When they meet in Washington next week For the annual meetings of the International Monetary Fund and the World Bank Group, world finance ministers face what has been called a multi-crisisChallenges ranging from rising interest rates, climate change, an epicly strong dollar, food shortages, high inflation, and the still-dominant pandemic all combine to threaten not only the global economy, but the livelihoods of hundreds of millions.
The US will likely enter a recession next year, Europe will suffer from rising energy costs, and China will suffer its lowest growth in decades. A major slowdown in the global economy is almost inevitable.
What is at stake – what will depend in large part on the decisions of finance ministers next week – is whether developing countries suffer from a lost decade of economic opportunity, as happened to many countries in the 1980s, or whether they are able to maintain the momentum, As happened after the 2009 financial crisis.
While much will depend on national policy choices, the external environment will be very important for most countries. Global cooperation through the International Monetary Fund and the World Bank is very important. The challenge for these institutions will not be simply to discuss new funding and funding mechanisms, but actually to provide the exponentially increased support that the moment requires.
Work in three areas is essential:
Reducing immediate funding pressures: In addition to Ukraine’s need for continued support, the war has driven up food, energy, and fertilizer prices, all of which strain the budgets of the most vulnerable low- and middle-income economies. There will be more challenges with rising interest rates, declining exports to the industrialized world and diminishing global liquidity making it difficult to attract capital. To avoid a cascading downturn, rapid and substantial new financing will be required.
The International Monetary Fund provided some funding. However, as his dire response has shown, he could do much more – if the fund’s major shareholders provide a clear, unified direction. Appropriately, the IMF Temporarily Starch 50 percent of the maximum funding it provides to countries through their emergency window; Now you need to show an initiative similar to its regular programmes. Many countries that need IMF funding do not seek it because of the stigma involved. This problem can be addressed by developing a new Emergency Financing Facility that provides financing to countries affected by external developments without insisting on the IMF’s traditional conditionality.
The World Bank announced that New financing commitments will increase to $170 billion Until June 2023 to help borrowing countries deal with these shocks. However, as the bank’s response to the pandemic has shown, the liabilities are not the same as the money received: between 2019 and 2022, the bank increased liabilities by an amount More than 36 billion dollars But the exchange quickly halved. At next week’s meetings, shareholders must extract a pledge that these new commitments will be disbursed quickly.
Dealing with unsustainable debt: The debt issue must also be addressed. Sixty per cent of low-income countries and a third of emerging markets are already at high risk of debt distress. Initially, the major creditor nations of the G20 should suspend debt servicing of the countries most in need, which will provide about $15 billion in cash flow forgiveness next year.
However, many countries will still need to restructure their debt. Unfortunately, the mechanism for resolving sovereign debt problems is broken and it is unlikely that it will be rethought anytime soon. But the IMF could help fill the gap by playing a more active role in sovereign debt settlement, and working with major creditors to make the process more predictable and productive.
To be sure, there are serious problems of coordination between official creditors as well as between public and private creditors. China’s reluctance to engage in debt relief and restructuring has been a particular problem given the size of Chinese holdings. But that’s not a reason for others to hold back – it’s a reason to move faster to set an example.
Do not forget about climate change and epidemics: And while the meetings will properly focus on the current crisis, it would be reckless to ignore the longer-term challenges. An important step is for shareholders to agree that, over time, the World Bank should significantly reorient its focus toward global rather than just national challenges.
Reducing pandemic risks, combating climate change, and preserving biodiversity will require a new generation of investment that the reinvented World Bank will be uniquely positioned to catalyze. Sustainability must become central to the Bank’s work, such as reconstruction and development.
An expanded role for the World Bank also means more lending and advising. The quickest way to start this is to implement the recommendations of the recent independent panel of experts convened by the Group of Twenty, which found that the World Bank and other development banks can use existing capital more efficiently while maintaining their core financial strength. In parallel, shareholders should initiate discussions on increasing “green capital” to support an expanded focus on global public goods, as well as to advance the bank’s renewal as a partner with the private sector in sustainable investment. Combined, these changes could drive more than $1 trillion in new public investment over the next decade and encourage even larger increases in private investment.
Confidence in international cooperation has been severely damaged, first by real and perceived shortcomings in aid to developing countries during the pandemic, and now by skyrocketing food and energy prices and the threat of recession spreading from the industrialized world. The global economy is in dire need of reform. Next week is the time to start.