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In his interview with Armenia News – NEWS.am, the Deputy Managing Director of the International Monetary Fund, Mr Tao Zhang, talks on his visit to Armenia in June, as part of the IMF – World Bank Constituency Meeting. Mr Tao shares his views on the economic reforms of Armenia, as well as on global economic trends, such as possible “low for long” environment for oil and interest rates, rebalancing in China, and fiscal stimulus in the US (at the time of the interview it had not yet been announced).​

We know that you will be visiting Armenia soon. What are the objectives of the visit and what are the opportunities and challenges facing the Armenian economy as part of the global economy?

I will be visiting Armenia in June to attend an International Monetary Fund-World Bank Constituency Meeting. It is my first trip to the region in my current role, and I am looking forward to this visit. This is a meeting during which I will be joined by the Executive Director representing a group of countries on the IMF Executive Board so that we can hold discussions with our counterparts in the region, including high-level government official, our counterparts in the region, leading experts and other groups of the society. The meeting will be led by Belgium and the Netherlands. It will also celebrate the 25th anniversary of IMF membership for seven constituency members, including Armenia.

I was pleased to see that staff had a successful conclusion to their recent mission. Specifically, they reported that the program is on-track and that the final review under the EFF will likely soon be presented to the IMF Executive Board for decision. Looking back, I take note of the significant accomplishments that Armenia has made under the IMF supported program. As just one example, I would highlight the passage last year of a landmark an important new tax law. A tax law that, if fully implemented, will provide lasting benefits to the Armenian economy by helping to safeguard fiscal sustainability in a fairer and more growth-friendly manner.

Armenia has faced a difficult external environment since late 2014 with large declines in remittances and in the price of copper. Vulnerabilities to external shocks and the resulting weaker economic activity warrant increased focus on reforms to promote sustainable inclusive growth through increasing competition, attracting FDI, diversifying exports, and improving infrastructure. We welcome the government’s efforts in these areas, which should help Armenia become a more resilient and dynamic emerging market economy in the coming decade.

Does the environment of low interest rates, if it persists, demand any changes in advisory and lending policy of the IMF?

If interest rates stayed low, it would presumably reflect weaker-than-expected prospects for economic growth. In that case, we would likely advise countries to use other policy tools that could reduce the role of fiscal consolidation, particularly among countries that have space to do so, and to implement structural reform aimed at removing impediments to growth.

The IMF’s lending policies would not change, but if global interest rates remain low then interest rates on IMF loans would also remain correspondingly low.

Do you think that banks and non-bank businesses alike may want to reach out to emerging markets for higher profit margins?

It is difficult to generalize but it is possible that some advanced economy banks could seek profits by taking higher risks, including increasing exposure to emerging market economies. Japanese banks, for example, have been expanding in Asia over the past few years. But there has been less evidence of this, to date, in Europe, where banks seem to be more focused on shrinking balance sheets to core businesses.

Under a (hypothetical) scenario of low growth and low interest rates for the foreseeable future, larger banks may have strong incentives for international expansion into countries where asset returns remain high, including potentially, to emerging markets. In order to finance such an expansion, banks may increase, within regulatory limits, their share of wholesale funding. Such a development could affect prospects for financial stability in their home and host countries, depending on the modality of expansion. For this reason, we underscore the need for prudential authorities to continue to carefully monitor such developments with a view to manage and contain any systemic risk implications.

If China’s new model of economic growth implies less commodity imports, does that mean less demand for raw materials and hence, less opportunities for commodity exporters across the globe?

The rebalancing effort in China is key for the transition to more sustainable levels of growth. This is a transition that is good for China and is also good for the world.

While this transition would benefit the global economy, it would likely have an uneven impact. For example, the growth rate of China’s demand for commodities is likely to slow, affecting commodity prices, especially metals. Intermediate and capital goods exporters may also face slower growth in demand, while consumer goods exporters would likely benefit from faster demand growth.

As labor costs in China rise and China moves up the supply chain, countries with lower labor costs could benefit from China’s exit from labor intensive goods.

What are the biggest challenges facing inclusive growth and more broad-based to finance?

As you might know, the IMF has been highlighting the importance of inclusive growth for a number of years. Managing Director Christine Lagarde underscored often last year that growth has been too low, for too long and benefited too few.  With the global economic recovery gaining momentum, the right policy mix will be very important to achieve strong, sustainable, and inclusive growth.

This will require countries to pursue growth-supporting policies or what we call a three-pronged approach, with fiscal, monetary, and structural policy mixes that will vary by country. Generally, countries need to support productivity and innovation, and some may accomplish that by upgrading tax systems to reduce distortions and to incentivize corporate capital spending, and by promoting trade. Inclusiveness could also be improved through measures that support less-skilled workers, young people, and women by updating labor policies, increasing spending on health and education and by improving tax policy.

Do you expect that Russia and other oil exporters will keep their fiscal and monetary policies anchored to the oil prices, as they seem to enter a period of relative stability?

You are right. Commodity prices have rallied to some degree. Oil prices have increased following the announcement of the production agreement by the Organization of the Petroleum Exporting Countries (OPEC). Despite some weakening in recent days, they stand at around US$52 per barrel, some 18 percent stronger than a year ago. China’s continued strength in the construction sector and the anticipated possibility of a fiscal stimulus in the United States have increased metal demand prospects and prices. Easing of excess supply conditions has helped the recovery in food prices.

Our policy advice to oil and commodity exporters remains that it is important to adjust policies to the “low for long” prices. Revenues from commodities often account for an important fraction of government revenues in emerging markets and developing countries. Despite the rally in commodity prices, prices are almost half of their 2011 peak. Adjusting to a low commodity price environment remains a key challenge.

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