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The European Commission has today launched plans for the biggest reform of EU VAT rules in a quarter of a century. The reboot would improve and modernise the system for governments and businesses alike. Overall, over€150 billion of VAT is lost every year, meaning that Member States miss out on revenue that could be used for schools, roads and healthcare. Of this, around €50 billion – or €100 per EU citizen each year – is estimated to be due to cross-border VAT fraud. This money can be used to finance criminal organisations, including terrorism. It is estimated that this sum would be reduced by 80% thanks to the proposed reform.

The proposed VAT reform would also make the system more robust and simpler to use for companies. The Commission wants a VAT system that helps European companies to reap all the benefits of the Single Market and to compete in global markets. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. Simplifying and modernising VAT should reduce these costs by an estimated €1 billion.

A definitive VAT system that works for the Single Market has been a long-standing commitment of the European Commission. The 2016VAT Action Planexplained in detail the need to come to a single European VAT area that is simpler and fraud-proof.

Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue said: “Today, we are proposing to renew the current VAT system, which was set up a quarter century ago on a temporary basis. We need a definitive system that allows us to deal more efficiently with cross‑border VAT fraud. At the European Union level, this fraud causes an annual tax revenue loss of around €50 billion.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Twenty-five years after the creation of the Single Market, companies and consumers still face 28 different VAT regimes when operating cross-border. Criminals and possibly terrorists have been exploiting these loopholes for too long, organising a €50bn fraud per year. This anachronistic system based on national borders must end! Member States should consider cross-border VAT transactions as domestic operations in our internal market by 2022. Today’s proposal is expected to reduce cross-border VAT fraud by around 80%. At the same time, it will make life easier for EU companies trading across borders, slashing red tape and simplifying VAT-related procedures. In short: good news for business, consumers and national budgets, bad news for fraudsters.”

With today’s package, the Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.

We will seek agreement on four fundamental principles, or ‘cornerstones’ of a new definitive single EU VAT area:
Tackling fraud: VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.

One Stop Shop: It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a ‘One Stop Shop’. Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services.

Greater consistency: A move to the principle of ‘destination’ whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. This has been a long-standing commitment of the European Commission, supported by Member States. It is already in place for sales of e-services.

Less red tape: Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called ‘recapitulative statement’).

Today’s proposal also introduces the notion of a Certified Taxable Person – a category of trusted business that will benefit from much simpler and time-saving rules. Four ‘quick fixes’ have also been proposed, to come into force by 2019. These short-term measures were explicitly requested by Member States to improve the day-to-day functioning of the current VAT system until the definitive regime has been fully agreed and implemented.

Next steps
This legislative proposal will be sent to the Member States in the Council for agreement and to the European Parliament for consultation. The Commission will follow this initiative in 2018 with a detailed legal proposal to amend the so-called ‘VAT Directive’ at technical level so that the definitive VAT regime proposed today can be smoothly implemented.

Background
The common Value Added Tax (VAT) system plays an important role in Europe’s Single Market. The first VAT directive dates from 1967. It was originally put in place to do away with turnover taxes which distorted competition and hindered the free movement of goods and to remove fiscal checks and formalities at internal borders. VAT is a major and growing source of revenue in the EU, raising over €1 trillion in 2015, corresponding to 7% of EU GDP. One of the EU’s own resources is also based on VAT. As a consumption tax, it is one of the most growth-friendly forms of taxation.

Despite many reforms, the VAT system has been unable to keep pace with the challenges of today’s global, digital and mobile economy. The current VAT system dates from 1993 and was intended to be a transitional system. It is fragmented and overly complex for the growing number of businesses operating cross-border and leaves the door open to fraud: domestic and cross-border transactions are treated differently and goods or services can be bought free of VAT within the Single Market.

The Commission has consistently pressed for the reform of the VAT system. For companies trading across the EU, borders are still a fact of daily life when it comes to VAT. Current VAT rules are one of the last areas of EU law not in line with the principles underpinning the Single Market.

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases are made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

The Executive Board of the International Monetary Fund (IMF) has concluded the Article IV consultation[1] with China.

China continues to transition to a more sustainable growth path and reforms have advanced across a wide domain. Growth slowed to 6.7 percent in 2016 and is projected to remain robust at 6.7 percent this year owing to the momentum from last year’s policy support, strengthening external demand, and progress in domestic reforms. Inflation rose to 2 percent in 2016 and is expected to remain stable at 2 percent in 2017. Important supervisory and regulatory action is being taken against financial sector risks, and corporate debt is growing more slowly, reflecting restructuring initiatives and overcapacity reduction.

Fiscal policy remained expansionary and credit growth remained strong in 2016. Growth momentum will likely decline over the course of the year reflecting recent regulatory measures which have tightened financial conditions and contributed to a declining credit impulse.

The current account surplus fell to 1.7 percent of GDP in 2016, driven by a sharp recovery in goods imports and continued strength in tourism outflows. It is projected to further narrow to 1.4 percent of GDP this year, due primarily to robust domestic demand and a deterioration in terms of trade. Capital outflows have moderated amid tighter enforcement of capital flow management measures and more stable exchange rate expectations. After depreciating 5 percent in real effective terms in 2016, the renminbi has depreciated some 2¾ percent since then and remains broadly in line with fundamentals.

Executive Board Assessment[2]
Executive Directors acknowledged that China’s continued strong growth has provided critical support to global demand. They commended the authorities’ ongoing progress in rebalancing the Chinese economy toward services and consumption. They noted that economic activity had recently firmed and saw this as an opportunity for the authorities to accelerate needed reforms and focus more on the quality and sustainability of growth.

Directors supported the importance of reducing national savings to help prevent domestic and external imbalances. In this regard, Directors emphasized the need for greater social spending and making the tax system more progressive.

Directors welcomed the improvements in the performance of state-owned enterprises and urged further reforms, including hardening budget constraints, accelerating restructuring of under performing debt, and allowing exit of non-viable firms. Directors also highlighted the importance of a broader improvement in the investment climate, including reducing barriers to entry, ensuring a level playing field, and reducing trade barriers. Directors welcomed the authorities’ efforts to reduce overcapacity and urged them to broaden such efforts with greater reliance on market forces.

Directors commended the authorities’ increased focus on reducing financial stability risks and urged them to continue to strengthen regulatory and supervisory efforts. In this connection, they looked forward to the findings and recommendations of the ongoing Financial Sector Assessment Program.

Directors supported a gradual tightening of monetary policy if core inflation continues to pick up.

Directors concurred that the immediate priority for fiscal policy should be to adjust the composition of the budget to support faster rebalancing and ease the costs of transition from an investment and credit led model. Directors agreed that having some fiscal space allows the pace of consolidation to balance concerns about growth and sustainability. They also underscored the importance of monitoring debt, noting that further efforts to reform central-local fiscal relations can help reduce risks arising from off budget spending.

Directors took note of the staff assessment that the renminbi remains broadly in line with fundamentals, although the external position in 2016 was moderately stronger than implied by fundamentals. They stressed the importance of continued progress toward greater exchange rate flexibility, and welcomed the authorities’ commitment to deepen reforms and rely more on market forces to determine the exchange rate. Directors noted that recent steps to tighten enforcement of capital flow measures were broadly consistent with the Fund’s Institutional View, but emphasized the need to ensure consistent and transparent implementation. Directors stressed the importance of carefully sequenced reforms to support the ongoing capital account liberalization.

Directors agreed that further improvements in policy frameworks are needed to maintain economic growth and stability in the medium term. They supported improving the fiscal framework to increase local government autonomy, reduce the scope for off budget spending, and centralize some expenditure responsibilities. They also called for completing the transition to a modern price based monetary policy framework. To inform better policymaking and investment decisions, Directors encouraged the authorities to continue to improve both the coverage and quality of officially provided statistics.

The European Commission has announced a support package of €143 million today for the early recovery and reconstruction needs in Borno State in Nigeria which is suffering from a worsening humanitarian crisis.

Nigeria is one of four countries across the globe experiencing or at risk of famine this year, along with Somalia, South Sudan and Yemen. The package combines short term EU humanitarian aid with long term development support to help those in the affected area, which has been devastated by the terror campaign of Boko Haram. This reflects the Commission’s strategic approach to resilience, which was presented a week ago.

Commissioner for International Cooperation and Development, Neven Mimica, made the following announcement today: “Our support package of €143 million will assist approximately 1.3 million internally displaced people and affected communities in and around the Borno State in Nigeria. Our assistance will not only target the immediate needs of the people but, it will also help to restore basic services, stimulate employment and create livelihood opportunities, particularly for women and young people”.

Commissioner for Humanitarian Aid and Crisis Management, Christos Stylianides added: “The European Union is committed to get lifesaving aid to those in need in Nigeria. Emergency aid can help them but to do so aid organisations need safe and full access to do their job. We also need to think about the long term affects and how to help communities recover. I have visited the country several times and seen the suffering caused by the victims of terrorism but also the strength and determination of the local people to rebuild their lives. It is this desire to rebuild a better future that the EU will support.”

This brings total EU support for the crisis in Nigeria’s Borno state to €224.5 million for 2017, following earlier announcements of €81.5 million in humanitarian aid.

In line with its strategic approach to resilience, the European Commission is providing a comprehensive package of humanitarian and development measures for the crisis in Nigeria. EU support will provide immediate humanitarian assistance for the most vulnerable populations affected by the ongoing emergency situation, as well as for early recovery and restoration of basic services, such as health, nutrition, education, water access, sanitation and hygiene, solar power, in areas of return or resettlement.

Furthermore, it will provide social protection, stimulate employment and livelihood opportunities, with a special focus on women, young people and vulnerable households. By strengthening public administration and financial management systems in the Borno State, it will help improve sustainable public service delivery, crisis management and coordination of related donor activities.

Background
The €143 million announced today consists of development aid of €123 million from the Nigeria 11th European Development Fund National Indicative Programme and €20 million from the EU Emergency Trust Fund for Africa. It comes in addition to the previously announced €81.5 million in humanitarian funding.

It is further in addition to €177 million in development assistance from the EU Emergency Trust Fund for Africa, which was recently allocated to support 17 projects in and around the Lake Chad area.

Borno crisis in Nigeria
Nigeria faces one of the worst humanitarian crises in its history over five million people in need of urgent food assistance. A large proportion of the Borno population has little or no access to clean water, sanitation, shelter, education, primary health care (60% of health infrastructure is either destroyed or damaged), and is food insecure.

There are an estimated 1.7 million internally displaced persons, the majority, living in and around the urban area of Maiduguri, the State Capital of Borno and almost 200,000 refugees from Nigeria in the neighbouring countries around the Lake Chad.

The Executive Board of the International Monetary Fund (IMF) discussed a staff paper titled “ Social Safeguards and Program Design in PRGT and PSI-supported Programs . ” The paper considers how poor and vulnerable groups can be protected in Fund-supported programs in low-income countries using measures to safeguard and improve public spending on these groups.

Poverty reduction is a core objective of IMF programs in low-income countries. Hence, the 2009 reform of the Poverty Reduction and Growth Trust (PRGT) called for PRGT facilities to support policies that safeguard and, where possible, increase social and other priority spending. The Fund recommended including a program target on such spending in PRGT-supported programs wherever possible. The Fund also recommended the use of measures to mitigate any adverse effects of program measures on the most vulnerable. The staff paper looks at experience with spending targets and countervailing measures to improve social safety nets, which are jointly described as “social safeguards.”

