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IMF says economic policymakers need to juggle continued support, risks By Reuters

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© Reuters. FILE PHOTO – The International Monetary Fund logo can be seen in the Headquarters at the conclusion of the IMF/World Bank Annual Meetings, Washington, U.S.A, September 9, 2016. REUTERS/Yuri Gripas

By Pete Schroeder

WASHINGTON, (Reuters) – Policymakers around the world are in a difficult phase of pandemic recovery. They should be careful to continue economic support and not promote instability in the financial markets.

Nearly twenty months after the pandemic began, several countries, including the United States, are looking at ways to draw back on extraordinary economic stimuli. This process, however, has risks that it could disrupt global markets.

IMF has issued its most recent Global Financial Stability Report. It urged policymakers and decision-makers to take decisive action to target economic support that is tailored to each country’s needs.

It is crucial that policy changes are communicated clearly and quickly to avoid inflation or increase volatility.

The report said that policymakers face a difficult choice: maintain near-term support of the global economy, while also avoiding unintended consequences and medium term financial stability risk,”

The report highlighted early warning signs of instability. These include increased risk taking and financial fragility among nonbanks such as life insurance companies.

Recent weeks have witnessed markets shaken by concerns about Evergrande’s Chinese property empire and by the escalating energy prices that have caused some to collapse.

According to the IMF, policymakers should “urgently” deal with market instability and fragilities.

The report said that if these weaknesses are not addressed, they could become structural legacy issues, which would put medium-term growth at danger and test the resilience of global financial systems.

IMF stated that investors and policymakers face many risks due to the explosive growth of crypto currencies. According to the IMF, “stablecoins”, digital currencies that are pegged to conventional currencies, typically have low disclosure levels and can be vulnerable to rans if their value is questioned.

According to the report, emerging markets face “destabilizing flows of capital” due to cryptocurrencies being used as an escape route from capital controls and exchange restrictions.

The report said that a sound regulatory framework must exist for crypto assets and the decentralized financial markets in general.

The IMF stated that policymakers must prioritize stronger sustainable finance regulations, including disclosures and data requirements. This will encourage private sector investment in clean energy.

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