IMF chief warns of a gloomy growth scenario

Delivering a gloomy warning ahead of the spring meetings of the International Monetary Fund and World Bank, \, IMF’s managing director, said on Thursday that global growth dropped by half in 2022 and it will hover around 3% for the next five years, the lowest medium-term growth forecast since 1990.

She added that while India and China will drive half of global growth in 2023, 90% of the advanced economies will see a dip in growth this year. The growth in per capita incomes of low-income countries will remain lower than that of emerging economies. Poverty and hunger can increase. “With rising geopolitical tensions and still-high inflation, a robust recovery remains elusive. This harms the prospects of everyone, especially for the most vulnerable people and countries.”

Speaking in Washington DC on Thursday morning, Georgieva also laid out three “hills” that the international community needs to climb — fighting inflation and safeguarding financial stability; improving medium-term prospects for growth; and fostering solidarity to reduce global disparities.

Financial stability

On financial stability, the IMF chief laid out the policy dilemma now confronting central bankers and policymakers. Despite lifting interest rates, core inflation has remained “stubbornly high”. But the transition from a “prolonged period of low interest rates and ample liquidity to much higher rates and scarcer liquidity” is now creating other challenges, seen in the recent banking crises.

These exposed “risk management failures at specific banks, as well as supervisory lapses,” Georgieva added. But she acknowledged that banks have been relatively strong and resilient and policymakers have been swift in their actions in recent weeks.

The IMF expects central banks to stay the course in the fight against inflation by holding a “tight stance to prevent the de-anchoring of inflation expectations”, but also expects the banks will address financial stability risks through appropriate provision of liquidity and carefully monitoring risks in banks, non-banking financial institutions and real estate. On the fiscal side, the Fund believes that efforts to reduce deficits are critical to “support the fight against inflation” and creating fiscal space to deal with future crises. At the same time, it has underlined the need to support the most vulnerable.

Given the contradictions in all these policy measures laid out, Georgieva said, “So, this is a difficult climb: tackle inflation, protect financial stability, and safeguard social cohesion. Getting it right brings the benefit of major advanced economies staying on the narrow path to a soft landing, and protecting the more vulnerable emerging and developing economies against harmful spillovers.”

Growth prospects

The average global growth rate in the past two decades has been 3.8%. But with the Fund projecting 3% annual growth over the next five years, it will be hard to reduce poverty and create opportunities, the IMF chief warned.

Offsetting this, she suggested, required major steps. These include “a boost in productivity”, where, for instance, just closing the gap in female labour force participation could increase output by 35% in countries with gender inequality and a “green step change” that will require redirecting trillions of dollars to green projects.

It will also entail enhanced international cooperation to reduce the impact of geopolitical fragmentation; the Fund estimates that the cost of trade fragmentation could be 7% of global GDP, and with technological decoupling, costs could go into 12% of GDP.

The debt question

The final hill, Georgieva said, was fostering solidarity of reduce global disparities. In this regard she made a “double plea” on behalf of the weakest members of the international community. “Help them handle the burden of debt, which was made so much harder by the shocks of the past years; and secondly, help ensure that the IMF continues to be in a position to support them in the years ahead.”

Fifteen percent of low-income countries are already in debt distress; another 45% are vulnerable; and a quarter of emerging economies are at high-risk. “This has raised concerns over a potential wave of debt restructuring requests—and how to handle them at a time when current restructuring cases are facing costly delays.”

Georgieva said, “To help resolve this issue, IMF, the World Bank, and India as G20 Chair, recently put in place a Global Sovereign Debt Roundtable. It brings together public and private creditors, as well as borrowers, to help reach consensus on standards and processes—so we can speed up restructuring cases, including those under the G20’s Common Framework.” But even as this is underway, the IMF chief made a pitch for enhancing the Fund’s capacity to help poor countries.