Countries should work to promote open trade system: IMF's Lagarde

Cautioning that escalation of trade conflicts and financial market volatility highlight downside risks beyond the next several quarters, IMF Managing Director Christine Lagarde today said countries should work to promote an open and rules based multilateral trade system.

"The momentum behind the cyclical global expansion remains strong. But escalating trade conflicts and financial market volatility highlight downside risks beyond the next several quarters," Lagarde said at the start of the annual spring meeting of the International Monetary Fund and the World Bank.

To sustain the upswing, policy makers need to enhance financial sector resilience, start rebuilding policy space, and implement structural reforms including on corruption and governance, she said.

"Countries should work to promote an open and rules-based multilateral trade system that works for all, and to durably reduce excess global imbalances. A cooperative approach to regulation will reap the benefits of financial technology, while addressing risks to stability and integrity," Lagarde said.

At the start of the spring meetings, Lagarde said that IMF is embarking on major policy reviews, including on surveillance, the Financial Sector Assessment Programme, programme conditionality, concessional lending tools, debt sustainability analysis, and capacity development.

The IMF has also launched a comprehensive work program on the opportunities and challenges from digitalisation.

Noting that economic activity continues to strengthen, she said that rising financial market risks and subdued medium-term prospects highlight the need for action.

"Momentum continues to gather behind a broad-based upswing, aided by a rebound in global trade and investment. Escalating trade conflicts could threaten that momentum, she warned.

Procyclical fiscal policies in some countries with excess current account deficitscombined with persistent excess current account surpluses in otherswill likely widen global imbalances, posing a medium-term risk, she said.

Also, population aging and sluggish reforms are dampening potential growth in advanced economies, while structural challenges are delaying income convergence of many emerging and developing economies toward advanced economies. Growth also needs to become more inclusive as income disparities have widened, the IMF head said.

Lagarde said that the road ahead could be bumpy, as illustrated by recent equity market volatility. Financial market vulnerabilities, including from stretched valuations and rising leverage could be exposed by a sudden adjustment in market expectations about the future path of monetary normalisation, she said.

Countries with limited room to manoeuvre including due to high debtcould be hit hardest if market conditions turn. Many low-income countries (LICs) and fragile states striving to meet development goals are also affected by conflicts and natural disasters, she noted.

"To sustain the cyclical upswing, policymakers should enhance financial sector resilience, rebuild policy space, and undertake necessary structural reforms," she said.

Lagarde said countries should collaborate on trade within an open and rules-based multilateral system, tackle risks from excess global imbalances, and address shared challenges.

"To protect the gains from integration and foster global prosperity and stability, the Fund will continue to highlight the benefits of an open and rules-based multilateral trade system that works for all, and of resolving tensions in that system, while encouraging further dismantling of trade and non-trade barriers, including in services," she noted.