The paper finds that targets for social and other priority spending were included in virtually all Fund-supported programs in low-income countries, and met in more than two-thirds of cases; health and education spending have typically been protected. Moreover, real per capita public spending was forecast to rise by 15 percent on average and 43 percent featured fiscal expansion at the time of program approval. In other areas, specific reform measures to strengthen social safety nets have been used only sparingly.

The paper recommends tightening the specification of program targets on social and other priority spending to improve the effectiveness of such spending. The focus should be on targeting spending where the benefit and impact on the poor is greatest. In addition, the paper recommends increased efforts to strengthen social safety nets, which are generally underdeveloped in low-income countries.

Collaboration with the World Bank and other development partners to draw on their expertise is needed to strengthen spending targets and social safety net measures, and should take place at an early stage, ideally during surveillance discussions. These early discussions would include a stocktaking of existing social policy instruments, an assessment of how to implement measures in a fiscally sustainable way, and an analysis on the distributional impact of macroeconomic policies.

The current staff paper will be followed by a guidance note for staff on how to best address social safeguards concerns in both surveillance and program discussions with low-income countries.

Executive Board Assessment [1]

Executive Directors welcomed the opportunity to review the experience with the use of social safeguards measures in PRGT and PSI‑supported programs, while recognizing that a more comprehensive assessment of the effectiveness of social safeguards would require further analysis, including from outside the Fund. They generally welcomed the findings in the staff paper that Fund‑supported programs with low‑income countries had helped to safeguard social spending in most programs, as reflected in indicative targets generally being met. At the same time, Directors saw scope to strengthen the effectiveness of these safeguards in protecting the poor and most vulnerable. In this regard, they generally supported staff’s proposals to improve the design of social safeguards measures in PRGT and PSI‑supported programs. Directors looked forward to the upcoming IEO evaluation on the “IMF and Social Protection,” and encouraged the staff to draw on Board‑endorsed policies based on its findings when preparing the staff guidance note that would help clarify how to treat social safeguards measures in Fund‑supported programs and surveillance. They indicated that the lessons learned from these experiences, as well as broad consultations with external stakeholders, could usefully feed into the holistic review of low‑income facilities scheduled for early‑2018. Directors also stressed the importance of pro‑active outreach and clear communications on the work of the Fund in this area and on collaboration with other development partners and stakeholders.

Directors welcomed the use of program floors for social and other priority spending as an important safeguard for outlays favoring vulnerable groups. They called for careful definition of the types of expenditures included in program floors to prioritize safeguarding resources for vulnerable groups, especially in cases where fiscal space is limited and the short‑term needs of the poor are significant. At the same time, Directors indicated that country authorities should retain flexibility in setting spending targets, to better reflect national priorities. They encouraged staff to support the adoption of spending targets by advising on questions of coverage, on how to strengthen the quality of spending, and on strategies for creating the fiscal space necessary to support such spending.

Directors welcomed the adoption in Fund‑supported programs of concrete measures to strengthen social safety nets, noting that such reforms may require time to design and implement. In general, staff should consider national capacity to operate social safety nets, and should seek to strengthen such capacity, where appropriate, with technical assistance and training provided by the Fund and other development partners.

Directors underscored the merits of early and consistent engagement with country authorities, development partners, and other external stakeholders, including civil society organizations, on social safeguards issues. Where social safeguards have the potential to affect domestic or balance‑of‑payments stability, staff should provide analysis and advice as part of Fund surveillance, with input from development partners where possible. This would provide a strong foundation where there is subsequent engagement under a Fund‑supported program, including by taking stock of existing social safety nets; identifying safeguards gaps; exploring technical assistance and training needs; identifying and addressing data gaps; and developing strategies for increasing fiscal space, where necessary.

Directors called for closer and more effective collaboration with the World Bank and other development partners, drawing on the specialist expertise of these agencies and catalyzing their support. Collaboration can also help in identifying possible adverse distributional effects of policy measures and the need to mitigate these through social safeguards.

Directors supported the recommendation to strengthen the documentation of social safeguards measures in country documents for PRGT and PSI‑supported programs. They indicated that documentation should cover policy goals for social safeguards; the design of safeguards measures; the factors explaining realized outcomes regarding spending targets and social safety net reform measures; and the corrective policy measures taken, or to be taken, in response to missed program goals. In addition, collaboration with the World Bank, other development partners, and external stakeholders could also be reflected in documents. Where Fund‑supported programs include policy measures with a potentially adverse distributional impact, Directors called on staff to document the steps taken to protect vulnerable groups, with input from other development partners and external stakeholders, where possible.

(Detroit) – JPMorgan Chase & Co. today announced that it will expand the firm’s commitment to Detroit’s economic recovery, expecting to reach $150 million by 2019. The announcement comes as the firm exceeded its initial $100 million, five-year investment two years ahead of schedule. The firm has been able to accelerate its investment to support Detroit’s recovery due to strong collaboration between civic, business, and nonprofit leadership, as well as improving economic conditions in the city.

“Detroit’s resurgence is a model for what can be accomplished when leaders work together to create economic growth and opportunity,” said Jamie Dimon, Chairman and CEO, JPMorgan Chase. “This collaboration allowed us to speed up our investment and extend our commitment over the next two years. Going forward, I hope business, government and nonprofit leaders will see Detroit’s comeback as a shining example of how to put aside differences and work to find meaningful and innovative solutions to our most pressing economic problems.”

“JPMorgan Chase has been a true partner in our work to restore economic growth and opportunity in Detroit,” said Detroit Mayor Mike Duggan. “The firm’s investments have enabled thousands of Detroiters to receive training, created new opportunities for entrepreneurs and revitalized neighborhoods. There is more work to do, and I hope our continued partnership will build a thriving economy for all Detroiters.”

Since 2014, JPMorgan Chase has invested $107 million in loans and grants in Detroit’s economic recovery, including $50 million in community development financing, $25.8 million to revitalize neighborhoods, $15 million for workforce development, $9.5 million for small business expansion, and $6.9 million in additional transformative investments.

The firm’s extended commitment over the next two years will keep pace and build upon the city’s progress, continuing to make coordinated investments of about $30 million focused on creating livable, inclusive and sustainable neighborhoods, arming residents with the skills needed for high-quality, well-paying careers and providing small businesses with the capital they need to succeed. Approximately $13 million in additional resources will be reinvested from loans paid back into two community development investment funds that JPMorgan Chase helped create with Invest Detroit and Capital Impact Partners.

“Our commitment to Detroit has truly been a firmwide effort that goes well beyond our financial investment,” said Peter Scher, Head of Corporate Responsibility, JPMorgan Chase. “We’ve utilized our firm’s data, the experience and the expertise of over 100 colleagues from 10 countries who have put their skills to work helping the city tackle some of its biggest economic challenges. As Detroit recovers, I hope our work continues to make an impact and yields lessons that are instructive for others looking to invest in Detroit and create more economic opportunity in their communities.”

JPMorgan Chase is combining its philanthropy and business expertise to address some of Detroit’s biggest economic challenges. The firm is using the same attributes that drive business success – innovation, ingenuity, data and the ability to efficiently marshal human and financial capital –to help solve the city’s pressing economic challenges. More than half of JPMorgan Chase’s investment supports a market-based approach to creating sustainable loan programs for residential and commercial development, small business access to capital and home rehabilitation. Other elements of the investment continue to strengthen underlying organizations and create system-wide changes such as an improved citywide workforce development strategy.

Investment Highlights

Community Development—$50 Million
Investments have led to financing being provided for 21 projects, with an additional $147 million leveraged from other investors. To date, $274 million in projects are completed or underway with the help of JPMorgan Chase’s financing, creating or preserving more than 800 jobs, over 800 housing units and 176,000 square feet of commercial space. Details include:

Launching the Detroit Neighborhoods Fund and Chase Invest Detroit Fund through two Community Development Financial Institutions (CDFIs)—Capital Impact Partners and Invest Detroit. These funds have helped finance rehabilitation and new construction of mixed-use real estate development, affordable multi-family housing and high-quality residential, commercial and retail developments, as well as provide flexible capital for small and medium-sized businesses in Detroit’s neighborhoods, Midtown and downtown.
Projects include: Global Titanium Inc., Granada Apartments, Hope of Detroit Academy Charter School, Rainer Court Apartments, Sakthi Automotive facility, Shoppes at Woodward, The Plaza, The Scott at Brush Park, The Whitney, a West Village project, and Willy’s Overland Lofts.
Small Business Development—$9.5 Million
Investments are helping more than 1,800 small businesses receive technical assistance, $7.2 million in loan and grant capital to 100 small businesses and 700 jobs created or maintained. Details include:

Establishing the $6.5 million Entrepreneurs of Color Fund to provide Detroit minority-owned small businesses with access to financing and technical assistance.
Expanding the Detroit Kitchen Connect program to provide food entrepreneurs with shared-use kitchens in neighborhoods.
Investing $1.7 million in Eastern Market’s Shed 5 to help create a new space with a commercial-grade kitchen for food entrepreneurs.
Providing support for business accelerator and incubator TechTown Detroit to create jobs and build storefronts.
Partnering with Macomb Community College to launch a $2.7 million Innovation Fund to provide financing to start-up and next-stage companies.
Sponsoring Detroit Startup Week to connect thousands of entrepreneurs with programming, education and networking resources.
These small business investments are informed by data collected and analyzed by the JPMorgan Chase’s Institute, having shown that consumers are spending more in Detroit’s small businesses than in other U.S. cities.

Workforce Readiness—$15 Million
Investments are helping to develop a data-driven city workforce investment strategy and allowing nearly 15,000 Detroit adults and young people to participate in job skills training programs and receive career and technical education aligned with high-demand industries. Details include:

Initiating research to empower the Mayor’s Workforce Investment Board to better align workforce investments and programs to prepare more Detroiters for good jobs.
Partnering to develop the first ever Detroit Workforce System Leadership Development Academy to allow 22 Detroit workforce leaders to develop practical solutions for Detroit’s workforce challenges.
Supporting Focus: HOPE, Detroit Employment Solutions Corporation, Goodwill’s Flip the Script and Center for Working Families programs, Ecowork’s Reclaim Detroit and Greening of Detroit to help train adults and young people for jobs in a variety of industries, including healthcare, informational technology and agriculture.
Neighborhood Revitalization—$25.8 Million
Investments have led to 700 mixed-income housing units created or preserved, financing and counseling to homeowners and 380,000 property parcels surveyed. Details include:

Supporting Motor City Mapping and People’s Property Dashboard to digitize the city’s property information and return blighted properties to productive use.
Supporting community lender Liberty Bank to extend affordable rehabilitation loans to qualified buyers and existing homeowners.
Enabling Southwest Economic Solutions and U-SNAP-BAC to offer financial coaching and homeownership counseling.
Partnering to establish the Strategic Neighborhood Fund to provide capital to underserved neighborhoods with a $5 million commitment.
Seeding Develop Detroit, the first citywide nonprofit focused on providing housing to low- and moderate-income Detroiters through a $4 million, four-year commitment.
Economic Growth—$6.9 Million
Investments have boosted Detroit’s transportation capabilities and helped build the capacity of Detroit nonprofits. Investments include:

Providing $1.5 million, in addition to over $13.5 million in New Market Tax Credit allocations, to facilitate the construction of the M-1 streetcar connecting Midtown and Downtown.
Mitigating the temporary impact of the M-1 construction on local businesses and helping them remain healthy and vibrant during the construction period.
Launching the Detroit Service Corps which, since 2014, has sent 68 JPMorgan Chase employees from 10 countries to work with 16 Detroit nonprofits for three intensive weeks, helping them analyze organizational challenges, solve problems and improve their overall chance for success.
Lessons Learned
JPMorgan Chase’s investment has enabled the firm to test solutions, adapt programs and find models that can be applied to other cities. Specifically:

Detroit’s Motor City Mapping project has provided significant insights into how blight mapping can be applied in other cities to bring community partners together to fight blight.
JPMorgan Chase has already shared the mapping technology in three Ohio cities: Cleveland, Columbus and Cincinnati.
Detroit’s Entrepreneurs of Color Fund serves as a proof point for investing in minority entrepreneurs and it has informed similar programs in Dallas, Houston, Austin, San Antonio, New Orleans and Atlanta.
What’s Next
JPMorgan Chase’s investment will reach $150 million by 2019.

