, and during the last one and a half years, Bangladesh cut down the imports by $3 billion each month and also got a modest rise on remittance. However, the reserve is yet to build up. What are the possible reasons and what is your policy suggestion? Thank you.

MR. SRINIVASAN: Thank you, Syful. Like many other countries in the region, Bangladesh was also hit by a confluence of shocks, or I would say multiplicity of shocks. You know, of course, following on the pandemic, the war in Ukraine, all that disrupted the recovery. I mean, the war in Ukraine, tensions disrupted the recovery from the COVID-19 pandemic. And rising global commodity prices, supply chain disruptions and global uncertainties have threatened macroeconomic stability. So when you think in terms of the program, this is a program owned by the government, supported by the IMF. They have placed emphasis on issues like monetary tightening because inflation is rising high. So they have embarked on macroeconomic adjustment, which is aimed at stabilizing the economy.

Now, you're right about the fact that the exchange rate, the reserve position, has not improved as much. And that partly relates to the fact, of course, you had the elections, which kind of put people on. When you have elections, there's always some uncertainty about prospects. So that affected part of the financial account. But also, I think it's important for Bangladesh to transition to a more flexible exchange rate regime. That will be important to build external resilience and build buffers and build reserves. So I think that is the area where engagement and dialogue continues in terms of allowing the exchange rate to be more flexible so that reserves can be built up, so that, in a sense, will be a key priority for the country going forward.

MS. VU: I think we will have time for one more question. I promised that I would come back to you. So, yeah, you get the last chance.

QUESTIONER: Thank you for the time. I'm Sharad Ojha from Nepal. What will be impacts on the -- what will be impact of ongoing Israel and Gaza war? As you see like Nepal, because due to the Red Sea crisis and other things, the cost of goods may be edged up. So to avoid the adversity on people and especially on vunerable, how does the government have to formulate the policy? One thing and another, in 2024, in several countries, elections is happening. The political parties are announcing different things and making huge commitments. And for fulfilling such commitments, they need huge resources. As you are mentioning several times, debt sustainability and government have to make plan about reducing the debt. The way the politicians are announcing different things, they need more resources. You're talking about debt sustainability and the politician need more resources. These types of dilemma, how they will going to resolve and how they can make good policies. And in Nepal also, we have huge debt in last five, seven years, the debt had been doubles. You rightly know that. How the country like Nepal have to make the policy to avoid adversities in coming days? Thank you so much.

MR. SRINIVASAN: So you had many questions within one question. I will not answer the question on what the politicians say. That's not our job. What I can tell you is on the issue of debt sustainability. It's an issue across the region in terms of not debt sustainably, but rising debt level, as I mentioned. And that's true in the case of Nepal also. I think the emphasis should be on revenue mobilization and not so much on just expenditure cuts, because, as I said, it's an easy way to get out of a problem fiscal thing by cutting capital spending, which doesn't really help with growth. So I think if you want to have strong growth, durable growth, you have to embark on growth friendly fiscal consolidation, placing more emphasis on revenue mobilization, which is what we're pushing for.

Your first question was, how do you see the impact of the war? So what we've seen around the world is back to back shocks. You had the pandemic, then you had the war in Ukraine, then you had the problems of the Red Sea. So there are many issues here which could affect commodity prices, oil prices. So with Nepal being an oil importer, let me talk about the fact that one channel through which Nepal could be affected adversely is if oil prices start rising very sharply. Just to give an example, there were some numbers which I could share with you. The work done by the Research Department at the IMF, suggests that if oil prices go up by 10 percent, this would weigh down global output by 0.15 percent in the following year. So a 10 percent increase in oil prices leads to a 0.15 percent fall in global output in the following year and also increase global inflation by about 0.4 percentage points. So that's at a global level.

But the point here is that any kind of increase in oil prices will have a bigger impact on oil importing countries like Nepal. So that is, in my opinion, a very clear channel through which Nepal could get affected. Also, what you've seen is disruptions in the Red Sea have led to trade from Asia, going around the Cape of Good Hope. That increases shipping and costs. That's also another factor which could affect countries in the region, including Nepal. So those are the channels through which I see this tension mounting, tensions affecting your country.

MS. VU: Thank you very much, Krishna. We have reached the end of our press briefing today. I would like to remind you that the full report of the Regional Economic Outlook for Asia and Pacific will be launched on April 30th in Singapore, and we will share more details in the coming days and we hope to see you all there as well. Thank you very much for your participation today. Have a wonderful day.

MR. SRINIVASAN: And just to conclude, if you have any questions, do send it to Pinky and we will address it.

MS. VU: Yeah. Or you can attend the press briefing on the 30th in Singapore. Thank you.

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