The Managing Director of International Monetary Fund (IMF), Kristalina Georgieva has warned against financial / income inequalities within countries which according to her might lead to another financial crisis.

In her speech on Friday during an event at the Peterson Institute for International Economics (PIIE) she said it was important to maintain high lending standards and good supervision, but work was needed to reverse widening gaps between rich and poor. In her ‘call to action’ she urged a shift to facilitate more lending to small and women-led businesses, which in turn would help bolster resilience in the event of a future crisis.

“Our new research shows that inequality tends to increase before a financial crisis, signaling a strong link between inequality and financial stability,” she said, citing parallels to 1920s boom years that led to the Great Depression.

A report by IMF staff released on Friday shows that expanding financial services to more low-income households, women and small businesses could serve as a powerful lever in creating a more inclusive society, but the increasing complexity of the financial sector often wound up benefitting mainly the wealthy.

“If we act, and act together, we can avoid repeating the mistakes of the 1920s in the 2020s,” Georgieva told an event at the Peterson Institute for International Economics.

The Fund would apply the lessons of the new research to its assessment and surveillance of financial sector stability, while focusing on bolstered financial literacy among less “sophisticated” populations, she added.

Georgieva, who served as the World Bank’s chief executive officer before moving to the IMF in October, has made reversing inequalities one of her top priorities.

In her speech on Friday, she said it was important to maintain high lending standards and good supervision, but work was needed to reverse widening gaps between rich and poor.

Unlike the 1920s, climate change was a huge factor exacerbating inequality today, she said, citing a World Bank estimate that 100 million people could be living in extreme poverty by 2030 if current policies were not changed.

The Fund in November called for central banks to develop stress tests for climate risks, and Georgieva said it would seek to incorporate them into its assessment instruments this calendar year. Devaluing climate-related stranded assets could result in costs of $4 trillion to $20 trillion.

Governments should continue using fiscal policies to address growing rates of inequality, she said, and avert the populism and political upheaval it could spawn.

But the financial sector also had a key role to play, she said, citing research by IMF staff that showed a 2-to-3-percentage point difference in longer-term gross domestic product (GDP) growth between financially inclusive countries and their less inclusive peers.

The signing of a Phase 1 trade agreement between the United States and China will reduce - but not eliminate - uncertainty that has dampened global economic growth, Kristalina said.

Georgieva declined to give an adjusted global economic forecast, saying that would be released on Monday at the World Economic Forum in Davos, Switzerland.

But she said the IMF expected the trade deal would ensure that China’s gross domestic product expands by 6 per cent in 2020, and she had shared that forecast with Chinese Vice Premier Liu He during a meeting this week.

“It brings China in the parameters of around 6 per cent growth for 2020, rather than below,” she said.

Georgieva said the IMF had previously estimated that global trade tensions would shave 0.8 per cent, or $700 billion, off international economic growth. Only about one-third of that was due to tariffs, with the larger share resulting from a slowdown in business investment. Since the US-China trade deal was only an interim solution, the impact on investment would not be eradicated, she said.

“What we are seeing now is we have some reduction of this uncertainty, but it is not eliminated,” she said.

Georgieva also said the IMF generally favoured multilateral agreements, and warned that bilateral agreements could have negative implications for world economic growth in the longer term.

Kristalina Georgieva also said that the lender has had “very constructive” exchanges with Argentina’s new Peronist government and would do whatever possible to assist the indebted country.

Argentina is grappling with a severe debt crisis since last year that has forced it to enter negotiations with creditors, including the IMF, to restructure around $100 billion of sovereign debt to avoid a damaging default.

“We have had very constructive interactions so far with the new leadership in Argentina,” Georgieva said at an event at the Peterson Institute for International Economics in Washington, according to a recording shared by an IMF spokesman.

“We are looking at doing what we can to be helpful to Argentina. We see eye to eye on the need to restore the economy and to address the increase in poverty that has affected negatively many Argentinians.”

Agencies