Future investments will focus on further revitalizing Detroit’s neighborhoods, strengthening the city’s workforce system and helping minority-owned small businesses grow.
Additional resources paid back to Invest Detroit and Capital Impact Partners’ community development loan programs, which were started with financing from JPMorgan Chase, will be reinvested.
For more information visit: www.jpmorganchase.com/detroit.

About JPMorgan Chase & Co.
JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $2.5 trillion and operations worldwide. The firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the worlds most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.

It appears Americans have run out of excuses for not paying their friends back in a timely manner, whether it’s for a $5 latte or $2,500 vacation. A new survey released today finds 36 percent of adults currently use a person-to-person payments service (P2P), with millennials leading the charge at nearly double that rate (62 percent). What’s more, 45 percent of non-users say they plan to start using the service within the next year, foreshadowing exponential growth in the coming months.

These findings are from the latest Bank of America Trends in Consumer Mobility Report, exploring emerging payments trends – specifically P2P technologies that allow consumers to send money to others via their mobile device – and forward-looking behaviors among adult consumers who own a smartphone and have an existing banking relationship at any financial institution. The release of the survey follows the bank’s recent introduction of aspects of the Zelle℠ experience into its mobile banking app.

“Technology is developing faster today than at any time in history, and our newest report demonstrates how consumers are embracing emerging technologies to make sense of their financial lives,” said Michelle Moore, head of digital banking at Bank of America. “We were among the first institutions to integrate the features of Zelle this year, and we look forward to developing new innovations that anticipate our customers’ ever-changing needs in the payments space.”

Timing is top of mind
In a world where mobile technology is ubiquitous, most users say they started using P2P due to convenience and time savings (68 percent). This motivation is closely followed by peer influence (48 percent), new offerings from banks (30 percent) and a desire to no longer use cash or checks (16 percent).

Users are also in agreement that time is of the essence when paying each other back. The majority (69 percent) of respondents say they pay others back within the same day, and one-third say in under an hour. Similarly, 53 percent expect others to pay them back within 24 hours, and 22 percent within the hour.

Minding payments p’s and q’s
When it comes to what people are paying each other back for, just about anything goes. Practicality tops the list with shared bills (45 percent), including utilities and rent, being the most popular reason to use P2P, which is closely followed by shared expenses for gifts (42 percent), travel (37 percent) and dining (35 percent).

And the dollar amount doesn’t seem to matter much either. Fifty-one percent believe requesting a payment from others for $5 or less is socially acceptable, and 36 percent claim no amount is “too low.” The same mentality applies to sending funds, as 44 percent say they would be comfortable sending $1,000 or more to others using P2P, with 26 percent saying no amount is “too high.”

Imagining a world without physical currency
In sharing opinions about others’ payments faux pas, it appears that checks cause the most headaches. People are most annoyed by others paying via check in store (51 percent), followed by a delay in cashing checks (38 percent) and ignoring payment requests (24 percent).

As emerging payments continue to rival traditional methods, Americans increasingly question whether today’s youngest generations will ever use cash, checks or credit cards in their traditional forms. When asked what they believe to be true about children under the age of 10, many respondents agree they won’t know how to write a check (71 percent) and won’t use physical credit cards (42 percent). One in seven think the youngest members of Generation Z won’t even know what cash is.

Bank of America’s focus on mobile banking
With more than 22 million active mobile users and growing, Bank of America’s mobile banking platform is an evolving source of increased customer engagement and satisfaction. During the first quarter of 2017, mobile banking customers logged into their accounts 980 million times, or approximately 44 times per user. During that same period, customers made more than 29 million mobile bill payments and nearly 9 million P2P transfers, a growth of 76 percent over 2016. Customers also used their mobile devices to deposit more than 315,000 checks daily and redeem over 1 million credit card cash and travel rewards. More customers are opening new accounts through mobile, with sales increasing by 36 percent over the past year.

About the Bank of America Trends in Consumer Mobility Report

Convergys (an independent market research company) conducted a nationally representative, panel sample online survey on behalf of Bank of America March 20-April 1, 2017. Convergys surveyed 1,005 respondents throughout the U.S., comprised of adults 18+ with a current banking relationship (checking or savings), and who own a smartphone. An additional 407 panelists were surveyed who also use a person-to-person payments service. The margin of error for the national sample of n=1,005 is +/- 3.1 percent, and the margin of error for the person-to-person payments oversample where n=407 is +/- 4.9 percent, with each reported at a 95 percent confidence level.

Bank of America
Bank of America is one of the world’s leading financial institutions, serving individual consumers, small and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 47 million consumer and small business relationships with approximately 4,600 retail financial centers, approximately 15,900 ATMs, and award-winning digital banking with approximately 35 million active users and more than 22 million mobile users. Bank of America is a global leader in wealth management, corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 3 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and more than 35 countries. Bank of America Corporation stock (NYSE: BAC) is listed on the New York Stock Exchange.

The Financial Reporting Council (FRC) has commenced an investigation under the Audit Enforcement Procedure into the conduct of KPMG Audit Plc, in relation to the audit of the financial statements of Rolls-Royce Group plc for the year ended 31 December 2010 and of Rolls-Royce Holdings plc for the years ended 31 December 2011 to 31 December 2013.

The decision to investigate follows the SFO announcement on 17 January 2017 of a Deferred Prosecution Agreement* (DPA) between the SFO and Rolls-Royce PLC which relates to offences including conspiracy to corrupt and a failure to prevent bribery.

Notes to editors:
The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.

*A DPA is a statutory means by which a company can account to a court for conduct without suffering the full consequences of a criminal conviction, which might include international disbarment from competition for public contracts.

To meet its responsibility as the UK competent authority in respect of audit enforcement, the FRC operates the Audit Enforcement Procedure. This procedure applies to the investigation and sanctioning of breaches of the various requirements of the statutory auditors of Public Interest Entities (PIEs) and any other cases retained by the FRC including AIM companies with a market capitalisation in excess of €200m.

In brief, the stages of the Audit Enforcement Procedure are:
Initial case examination and decision to investigate
Investigation
Decision by Executive Counsel as to whether to issue a Decision Notice;
Referral to Enforcement Committee; and
Referral to a Tribunal.
In order for a matter to be referred for investigation by the FRC’s Executive Counsel under the Audit Enforcement Procedure, the FRC’s Conduct Committee is required to decide whether there is good reason to investigate an Allegation in relation to a Statutory Auditor and/or a Statutory Audit Firm.

Global economic activity is picking up with a long-awaited cyclical recovery in investment, manufacturing, and trade, according to Chapter 1 of this World Economic Outlook. World growth is expected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. Stronger activity, expectations of more robust global demand, reduced deflationary pressures, and optimistic financial markets are all upside developments. But structural impediments to a stronger recovery and a balance of risks that remains tilted to the downside, especially over the medium term, remain important challenges. Chapter 2 examines how changes in external conditions may affect the pace of income convergence between advanced and emerging market and developing economies. Chapter 3 looks at the trend in the declining share of income that goes to labor and the root causes. Overall, this report stresses the need for credible strategies in advanced economies and emerging market and developing ones to tackle a number of common challenges in an integrated global economy.

With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade, world growth is projected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. But binding structural impediments continue to hold back a stronger recovery, and the balance of risks remains tilted to the downside, especially over the medium term. With persistent structural problems—such as low productivity growth and high income inequality—pressures for inward-looking policies are increasing in advanced economies. These threaten global economic integration and the cooperative global economic order that has served the world economy, especially emerging market and developing economies, well. Against this backdrop, economic policies have an important role to play in staving off downside risks and securing the recovery, and a renewed multilateral effort is also needed to tackle common challenges in an integrated global economy.

Emerging market and developing economies have become increasingly important in the global economy in recent years. They now account for more than 75 percent of global growth in output and consumption, almost double the share of just two decades ago. The external environment has been important for this transformation. Terms of trade, external demand, and, in particular, external financial conditions are increasingly influential determinants of medium-term growth in these economies as they become more integrated into the global economy. The still-considerable income gaps in these economies vis-à-vis those in advanced economies suggest further room for catch-up, favoring their prospects of maintaining relatively strong potential growth over the medium term. Yet, the findings show that steady, sustained catch-up growth is not automatic and exhibits episodes of accelerations and reversals over time. Moreover, with the global economy in the midst of potentially persistent structural shifts, emerging market and developing economies may face a less supportive external environment going forward than they experienced for long stretches of the post-2000 period. Nevertheless, these economies can still get the most out of a weaker growth impulse from external conditions by strengthening their institutional frameworks, protecting trade integration, permitting exchange rate flexibility, and containing vulnerabilities arising from high current account deficits and external borrowing, as well as large public debt.

This chapter documents the downward trend in the labor share of income since the early 1990s, as well as its heterogeneous evolution across countries, industries, and workers of different skill groups, using newly assembled data for a large sample of advanced and emerging market and developing economies. The chapter then analyzes the forces behind these trends. Technological progress, reflected in the steep decline in the relative price of investment goods, along with varying exposure to routine-based occupations, explains about half the overall decline in advanced economies, with a larger negative impact on the earnings of middle-skilled workers. In emerging markets, the labor share evolution is explained predominantly by the forces of global integration, particularly the expansion of global value chains that contributed to raising the overall capital intensity in production.

In the years since the global financial crisis, Africa has witnessed a rapid expansion of cross-border banking, led by banking groups based in Africa that are spurring financial and economic integration and transforming the continent’s financial landscape.

The expansion is evident across the region. African banks headquartered from Morocco to South Africa have each established business operations in at least 10 countries. Ecobank, headquartered in Togo—is present in more than 30 countries on the continent.

The banks have facilitated many positive changes—providing customers with new and better products and services, operating improved IT and management systems, and observing more advanced regulatory and accounting standards. But these groups also pose new challenges for African regulators and supervisors, with potential implications for economic and financial stability. Many of these challenges have been felt worldwide, particularly in Europe, necessitating a strengthening of banking regulation and a tightening of oversight.

It falls to African financial sector regulators and supervisors to rapidly address these new challenges. They are moving to upgrade supervisory procedures and practices by embarking upon unprecedented cooperation with peers across Africa—and with international supervisors, who are facing the same issues.

This complicated set of challenges was the topic of a conference on Cross-Border Banking and Regulatory Reforms: Implications for Africa from International Experience, held in Mauritius on February 1-2. The conference brought together more than 80 officials from Africa and Europe—including 12 African central bank governors—and bank chief executives, along with an IMF team led by Managing Director Christine Lagarde.

In opening remarks, the Managing Director spoke of the key need to ensure that supervision of bank holding companies takes place on a consolidated basis. This places an important burden on supervisors. It is also essential that supervisors in countries hosting systemically important bank subsidiaries are involved in the process by attending meetings of supervisory colleges and exchanging information.

