IMF chief’s blog paints a grim global picture
International Monetary Fund Director Kristalina Georgieva has bad news for the global economy.
Ms. Georgieva writes in her latest blog, “Faced with a darkening economic outlook: how the G20 can react” that “2022 will be a difficult year – and perhaps an even more difficult 2023”.
Already under the double blow of the Covid pandemic and the Ukraine-Russia war, the world economy faces an increased risk of recession, she adds.
Taming the Inflation Monster
A major concern for Georgieva remains high global inflation, accelerated by the war in Ukraine and the resulting economic aftershocks.
The IMF, in its April 2022 economic outlook, expected “already high inflation to persist for longer”. Inflation in advanced economies is projected to reach 5.7% in 2022, while emerging economies will see inflation rise to 8.7%.
Fearing that a high inflation rate could sink the post-Covid global economic recovery, Georgieva urged countries to “do everything in their power” to bring it down. Central banks continuing to tighten monetary policy — by raising interest rates — is a key outcome, she notes.
Since July 2021, his blog notes, 75 central banks have raised interest rates an average of 3.8 times. Georgieva’s message is clear – “acting now will hurt less than acting later”.
Victim of economic growth?
Amid the global battle to rein in inflation, however, economic growth is likely to fall victim.
According to the IMF’s April 2022 projections, global growth is expected to slow to 3.6% in 2022 and 2023. This is largely due to the impact of the war in Ukraine. However, given the ongoing geopolitical disturbances, further downgrading is expected.
“Recent indicators imply a weak second quarter (April-June),” she wrote, fearing the outlook remains “extremely uncertain.”
China – a major global economic engine – is a source of concern. According to an IMF G-20 watchdog note, “Slower growth in China and other G-20 economies could further derail the economic recovery. China’s slowdown could prove more serious than currently planned”.
The member countries of the G-20 represent more than four-fifths of the world economy.
Avoid the debt trap
Georgieva urged economies to adopt fiscal policy – government revenue and spending – that will facilitate efforts to fight inflation. Tighter fiscal policy, she argues, will not only help fight inflation, but also “reduce the burden of increasingly expensive borrowing.”
Its emphasis on reducing the debt burden is likely to find many takers around the world. A recent analysis shows that apart from Sri Lanka, countries like Lebanon, Russia, Suriname and Zambia are in default. Belarus and at least a dozen other countries are also at risk of default.
Ms Georgieva recently cited Sri Lanka as a wake-up call. “Countries with high debt levels and limited policy space will face additional constraints. Look no further than Sri Lanka as a warning sign,” PTI said.
High sovereign bond yields are one of the main reasons countries are reducing their debt. “Sovereign bond yields have reached double digits in about a third of emerging economies,” she writes, adding that these economies are more vulnerable to tightening global financial conditions.
A higher yield shows that sovereign debt is riskier and the potential for default is higher. A higher yield also shows that all is not well with the economy.
The appreciation of the US dollar and capital outflows from emerging economies only add to the vulnerability of economies, according to the G-20 watchdog.
Food insecurity is on the rise
Ms. Georgieva called for greater international cooperation led by the G-20 to avert potential economic crises and support global food supplies.
The IMF chief also criticized growing “food protectionism”, such as banning food exports, arguing that such “restrictions are both harmful and ineffective in stabilizing domestic prices”.
However, G-20 members such as Argentina, Turkey and India are among the 20 countries, according to IFPRI. Food and Fertilizer Export Restriction Trackingwhich have imposed some form of food export ban.
According to Latest World Bank Food Security Update94.1% of low-income countries, 88.9% of lower-middle-income countries and 87% of upper-middle-income countries recorded inflation levels above 5%.
More than two-thirds of high-income countries experience high food inflation.