“You face a delicate balancing act,” Lagarde said. “You need to enhance regulation and supervision but, in implementing global standards, you also must take into account local circumstances. Fortunately, you are not alone. The IMF and other bodies recognize the challenges you face and are committed to drawing on our global experience to assist you.”

The closed-door conference addressed the supervisory challenges of pan-African banking in detail, particularly the task of coordinating among economies that are at widely varying stages of financial sector development—and where bank subsidiaries are much more important—even highly systemic—to the local economies where they operate.

It is clear that these issues are not unique to Africa. In fact, many of the challenges—ranging from data-sharing to cross-border bank resolution—are common to advanced and emerging market economies.

So an important feature of the Mauritius conference was the participation of European supervisors who are grappling with the same challenges. The group was led by Stefan Ingves, Governor of the Swedish Central Bank and Chairman of the Basel Committee on Banking Supervision. In his speech on cross-border bank resolution, Ingves spoke to the issues that supervisors in the Nordic and Baltic countries have faced, particularly during and after the global financial crisis.

The IMF has played an important role in providing technical expertise to assist the efforts to develop effective cross-border regulation and supervision, including through the Fund’s capacity development work. The conference was held at the Africa Training Institute, which along with the Mauritius-based AFRITAC South regional technical assistance center and other regional centers, is deeply involved in this effort.

In his remarks, Ingves spoke to another role for the IMF in the cross-border banking work. “Besides being able to bring its expertise, let alone its financial muscles, to the table, the Fund often also plays an important role as a neutral third party,” he said.

Managing Director Lagarde, in her speech, spoke of the broader purpose of a stronger financial sector in Africa. “At the end of the day, a strong regulatory and supervisory setting can help ensure that healthy banks are able to provide the lifeblood of Africa’s economic resurgence. This will be a long-term effort, and we will be with you every step of the way,” Lagarde said.

8 December 2016
New possibility to use cash as collateral
Pricing will be linked to the deposit facility rate
Changes aim to enhance effectiveness of PSPP securities lending
Maximum overall limit of €50 billion for the Eurosystem

Today, the Governing Council decided that Eurosystem central banks will have the possibility to also accept cash as collateral in their PSPP securities lending (SL) facilities without having to reinvest it in a cash-neutral manner.

The following Eurosystem members will make securities lending available also against cash collateral by 15 December 2016: the ECB, Nationale Bank van België/Banque Nationale de Belgique, Deutsche Bundesbank, Central Bank of Ireland, Banco de España, Banque de France, and De Nederlandsche Bank.

The overall limit for securities lending against cash collateral is set at €50 billion for the Eurosystem. To avoid unduly curtailing normal repo market activity, the cash collateral option will be offered at a rate equal to the lower of the rate of the deposit facility minus 30 basis points (i.e. currently -70 basis points) and the prevailing market repo rate.

The introduction of cash as collateral in the context of PSPP securities lending is intended to enhance the effectiveness of the SL framework, thereby supporting the smooth implementation of the PSPP as well as the euro area repo market liquidity and functioning. This technical amendment does not represent any change in the monetary policy stance of the Eurosystem. It will be reviewed in light of operational needs and the level of excess liquidity.

Real gross domestic product increased at an annual rate of 3.2 percent in the third quarter of 2016 (table 1), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.4 percent.

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.9 percent. With the second estimate for the third quarter, the general picture of economic growth remains the same; the increase in personal consumption expenditures was larger than previously estimated

Real gross domestic income (GDI) increased 5.2 percent in the third quarter, compared with an increase of 0.7 percent in the second (revised). The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 4.2 percent in the third quarter, compared with an increase of 1.1 percent in the second (table 1).

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and federal government spending, that were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

The acceleration in real GDP in the third quarter primarily reflected an upturn in private inventory investment, an acceleration in exports, an upturn in federal government spending, and smaller decreases in state and local government spending and residential fixed investment, that were partly offset by a deceleration in PCE, an acceleration in imports, and a deceleration in nonresidential fixed investment.

Current-dollar GDP increased 4.6 percent, or $207.8 billion, in the third quarter to a level of $18,657.9 billion (table 1 and table 3). In the second quarter, current dollar GDP increased 3.7 percent, or $168.5 billion.

The price index for gross domestic purchases increased 1.5 percent in the third quarter, compared with an increase of 2.1 percent in the second quarter (table 4). The PCE price index increased 1.4 percent, compared with an increase of 2.0 percent. Excluding food and energy prices, the PCE price index increased 1.7 percent, compared with an increase of 1.8 percent (appendix table A).

Updates to GDP
The upward revision to the percent change in real GDP primarily reflected an upward revision to PCE that was partly offset by downward revisions to nonresidential fixed investment and private inventory investment. For more information, see the Technical Note. For information on updates to GDP, see the “Additional Information” section that follows.

Advance Estimate Second Estimate
(Percent change from preceding quarter)
Real GDP 2.9 3.2
Current-dollar GDP 4.4 4.6
Real GDI … 5.2
Average of Real GDP and Real GDI … 4.2
Gross domestic purchases price index 1.6 1.5
PCE price index 1.4 1.4

For the second quarter of 2016, the percent change in real GDI was revised up 0.9 percentage point from -0.2 percent to 0.7 percent based on newly available second-quarter tabulations from the BLS Quarterly Census of Employment and Wages program.?

Corporate Profits (table 12)

Profits from current production (corporate profits with inventory valuation adjustment and capital consumption adjustment) increased $133.8 billion in the third quarter, in contrast to a decrease of $12.5 billion in the second.

Profits of domestic financial corporations increased $50.9 billion in the third quarter, compared with an increase of $5.6 billion in the second. Profits of domestic nonfinancial corporations increased $76.5 billion, in contrast to a decrease of $56.1 billion. The rest-of-the-world component of profits increased $6.4 billion, compared with an increase of $38.0 billion. This measure is calculated as the difference between receipts from the rest of the world and payments to the rest of the world. In the third quarter, receipts decreased $0.2 billion, and payments decreased $6.6 billion.

* * *

Next release: December 22, 2016 at 8:30 A.M. EST
Gross Domestic Product: Third Quarter 2016 (Third Estimate)
Corporate Profits: Third Quarter 2016 (Revised Estimate)

* * *

Release Dates in 2017

Estimate 2016: IV and annual 2017: I 2017: II 2017: III
Gross Domestic Product
Advance January 27 April 28 July 28 October 27
Second February 28 May 26 August 30 November 29
Third March 30 June 29 September 28 December 21

Corporate Profits
Preliminary … May 26 August 30 November 29
Revised March 30 June 29 September 28 December 21

IMF membership has committed US$340 billion in bilateral borrowed resources with maximum terms through end-2020
Access to bilateral borrowing will be governed by a new framework approved by the IMF’s Executive Board in August 2016
These resources will continue to serve as a third line of defense after quotas and the NAB

Twenty-five members of the International Monetary Fund (IMF) have committed a total of SDR 243 billion (US$340 billion) in bilateral borrowed resources with maximum terms through end-2020.

In welcoming these commitments, Ms. Christine Lagarde, IMF Managing Director, said: “These commitments will preserve the overall lending capacity of the IMF and provide confidence that the Fund will continue to address the needs of our membership. I am heartened that so many countries have already made a commitment, and I would encourage others to join this important international cooperative effort.”

Access to the bilateral borrowing will be governed by a new framework approved by the IMF’s Executive Board in August 2016 that will replace the framework agreed in 2012 when, in response to the global financial crisis, the membership decided to supplement IMF resources through bilateral borrowing agreements.

There are currently 35 agreements with creditors under the 2012 Borrowing Agreements for a total of SDR 282 billion or US$393 billion. These agreements, set to expire starting October 12, have not been drawn but have played a critical role as a third line of defense, after quotas and the New Arrangements to Borrow (NAB), in providing assurance to members and markets that the IMF has adequate resources to meet potential needs.

The new framework retains key modalities of the existing borrowing framework and includes a new multilateral voting structure that gives creditors a formal say in any future activation of the bilateral borrowing agreements. The new agreements will have a common maximum term of end-2020, with an initial term to end-2019 extendable for a further year with creditors’ consents. The agreements under the new framework will continue to serve as a third line of defense after quotas and the NAB.

Agreements under the new framework will be submitted to the Executive Board for approval once they are concluded.

Modern economies are held together by innumerable contracts. The new theoretical tools created by Hart and Holmström are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design.

Society’s many contractual relationships include those between shareholders and top executive management, an insurance company and car owners, or a public authority and its suppliers. As such relationships typically entail conflicts of interest, contracts must be properly designed to ensure that the parties take mutually beneficial decisions. This year’s laureates have developed contract theory, a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities.

In the late 1970s, Bengt Holmström demonstrated how a principal (e.g., a company’s shareholders) should design an optimal contract for an agent (the company’s CEO), whose action is partly unobserved by the principal. Holmström’s informativeness principle stated precisely how this contract should link the agent’s pay to performance-relevant information. Using the basic principal-agent model, he showed how the optimal contract carefully weighs risks against incentives. In later work, Holmström generalised these results to more realistic settings, namely: when employees are not only rewarded with pay, but also with potential promotion; when agents expend effort on many tasks, while principals observe only some dimensions of performance; and when individual members of a team can free-ride on the efforts of others.

In the mid-1980s, Oliver Hart made fundamental contributions to a new branch of contract theory that deals with the important case of incomplete contracts. Because it is impossible for a contract to specify every eventuality, this branch of the theory spells out optimal allocations of control rights: which party to the contract should be entitled to make decisions in which circumstances? Hart’s findings on incomplete contracts have shed new light on the ownership and control of businesses and have had a vast impact on several fields of economics, as well as political science and law. His research provides us with new theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing, and when institutions such as schools or prisons ought to be privately or publicly owned.

Through their initial contributions, Hart and Holmström launched contract theory as a fertile field of basic research. Over the last few decades, they have also explored many of its applications. Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions.

Oliver Hart, born 1948 in London, UK. Ph.D. 1974 from Princeton University, NJ, USA. Andrew E. Furer Professor of Economics at Harvard University, Cambridge, MA, USA.

Bengt Holmström, born 1949 in Helsinki, Finland. Ph.D. 1978 from Stanford University, CA, USA. Paul A. Samuelson Professor of Economics, and Professor of Economics and Management at Massachusetts Institute of Technology, Cambridge, MA, USA.

Prize amount: 8 million Swedish krona, to be shared equally between the Laureates.

The Royal Swedish Academy of Sciences, founded in 1739, is an independent organisation whose overall objective is to promote the sciences and strengthen their influence in society. The Academy takes special responsibility for the natural sciences and mathematics, but endeavours to promote the exchange of ideas between various disciplines.

October 4, 2016
– Global growth subpar at 3.1 percent in 2016, with slight increase to 3.4 percent next year
– Persistent stagnation in advanced economies could further fuel anti-trade sentiment, stifling growth
– Countries need to rely on all policy levers—monetary, fiscal and structural—to lift growth prospects

Global economic growth will remain subdued this year following a slowdown in the United States and Britain’s vote to leave the European Union, the IMF said in its October 2016 World Economic Outlook.

“Taken as a whole, the world economy has moved sideways,” said IMF chief economist and economic counsellor, Maurice Obstfeld. “We have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world,” he said.

The report highlighted the precarious nature of the recovery eight years after the global financial crisis. It raised the specter that persistent stagnation, particularly in advanced economies, could further fuel populist calls for restrictions on trade and immigration. Obstfeld said such restrictions would hamper productivity, growth, and innovation.

“It is vitally important to defend the prospects for increasing trade integration,’’ Obstfeld, said. “Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.”

To support growth in the near term, the central banks in advanced economies should maintain easy monetary policies, the IMF said. But monetary policy alone won’t restore vigor to economies dogged by slowing productivity growth and aging populations, according to the new report. Where possible, governments should spend more on education, technology, and infrastructure to expand productive capacity while taking steps to alleviate inequality. Many countries also need to counteract waning potential growth through structural reforms to boost labor force participation, better match skills to jobs, and reduce barriers to market entry.

The world economy will expand 3.1 percent this year, the IMF said, unchanged from its July projection. Next year, growth will increase slightly to 3.4 percent on the back of recoveries in major emerging market nations, including Russia and Brazil

Advanced economies: U.S. slowdown, Brexit

Advanced economies will expand just 1.6 percent in 2016, less than last year’s 2.1 percent pace and down from the July forecast of 1.8 percent.

The IMF marked down its forecast for the United States this year to 1.6 percent, from 2.2 percent in July, following a disappointing first half caused by weak business investment and diminishing pace of stockpiles of goods. U.S. growth is likely to pick up to 2.2 percent next year as the drag from lower energy prices and dollar strength fades.

Further increases in the Federal Reserve’s policy rate “should be gradual and tied to clear signs that wages and prices are firming durably,” the IMF said.

Uncertainty following the “Brexit’’ referendum in June will take a toll on the confidence of investors. U.K. growth is predicted to slow to 1.8 percent this year and to 1.1 percent in 2017, down from 2.2 percent last year.

The euro area will expand 1.7 percent this year and 1.5 percent next year, compared with 2 percent growth in 2015.

“The European Central Bank should maintain its current appropriately accommodative stance,” the IMF said. “Additional easing through expanded asset purchases may be needed if inflation fails to pick up.”

Growth in Japan, the world’s number 3 economy, is expected to remain subdued at 0.5 percent this year and 0.6 percent in 2017. In the near term, government spending and easy monetary policy will support growth; in the medium term, Japan’s economy will be hampered by a shrinking population.

Emerging market growth expected to accelerate

In emerging market and developing economies, growth will accelerate for the first time in six years, to 4.2 percent, slightly higher than the July forecast of 4.1 percent. Next year, emerging economies are expected to grow 4.6 percent.

However, prospects differ sharply across countries and regions.

In China, policymakers will continue to shift the economy away from its reliance on investment and industry toward consumption and services, a policy that is expected to slow growth in the short term while building the foundations for a more sustainable long-term expansion. Still, China’s government should take steps to rein in credit that is “increasing at a dangerous pace’’ and cut off support to unviable state-owned enterprises, “accepting the associated slower GDP growth,” the IMF said.

China’s economy, the world’s second largest, is forecast to expand 6.6 percent this year and 6.2 percent in 2017, down from growth of 6.9 percent last year.

“External financial conditions and the outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy,’’ the IMF said.

Growth in emerging Asia, and especially India, continues to be resilient. India’s gross domestic product is projected to expand 7.6 percent this year and next, the fastest pace among the world’s major economies. The IMF urged India to continue reform of its tax system and eliminate subsidies to provide more resources for investments in infrastructure, education, and health care.

Sub-Saharan Africa’s largest economies continue to struggle with lower commodity revenues, weighing on growth in the region. Nigeria’s economy is forecast to shrink 1.7 percent in 2016, and South Africa’s will barely expand. By contrast, several of the region’s non-commodity exporters, including Côte d’Ivoire, Ethiopia, Kenya, and Senegal, are expected to continue to grow at a robust pace of more than 5 percent this year.

Economic activity slowed in Latin America, as several countries are mired in recession, with recovery expected to take hold in 2017. Venezuela’s output is forecast to plunge 10 percent this year and shrink another 4.5 percent in 2017. Brazil will see a contraction of 3.3 percent this year, but is expected to grow at 0.5 percent in 2017, on the assumption of declining political and policy uncertainty and the waning effects of past economic shocks.

Countries in the Middle East are still confronting challenging conditions from subdued oil prices, as well as civil conflict and terrorism.

Overarching policy challenge
Given the still weak and precarious nature of the global recovery, and the threats it faces, the IMF underscored the urgent need for a comprehensive, consistent, and coordinated policy approach to reinvigorate growth, ensure it is distributed more evenly, and make it durable. “By using monetary, fiscal, and structural policies in concert—within countries, consistent over time, and across countries—the whole can be greater than the sum of its parts,” Obstfeld concluded.

Good morning. Provost Lizner, Dean Blount, thank you for your generous introduction. And thank you students, faculty, and guests for coming here this morning.

Some of you may not be aware that Chicago was my home for more than five years. And it is such a pleasure to be home again just before an enormously busy week in Washington, DC next week, when we hold the Annual Meetings of the IMF and the World Bank.

Our event today provides an informal opening to these meetings, and I am grateful that we can hold it at one of the most respected management schools in America. Kellogg’s success is based on what we at the IMF also strive to achieve: the ability of not only adapting to change, but leading it.

I would like to pay tribute to Dean Blount – one of that select group of women to become dean of a top-ranked business school in the United States. Your intellectual experience and vision will help Kellogg continue to anticipate and adjust to tomorrow’s challenges!

As you have rightly said: “In today’s world, sticking with the status quo can be even riskier than striving for change.”

Indeed, the world has changed fast over the past 20 years, and it will not stand still.

In the emerging and developing countries – home to 85 percent of the world’s population – we have seen more progress for more people than at any time in history: child mortality is down, life expectancy is up; absolute poverty has declined, school enrollment is on the rise.

A good deal of this development is due to the success of China, but there has been a broader trend of economic convergence between the poor and the rich nations—not as fast as it should be, but a trend nevertheless.

We are also in the middle of a giant move toward the digital age. Six billion people now have access to a cell phone, and 3½ billion can access the internet. Innovation is sure to follow.

And who knows, we may be on the cusp of a social revolution. At the UN General Assembly last week, I saw one global leader after another acknowledging that empowering women is not only morally right, but will also be an economic game changer for the planet.

These are all good reasons to be optimistic about the future. And yet, the mood in an important part of the world—the one we call the advanced economies—has shifted in the opposite direction.

Rising economic inequality is a phenomenon in many countries today, rich and poor, but it has really hit home in the advanced world right now, where real incomes for many have been declining – or growing at a much slower rate – and past economic achievements seem at risk.

What this tells us is that governments must work harder to make growth inclusive, so that all people can benefit from the positive trends that I just mentioned.

Of course, the solution to making people better off is not to fall back on protectionism or other failed economic recipes of the past.

The task at hand is, first of all, to take the right macroeconomic policy decisions and maintain economic openness, a combination that has delivered so much good for the world in recent decades.

Getting everyone a bigger piece of the pie means that the pie has to continue to grow.

I will come back to these themes, but let me first talk about the economic outlook.

1. The State of the Global Economy: Still Weak and Fragile

For the past several years, the global recovery has been weak and fragile, and this continues to be the case today. Especially for advanced economies – while there are some good signs – the overall growth outlook still remains subdued.

The U.S. economy has been recovering for some time but had a setback in the first half of 2016, which will lead to a downgrade in our U.S. forecast. However, news on the employment front has been relatively good, and there are hopeful signs of falling poverty and rising median incomes in 2015.

In the Euro area, growth remains sub-par, although economic activity is now holding up under strain from high debt and weaknesses among a number of banks.

Japan also has seen a small rebound, but it will need to implement difficult reforms to maintain momentum.

The prospects of the emerging and developing economies merit some guarded optimism. After driving the global recovery since the 2008 financial crisis, these countries will continue to contribute more than three-quarters of total global growth this year and next.

China is rightly rebalancing from manufacturing to services, from investment to consumption, and from exports to domestic services – which should produce a more sustainable, albeit slower growing economic model. Even so, it will continue to grow at a robust rate of about 6 percent.

So too will India, which is also embarking on significant reforms, at more than 7 percent.

Moreover, Russia and Brazil are showing some signs of improvement after a period of severe contraction.

Commodity exporters have been hit hard by low commodity prices, and countries in the Middle East continue to suffer from conflict and terrorism.

Many low-income countries in Sub-Saharan Africa, which have performed so well over the past decade, are also facing a challenge from lower commodity prices.

Adding it all up, the good and the bad, we continue to face the problem of global growth being too low for too long, benefiting too few.

And even around that modest recovery, there is considerable uncertainty. Diverging paths of monetary policy in the major economies could trigger a resurgence of financial market volatility.

Low productivity growth and high levels of debt could further depress investment and expectations of future demand. And, of course, geopolitical events such as terrorism and the related refugee surge pose risks that are very hard to quantify, let alone mitigate.

Now, I would not speak for the IMF if I did not have a number of policy suggestions for dealing with this forecast, which I admit is not a very uplifting one.

2. Adjusting to Change: Do No Harm

My first policy message would be the one given to students when they enter medical school: “First, do no harm.” What do I mean by that?

I just mentioned tentative signs of improvement among some economies, as well as signs of transition and turnaround in emerging markets.

These changes have not just happened by themselves—they reflect a positive impulse from supportive monetary conditions. They reflect improvements in financial regulation and oversight that have helped the financial sector weather shocks such as the change in the Chinese currency regime or the UK referendum. And they reflect very deliberate structural reforms in a number of countries.

Good policy choices – based on expert analysis – matter, even if they take time to work. This is true especially after a crisis of the 2008 magnitude which – unlike in the 1930s – was itself contained only through the exceptional efforts of policy makers around the globe.

The same applies in reverse. Policies that hurt growth will have real consequences—both for the world at large, and very often also for the very people they are meant to protect.

Take trade, for example.

Since World War Two, trade has been the engine that has propelled economic progress. Trade was growing at twice the rate of global GDP until the 2008 crisis but has since fallen below that pace. This is largely due to weak overall demand, but a non-trivial role is also played by the increase in protectionist trade measures over the past five years. [1]

If we were to turn our backs on trade now, we would be choking off a key driver of growth at a point when the global economy is still in need of every good piece of news it can get.

Restricting trade is a clear case of economic malpractice. Rather than helping those sectors of the economy it means to protect, shutting off trade would deny families and workers important economic opportunities, wreak havoc on supply chains, and raise the cost of many basic goods.

And as our esteemed colleagues Robert McDonald and Janice Eberly have shown, policy uncertainty, including in trade policy, can deter investment – a critical driver of growth.

History tells us that this would disproportionally hurt the poor and worsen real income inequality, including in the United States.

So we must reverse the trend toward protectionism and restore a climate that supports a rebound in trade—by completing multilateral trade agreements and pushing forward reforms in services and other areas of the “new economy” such as regulatory cooperation and intellectual property rights.

Inclusive growth

At the same time, of course, the challenge is to make sure that the gains from trade are widely shared, and that those at risk of losing out are being supported.

Now, I am under no illusion how difficult it is to achieve such inclusive growth. It requires actions that go beyond just economics, and they can be very different from country to country.

But we do know some policies that work: well-designed public investment in education not only raises underlying growth but increases human capital and the earning potential of low-income people. Education of girls, in particular, is a proven high-return investment.

Another good investment is helping workers displaced by offshoring, outsourcing, or new digital technologies. Some of the Nordic countries, for example, have had success with programs that pair retraining with active job counseling—the goal being to shorten the duration of unemployment.

Here in the U.S., we have advocated raising the minimum wage and extending the earned income tax credit as measures that can help low-income workers adapt to dislocation.

These are not silver bullets – none actually exist – but if we want to keep globalization alive for the next generation, there is no alternative to ensuring that it works to the benefit of all.

3. Boosting Growth: The Immediate Response

Let me now turn to the macroeconomic and structural policy priorities.

Our priority must be to emerge from this prolonged environment of low growth, low inflation, and low interest rates that I have termed the “new mediocre.” It is bad for financial stability, bad for employment, and as I just mentioned, it also encourages bad, inward-looking policies.

Pessimists believe that our traditional tools of monetary and fiscal policy are exhausted, but I beg to differ. In my view, there is more policy space – more room to act – than is commonly believed. It requires pushing harder on all policy levers and taking more advantage of the synergies between them.

Let us start with what I have called a three-pronged strategy: using structural, fiscal, and monetary policies in a country-specific way to make them mutually reinforcing.

First, we need to identify for each country a set of structural reforms that provide the biggest effect on growth and productivity relative to the political capital that needs to be spent. For example, breaking down monopolies in the retail sector and professional services has had positive effects on growth, especially during downturns, and we have called for such measures in several advanced economies. [2]

All these efforts should be supported by macroeconomic policies to make them more politically palatable and accelerate their short-term growth effect.

Second, as for fiscal policies, few would dispute that better roads and airports, more power grids, and high-speed internet are essential components of modern public infrastructure. The current low-interest environment provides an historic opportunity to make these necessary investments—and to boost growth.

Unlike in 2008, we are not calling for broad-based fiscal stimulus today. The basic principle is that countries with fiscal space should use it—Canada, Germany, Korea, for example. Not all countries have such space and need to guard against debt problems accumulating later on.

But even for countries where public finances are stretched, reallocating spending within a given envelope will help. Think of replacing current spending with tax credits on R&D that can support technology and promote innovation.

Third, monetary policy in advanced economies needs to remain expansive at this stage. While supporting demand in general, our research also shows that monetary policy could add a further boost to GDP when infrastructure investment is debt-financed. In fact, the impact on GDP would bealmost twice as large and the debt ratio would fall, compared to the case without monetary support. [3]

In all these cases, it is important for countries to adhere to medium-term monetary and budgetary frameworks—which provide policy consistency over time, set clear expectations and allow for some short-term expansion without undermining the credibility of the overall policy effort.

Coordination

Finally, let me emphasize one important and often overlooked aspect of global policy making—the one relating to policy cooperation, or even coordination.

Eight years after Lehman Brothers, countries have gone back to their old ways of policy making, largely following their domestic policy priorities.

No doubt, the current situation is different from the 2008 crisis, which required a prompt, massive, and coordinated fiscal response. But as our “new mediocre” is less acute, it is also more divisive and subtle than a full-blown crisis, and it could prove just as toxic as the recovery has so far proven elusive.

This requires a more sophisticated and coordinated approach. The principle is simple: if all countries act decisively to stimulate their own growth, the positive spillovers reinforce each other. And as everyone is working to expand growth, everyone benefits from the efforts of others, to a much greater effect overall.

We will be providing more detail on the benefits of coordination in a staff paper being released later today.

4. Conclusion

Let me conclude. The bottom line is this:

First, do no harm. Restricting trade and limiting economic openness is sure to worsen the growth outlook for the world and especially its weakest citizens. But we need to rethink fundamentally how growth can be made more inclusive, and act accordingly.

Second, stronger, better growth is possible and will facilitate inclusion. By using monetary, fiscal, and structural policies in concert—within countries, across them, and consistent over time—we can make the whole greater than the sum of the parts.

The IMF can assist countries in identifying their fiscal space, their medium term anchoring and the sequencing of necessary reforms.

A few weeks ago, G20 leaders in Hangzhou expressed strong support for a well-equipped and well-resourced Fund, and we will continue to be at the service of our membership.

Michael Jordan once said: “Talent wins games, but teamwork and intelligence wins championships. Winning the “championship of growth and inclusive globalization” requires teamwork and collaboration across the world.

Thank you!

The United Kingdom’s Department for International Development (DFID) today became the first development partner to participate in the new five-year phase (2017–22) of the International Monetary Fund’s (IMF) Regional Technical Assistance Center in the Caribbean (CARTAC), with a contribution of GBP 6 million (about US$7.8 million). Mr. Mark George, Deputy Head and Growth Team Leader of DFID’s Caribbean Office met today with Ms. Sharmini Coorey, Director of the IMF’s Institute of Capacity Development, to recognize the renewed partnership between the IMF and the United Kingdom in the Caribbean.

At the conclusion of today’s meeting, Mr. George said: “The United Kingdom is pleased to continue its longstanding cooperation with the IMF for the delivery of capacity development services in partner countries. CARTAC strongly complements our work in the Caribbean focused on economic prosperity, governance, and disaster risk reduction, and remains a much-needed resource in the region to help countries strengthen their economic resilience as they continue with their efforts to achieve their development goals.”

Ms. Coorey made the following statement: “The United Kingdom is a key contributor to the IMF’s capacity development work, and I am delighted that it will continue its support to CARTAC. Our shared vision for economic development has helped build economic institutions and boost growth in the region, and we look forward to further deepening this partnership.”

The United Kingdom has contributed approximately US$130 million to IMF capacity development since 2002. It has been supporting IMF regional centers in Eastern and Southern Africa and the Caribbean, and work on key topics such as anti-money laundering/combating the financing of terrorism, tax and financial sector reform, and economic institution building in Somalia and South Sudan. It has also supported improvements in statistics and analytical work on low-income countries.

The Caribbean Regional Technical Assistance Center (CARTAC ) is one of ten IMF Regional Technical Assistance Centers (RTACs) worldwide. Since its establishment in 2001, CARTAC has provided support to economic institution building and related training needs to its 20 regional member countries. Building on its achievements to date, during 2017–22 CARTAC will particularly focus on helping countries improve domestic resource mobilization, enhance fiscal governance, and strengthen economic statistics and macroeconomic programming and analysis.

RTACs provide hands-on, regionally‑based support for IMF member countries to develop the institutions and skills necessary for sound economic and financial policies that promote inclusive growth and reduce poverty. RTACs are financed jointly by the IMF, external development partners, and member countries.

Regional technical assistance and training centers complement global thematic funds to support the IMF’s capacity development activities worldwide.

The European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid.

Commissioner Margrethe Vestager, in charge of competition policy, said: “Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules. The Commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.”

Following an in-depth state aid investigation launched in June 2014, the European Commission has concluded that two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991. The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a “head office”. The Commission’s assessment showed that these “head offices” existed only on paper and could not have generated such profits. These profits allocated to the “head offices” were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force. As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International.

This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules. The Commission can order recovery of illegal state aid for a ten-year period preceding the Commission’s first request for information in 2013. Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to €13 billion, plus interest.

In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple’s decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.

Apple’s tax structure in Europe
Apple Sales International and Apple Operations Europe are two Irish incorporated companies that are fully-owned by the Apple group, ultimately controlled by the US parent, Apple Inc. They hold the rights to use Apple’s intellectual property to sell and manufacture Apple products outside North and South America under a so-called ‘cost-sharing agreement’ with Apple Inc. Under this agreement, Apple Sales International and Apple Operations Europe make yearly payments to Apple in the US to fund research and development efforts conducted on behalf of the Irish companies in the US. These payments amounted to about US$ 2 billion in 2011 and significantly increased in 2014. These expenses, mainly borne by Apple Sales International, contributed to fund more than half of all research efforts by the Apple group in the US to develop its intellectual property worldwide. These expenses are deducted from the profits recorded by Apple Sales International and Apple Operations Europe in Ireland each year, in line with applicable rules.

The taxable profits of Apple Sales International and Apple Operations Europe in Ireland are determined by a tax ruling granted by Ireland in 1991, which in 2007 was replaced by a similar second tax ruling. This tax ruling was terminated when Apple Sales International and Apple Operations Europe changed their structures in 2015.

Apple Sales International
Apple Sales International is responsible for buying Apple products from equipment manufacturers around the world and selling these products in Europe (as well as in the Middle East, Africa and India). Apple set up their sales operations in Europe in such a way that customers were contractually buying products from Apple Sales International in Ireland rather than from the shops that physically sold the products to customers. In this way Apple recorded all sales, and the profits stemming from these sales, directly in Ireland.

The two tax rulings issued by Ireland concerned the internal allocation of these profits within Apple Sales International (rather than the wider set-up of Apple’s sales operations in Europe). Specifically, they endorsed a split of the profits for tax purposes in Ireland: Under the agreed method, most profits were internally allocated away from Ireland to a “head office” within Apple Sales International. This “head office” was not based in any country and did not have any employees or own premises. Its activities consisted solely of occasional board meetings. Only a fraction of the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland. The remaining vast majority of profits were allocated to the “head office”, where they remained untaxed.

Therefore, only a small percentage of Apple Sales International’s profits were taxed in Ireland, and the rest was taxed nowhere. In 2011, for example (according to figures released at US Senate public hearings), Apple Sales International recorded profits of US$ 22 billion (c.a. €16 billion[1]) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland, leaving €15.95 billion of profits untaxed. As a result, Apple Sales International paid less than €10 million of corporate tax in Ireland in 2011 – an effective tax rate of about 0.05% on its overall annual profits. In subsequent years, Apple Sales International’s recorded profits continued to increase but the profits considered taxable in Ireland under the terms of the tax ruling did not. Thus this effective tax rate decreased further to only 0.005% in 2014.

Apple Operations Europe
On the basis of the same two tax rulings from 1991 and 2007, Apple Operations Europe benefitted from a similar tax arrangement over the same period of time. The company was responsible for manufacturing certain lines of computers for the Apple group. The majority of the profits of this company were also allocated internally to its “head office” and not taxed anywhere.

Commission assessment
Tax rulings as such are perfectly legal. They are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions.

The role of EU state aid control is to ensure Member States do not give selected companies a better tax treatment than others, via tax rulings or otherwise. More specifically, profits must be allocated between companies in a corporate group, and between different parts of the same company, in a way that reflects economic reality. This means that the allocation should be in line with arrangements that take place under commercial conditions between independent businesses (so-called “arm’s length principle”).

In particular, the Commission’s state aid investigation concerned two consecutive tax rulings issued by Ireland, which endorsed a method to internally allocate profits within Apple Sales International and Apple Operations Europe,two Irish incorporated companies. It assessed whether this endorsed method to calculate the taxable profits of each company in Ireland gave Apple an undue advantage that is illegal under EU state aid rules.

The Commission’s investigation has shown that the tax rulings issued by Ireland endorsed an artificial internal allocation of profits within Apple Sales International and Apple Operations Europe, which has no factual or economic justification. As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its “head office” when this “head office” had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter. Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

The “head office” did not have any employees or own premises. The only activities that can be associated with the “head offices” are limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management. These activities generated profits in terms of interest that, based on the Commission’s assessment, are the only profits which can be attributed to the “head offices”.

Similarly, only the Irish branch of Apple Operations Europe had the capacity to generate any income from trading, i.e. from the production of certain lines of computers for the Apple group. Therefore, sales profits of Apple Operation Europe should have been recorded with the Irish branch and taxed there.

On this basis, the Commission concluded that the tax rulings issued by Ireland endorsed an artificial allocation of Apple Sales International and Apple Operations Europe’s sales profits to their “head offices”, where they were not taxed. As a result, the tax rulings enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid rules.

This decision does not call into question Ireland’s general tax system or its corporate tax rate.

Furthermore, Apple’s tax structure in Europe as such, and whether profits could have been recorded in the countries where the sales effectively took place, are not issues covered by EU state aid rules. If profits were recorded in other countries this could, however, affect the amount of recovery by Ireland (see more details below).

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The infographic is available in high resolution here.

Recovery
As a matter of principle, EU state aid rules require that incompatible state aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU State aid rules and recovery does not penalise the company in question. It simply restores equal treatment with other companies.

The Commission has set out in its decision the methodology to calculate the value of the undue competitive advantage enjoyed by Apple. In particular, Ireland must allocate to each branch all profits from sales previously indirectly allocated to the “head office” of Apple Sales International and Apple Operations Europe, respectively, and apply the normal corporation tax in Ireland on these re-allocated profits. The decision does not ask for the reallocation of any interest income of the two companies that can be associated with the activities of the “head office”.

The Commission can only order recovery of illegal state aid for a ten-year period preceding the Commission’s first request for information in this matter, which dates back to 2013. Ireland must therefore recover from Apple the unpaid tax for the period since 2003, which amounts to up to €13 billion, plus interest. Around €50 million in unpaid taxes relate to the undue allocation of profits to the “head office” of Apple Operations Europe. The remainder results from the undue allocation of profits to the “head office” of Apple Sales International. The recovery period stops in 2014, as Apple changed its structure in Ireland as of 2015 and the ruling of 2007 no longer applies.

The amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require Apple to pay more taxes on the profits recorded by Apple Sales International and Apple Operations Europe for this period. This could be the case if they consider, in view of the information revealed through the Commission’s investigation, that Apple’s commercial risks, sales and other activities should have been recorded in their jurisdictions. This is because the taxable profits of Apple Sales International in Ireland would be reduced if profits were recorded and taxed in other countries instead of being recorded in Ireland.

The amount of unpaid taxes to be recovered by the Irish authorities would also be reduced if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts. These are conducted by Apple in the US on behalf of Apple Sales International and Apple Operations Europe, for which the two companies already make annual payments.

Finally, all Commission decisions are subject to scrutiny by EU courts. If a Member State decides to appeal a Commission decision, it must still recover the illegal state aid but could, for example, place the recovered amount in an escrow account pending the outcome of the EU court procedures.

Background
Since June 2013, the Commission has been investigating the tax ruling practices of Member States. It extended this information inquiry to all Member States in December 2014. In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. In January 2016, the Commission concluded that selective tax advantages granted by Belgium to least 35 multinationals, mainly from the EU, under its “excess profit” tax scheme are illegal under EU state aid rules. The Commission also has two ongoing in-depth investigations into concerns that tax rulings may give rise to state aid issues in Luxembourg, as regards Amazon and McDonald’s.

This Commission has pursued a far-reaching strategy towards fair taxation and greater transparency and we have recently seen major progress. Following our proposals on tax transparency of March 2015, Member States reached a political agreementalready in October 2015 on automatic exchange of information on tax rulings. This legislation will help to bring about a much greater degree of transparency and deter from using tax rulings as an instrument for tax abuse. In June 2015, we unveiled our Action Plan for fair and effective taxation: a series of initiatives which aims to make the corporate tax environment in the EU fairer and more efficient. Key actions included a framework to ensure effective taxation where profits are generated and a strategy to re-launch the Common Consolidated Corporate Tax Base for which a fresh proposal is expected later this year. The Commission launched a further package of initiatives to combat corporate tax avoidance within the EU and throughout the world on 27 January of this year. As a direct result, Member States have already agreed to tackle the most prevalent loopholes in national laws that allow tax avoidance to take place and to extend their automatic exchange of information to country-by-country reporting of tax-related financial information of multinationals. A proposal is also on the table to make some of this information public. All of our work rests on the simple principle that all companies, big and small, must pay tax where they make their profits.

The non-confidential version of the decisions will be made available under the case number SA.38373 in the State aid register on the DG Competition website once any confidentiality issues have been resolved. The State Aid Weekly e-News lists new publications of State aid decisions on the internet and in the EU Official Journal.

The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy. With the U.S. economy now nearing the Federal Reserve’s statutory goals of maximum employment and price stability, this conference provides a timely opportunity to consider how the lessons we learned are likely to influence the conduct of monetary policy in the future.

The theme of the conference, “Designing Resilient Monetary Policy Frameworks for the Future,” encompasses many aspects of monetary policy, from the nitty-gritty details of implementing policy in financial markets to broader questions about how policy affects the economy. Within the operational realm, key choices include the selection of policy instruments, the specific markets in which the central bank participates, and the size and structure of the central bank’s balance sheet. These topics are of great importance to the Federal Reserve. As noted in the minutes of last month’s Federal Open Market Committee (FOMC) meeting, we are studying many issues related to policy implementation, research which ultimately will inform the FOMC’s views on how to most effectively conduct monetary policy in the years ahead. I expect that the work discussed at this conference will make valuable contributions to the understanding of many of these important issues.

My focus today will be the policy tools that are needed to ensure that we have a resilient monetary policy framework. In particular, I will focus on whether our existing tools are adequate to respond to future economic downturns. As I will argue, one lesson from the crisis is that our pre-crisis toolkit was inadequate to address the range of economic circumstances that we faced. Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. In addition, policymakers inside and outside the Fed may wish at some point to consider additional options to secure a strong and resilient economy. But before I turn to these longer-run issues, I would like to offer a few remarks on the near-term outlook for the U.S. economy and the potential implications for monetary policy.

Current Economic Situation and Outlook
U.S. economic activity continues to expand, led by solid growth in household spending. But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports. While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market. Smoothing through the monthly ups and downs, job gains averaged 190,000 per month over the past three months. Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved. Inflation has continued to run below the FOMC’s objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices.

Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.

And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy. In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight. For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide–a point illustrated by figure 1 in your handout. The line in the center is the median path for the federal funds rate based on the FOMC’s Summary of Economic Projections in June.1 The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018.2 The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted. When shocks occur and the economic outlook changes, monetary policy needs to adjust. What we do know, however, is that we want a policy toolkit that will allow us to respond to a wide range of possible conditions.

The Pre-Crisis Toolkit
Prior to the financial crisis, the Federal Reserve’s monetary policy toolkit was simple but effective in the circumstances that then prevailed. Our main tool consisted of open market operations to manage the amount of reserve balances available to the banking sector.3 These operations, in turn, influenced the interest rate in the federal funds market, where banks experiencing reserve shortfalls could borrow from banks with excess reserves. Before the onset of the crisis, the volume of reserves was generally small–only about $45 billion or so.4 Thus, even small open market operations could have a significant effect on the federal funds rate. Changes in the federal funds rate would then be transmitted to other short-term interest rates, affecting longer-term interest rates and overall financial conditions and hence inflation and economic activity. This simple, light-touch system allowed the Federal Reserve to operate with a relatively small balance sheet–less than $1 trillion before the crisis–the size of which was largely determined by the need to supply enough U.S. currency to meet demand.5

The global financial crisis revealed two main shortcomings of this simple toolkit. The first was an inability to control the federal funds rate once reserves were no longer relatively scarce. Starting in late 2007, faced with acute financial market distress, the Federal Reserve created programs to keep credit flowing to households and businesses.6 The loans extended under those programs helped stabilize the financial system. But the additional reserves created by these programs, if left unchecked, would have pushed down the federal funds rate, driving it well below the FOMC’s target. To prevent such an outcome, the Federal Reserve took several steps to offset (or sterilize) the effect of its liquidity and credit operations on reserves.7 By the fall of 2008, however, the reserve effects of our liquidity and credit programs threatened to become too large to sterilize via asset sales and other existing tools. Without sufficient sterilization capacity, the quantity of reserves increased to a point that the Federal Reserve had difficulty maintaining effective control over the federal funds rate.

Of course, by the end of 2008, stabilizing the federal funds rate at a level materially above zero was not an immediate concern because the economy clearly needed very low short-term interest rates. Faced with a steep rise in unemployment and declining inflation, the FOMC lowered its target for the federal funds rate to near zero, a reduction of roughly 5 percentage points over the previous year and a half. Nonetheless, a variety of policy benchmarks would, at least in hindsight, have called for pushing the federal funds rate well below zero during the economic downturn.8 That doing so was impossible highlights the second serious limitation of our pre-crisis policy toolkit: its inability to generate substantially more accommodation than could be provided by a near-zero federal funds rate.

Our Expanded Toolkit
To address the challenges posed by the financial crisis and the subsequent severe recession and slow recovery, the Federal Reserve significantly expanded its monetary policy toolkit. In 2006, the Congress had approved plans to allow the Fed, beginning in 2011, to pay interest on banks’ reserve balances.9 In the fall of 2008, the Congress moved up the effective date of this authority to October 2008. That authority was essential. Paying interest on reserve balances enables the Fed to break the strong link between the quantity of reserves and the level of the federal funds rate and, in turn, allows the Federal Reserve to control short-term interest rates when reserves are plentiful. In particular, once economic conditions warrant a higher level for market interest rates, the Federal Reserve could raise the interest rate paid on excess reserves–the IOER rate. A higher IOER rate encourages banks to raise the interest rates they charge, putting upward pressure on market interest rates regardless of the level of reserves in the banking sector.

While adjusting the IOER rate is an effective way to move market interest rates when reserves are plentiful, federal funds have generally traded below this rate. This relative softness of the federal funds rate reflects, in part, the fact that only depository institutions can earn the IOER rate. To put a more effective floor under short-term interest rates, the Federal Reserve created supplementary tools to be used as needed. For instance, the overnight reverse repurchase agreement (ON RRP) facility is available to a variety of counterparties, including eligible money market funds, government-sponsored enterprises, broker-dealers, and depository institutions. Through it, eligible counterparties may invest funds overnight with the Federal Reserve at a rate determined by the FOMC. Similar to the payment of IOER, the ON RRP facility discourages participating institutions from lending at a rate substantially below that offered by the Fed.10

Our current toolkit proved effective last December. In an environment of superabundant reserves, the FOMC raised the effective federal funds rate–that is, the weighted average rate on federal funds transactions among participants in that market–by the desired amount, and we have since maintained the federal funds rate in its target range.

Two other major additions to the Fed’s toolkit were large-scale asset purchases and increasingly explicit forward guidance.11 Both were used to provide additional monetary policy accommodation after short-term interest rates fell close to zero. Our purchases of Treasury and mortgage-related securities in the open market pushed down longer-term borrowing rates for millions of American families and businesses. Extended forward rate guidance–announcing that we intended to keep short-term interest rates lower for longer than might have otherwise been expected–also put significant downward pressure on longer-term borrowing rates, as did guidance regarding the size and scope of our asset purchases.

In light of the slowness of the economic recovery, some have questioned the effectiveness of asset purchases and extended forward rate guidance. But this criticism fails to consider the unusual headwinds the economy faced after the crisis. Those headwinds included substantial household and business deleveraging, unfavorable demand shocks from abroad, a period of contractionary fiscal policy, and unusually tight credit, especially for housing. Studies have found that our asset purchases and extended forward rate guidance put appreciable downward pressure on long-term interest rates and, as a result, helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below our 2 percent objective.12

Two of the Fed’s most important new tools–our authority to pay interest on excess reserves and our asset purchases–interacted importantly. Without IOER authority, the Federal Reserve would have been reluctant to buy as many assets as it did because of the longer-run implications for controlling the stance of monetary policy. While we were buying assets aggressively to help bring the U.S. economy out of a severe recession, we also had to keep in mind whether and how we would be able to remove monetary policy accommodation when appropriate. That issue was particularly relevant because we fund our asset purchases through the creation of reserves, and those additional reserves would have made it ever more difficult for the pre-crisis toolkit to raise short-term interest rates when needed.

The FOMC considered removing accommodation by first reducing our asset holdings (including through asset sales) and raising the federal funds rate only after our balance sheet had contracted substantially. But we decided against this approach because our ability to predict the effects of changes in the balance sheet on the economy is less than that associated with changes in the federal funds rate. Excessive inflationary pressures could arise if assets were sold too slowly. Conversely, financial markets and the economy could potentially be destabilized if assets were sold too aggressively. Indeed, the so-called taper tantrum of 2013 illustrates the difficulty of predicting financial market reactions to announcements about the balance sheet. Given the uncertainty and potential costs associated with large-scale asset sales, the FOMC instead decided to begin removing monetary policy accommodation primarily by adjusting short-term interest rates rather than by actively managing its asset holdings.13 That strategy–raising short-term interest rates once the recovery was sufficiently advanced while maintaining a relatively large balance sheet and plentiful bank reserves–depended on our ability to pay interest on excess reserves.

Where Do We Go from Here?
What does the future hold for the Fed’s toolkit? For starters, our ability to use interest on reserves is likely to play a key role for years to come. In part, this reflects the outlook for our balance sheet over the next few years. As the FOMC has noted in its recent statements, at some point after the process of raising the federal funds rate is well under way, we will cease or phase out reinvesting repayments of principal from our securities holdings. Once we stop reinvestment, it should take several years for our asset holdings–and the bank reserves used to finance them–to passively decline to a more normal level. But even after the volume of reserves falls substantially, IOER will still be important as a contingency tool, because we may need to purchase assets during future recessions to supplement conventional interest rate reductions.14 Forecasts now show the federal funds rate settling at about 3 percent in the longer run.15 In contrast, the federal funds rate averaged more than 7 percent between 1965 and 2000. Thus, we expect to have less scope for interest rate cuts than we have had historically.

In part, current expectations for a low future federal funds rate reflect the FOMC’s success in stabilizing inflation at around 2 percent–a rate much lower than rates that prevailed during the 1970s and 1980s. Another key factor is the marked decline over the past decade, both here and abroad, in the long-run neutral real rate of interest–that is, the inflation-adjusted short-term interest rate consistent with keeping output at its potential on average over time.16 Several developments could have contributed to this apparent decline, including slower growth in the working-age populations of many countries, smaller productivity gains in the advanced economies, a decreased propensity to spend in the wake of the financial crises around the world since the late 1990s, and perhaps a paucity of attractive capital projects worldwide.17 Although these factors may help explain why bond yields have fallen to such low levels here and abroad, our understanding of the forces driving long-run trends in interest rates is nevertheless limited, and thus all predictions in this area are highly uncertain.18

Would an average federal funds rate of about 3 percent impair the Fed’s ability to fight recessions? Based on the FOMC’s behavior in past recessions, one might think that such a low interest rate could substantially impair policy effectiveness. As shown in the first column of the table in the handout, during the past nine recessions, the FOMC cut the federal funds rate by amounts ranging from about 3 percentage points to more than 10 percentage points. On average, the FOMC reduced rates by about 5-1/2 percentage points, which seems to suggest that the FOMC would face a shortfall of about 2-1/2 percentage points for dealing with an average-sized recession. But this simple comparison exaggerates the limitations on policy created by the zero lower bound. As shown in the second column, the federal funds rate at the start of the past seven recessions was appreciably above the level consistent with the economy operating at potential in the longer run. In most cases, this tighter-than-normal stance of policy before the recession appears to have reflected some combination of initially higher-than-normal labor utilization and elevated inflation pressures. As a result, a large portion of the rate cuts that subsequently occurred during these recessions represented the undoing of the earlier tight stance of monetary policy. Of course, this situation could occur again in the future. But if it did, the federal funds rate at the onset of the recession would be well above its normal level, and the FOMC would be able to cut short-term interest rates by substantially more than 3 percentage points.

A recent paper takes a different approach to assessing the FOMC’s ability to respond to future recessions by using simulations of the FRB/US model.19 This analysis begins by asking how the economy would respond to a set of highly adverse shocks if policymakers followed a fairly aggressive policy rule, hypothetically assuming that they can cut the federal funds rate without limit.20 It then imposes the zero lower bound and asks whether some combination of forward guidance and asset purchases would be sufficient to generate economic conditions at least as good as those that occur under the hypothetical unconstrained policy. In general, the study concludes that, even if the average level of the federal funds rate in the future is only 3 percent, these new tools should be sufficient unless the recession were to be unusually severe and persistent.

Figure 2 in your handout illustrates this point. It shows simulated paths for interest rates, the unemployment rate, and inflation under three different monetary policy responses–the aggressive rule in the absence of the zero lower bound constraint, the constrained aggressive rule, and the constrained aggressive rule combined with $2 trillion in asset purchases and guidance that the federal funds rate will depart from the rule by staying lower for longer.21 As the blue dashed line shows, the federal funds rate would fall far below zero if policy were unconstrained, thereby causing long-term interest rates to fall sharply. But despite the lower bound, asset purchases and forward guidance can push long-term interest rates even lower on average than in the unconstrained case (especially when adjusted for inflation) by reducing term premiums and increasing the downward pressure on the expected average value of future short-term interest rates. Thus, the use of such tools could result in even better outcomes for unemployment and inflation on average.

Of course, this analysis could be too optimistic. For one, the FRB/US simulations may overstate the effectiveness of forward guidance and asset purchases, particularly in an environment where long-term interest rates are also likely to be unusually low.22 In addition, policymakers could have less ability to cut short-term interest rates in the future than the simulations assume. By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving.23 If so, then the average level of the nominal federal funds rate down the road might turn out to be only 2 percent, implying that asset purchases and forward guidance might have to be pushed to extremes to compensate.24 Moreover, relying too heavily on these nontraditional tools could have unintended consequences. For example, if future policymakers responded to a severe recession by announcing their intention to keep the federal funds rate near zero for a very long time after the economy had substantially recovered and followed through on that guidance, then they might inadvertently encourage excessive risk-taking and so undermine financial stability.

Finally, the simulation analysis certainly overstates the FOMC’s current ability to respond to a recession, given that there is little scope to cut the federal funds rate at the moment. But that does not mean that the Federal Reserve would be unable to provide appreciable accommodation should the ongoing expansion falter in the near term. In addition to taking the federal funds rate back down to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly–although with long-term interest rates already quite low, the net stimulus that would result might be somewhat reduced.

Despite these caveats, I expect that forward guidance and asset purchases will remain important components of the Fed’s policy toolkit. In addition, it is critical that the Federal Reserve and other supervisory agencies continue to do all they can to ensure a strong and resilient financial system. That said, these tools are not a panacea, and future policymakers could find that they are not adequate to deal with deep and prolonged economic downturns. For these reasons, policymakers and society more broadly may want to explore additional options for helping to foster a strong economy.

On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets. Beyond that, some observers have suggested raising the FOMC’s 2 percent inflation objective or implementing policy through alternative monetary policy frameworks, such as price-level or nominal GDP targeting. I should stress, however, that the FOMC is not actively considering these additional tools and policy frameworks, although they are important subjects for research.

Beyond monetary policy, fiscal policy has traditionally played an important role in dealing with severe economic downturns. A wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy.25 For example, steps could be taken to increase the effectiveness of the automatic stabilizers, and some economists have proposed that greater fiscal support could be usefully provided to state and local governments during recessions. As always, it would be important to ensure that any fiscal policy changes did not compromise long-run fiscal sustainability.

Finally, and most ambitiously, as a society we should explore ways to raise productivity growth. Stronger productivity growth would tend to raise the average level of interest rates and therefore would provide the Federal Reserve with greater scope to ease monetary policy in the event of a recession. But more importantly, stronger productivity growth would enhance Americans’ living standards. Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals.

Conclusion
Although fiscal policies and structural reforms can play an important role in strengthening the U.S. economy, my primary message today is that I expect monetary policy will continue to play a vital part in promoting a stable and healthy economy. New policy tools, which helped the Federal Reserve respond to the financial crisis and Great Recession, are likely to remain useful in dealing with future downturns. Additional tools may be needed and will be the subject of research and debate. But even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively.

In response to a request from the Egyptian authorities, an International Monetary Fund (IMF) mission led by Mr. Chris Jarvis visited Cairo from July 30 to August 11, 2016 to discuss support for the authorities’ economic reform program through IMF financial assistance. At the end of the visit, Mr. Jarvis issued the following statement:

“I am pleased to announce that, in support of the government’s economic reform program, the Egyptian government, the Central Bank of Egypt (CBE) and the IMF team have reached a staff-level agreement on a three-year Extended Fund Facility (EFF) in the amount of SDR 8.5966 billion (422 percent of quota or about US$12 billion). This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider Egypt’s request in the coming weeks.

“Egypt is a strong country with great potential but it has some problems that need to be fixed urgently. The EFF supports the authorities’ comprehensive economic reform program as stated in the government plan approved by the parliament. The government recognizes the need for quick implementation of economic reforms for Egypt to restore macroeconomic stability and to support strong, sustainable and job-rich growth. The program aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs, especially for women and young people. It also aims to strengthen the social safety net to protect the vulnerable during the process of adjustment.

“The government’s fiscal policy will be anchored to placing public debt on a clearly declining path toward more sustainable levels. Over the program period general government debt is expected to decline from about 98% in 15/16 to about 88% of GDP in 2018/19. The aim is to raise revenue and rationalize spending, to reduce the deficit and to free up public funds for high-priority spending, such as infrastructure, health and education, and social protection. As indicated in the budget approved by the parliament, the government will adopt the VAT law after approval by the parliament, and will continue the program begun in 2014 to rationalize energy subsidies. It will advance the structural reform agenda to help increase investment and strengthen the role of the private sector

“Social protection is a cornerstone in the government’s reform program. Budgetary savings that come from other measures will be partially spent on social protection: including specifically food subsidies and targeted social transfers. The social protection measures will preserve or increase support for insurance and medicine for the poor, subsidies for infant milk and medicine for children, health insurance for young children and female primary providers, and vocational training for youth. The government will also develop a plan to enhance the school meals program. Priority will also be given to investment in public infrastructure.

“The CBE monetary and exchange rate policy will aim to improve the functioning of the foreign exchange market, increase foreign reserves, and bring down inflation to single digits during the program. Moving to a flexible exchange rate regime will strengthen competitiveness, support exports and tourism and attract foreign direct investment. This would foster growth and jobs and reduce financing needs.

“Financial sector policies will be geared toward safeguarding the strength and stability of the banking system.

“Structural reforms will aim at improving the business environment, deepening labor markets, simplifying regulations and promoting competition. The ambition is to significantly improve Egypt’s ratings in Doing Business and Global Competitiveness. In this context, the reform measures being implemented target creating a competitive business environment, attracting investment and increasing productivity to provide fertile ground for private sector activity.

“Public financial management and fiscal transparency will be strengthened to improve governance and delivery of public services, enhance accountability in policymaking, and combat corruption.

“With the implementation of the government reform program, together with the help of Egypt’s friends, the Egyptian economy will return to its full potential. This will help achieve inclusive job-rich growth and raise living standards for the Egyptian people. We at the IMF are ready to partner with Egypt in this program. We will also encourage other multilateral agencies and countries to support Egypt. We have talked to our colleagues in the World Bank and the African Development Bank and they are willing to help. It would also be very helpful for Egypt’s bilateral partners to step forward at this critical time.

“The mission would like to thank the authorities and all those with whom they met for their warm welcome and the frank and constructive discussions.”