‘World Economic Outlook’ and IMF’s own performance

The International Monetary Fund (IMF) recently released the April edition of its flagship report ‘World Economic Outlook (WEO)’ titled ‘Managing divergent recoveries’, where it revised upward its earlier projection for global economic growth for 2021 – from the one it predicted in October 2020 WEO at 5.2 percent, and then upgraded it to 5.5 percent in January 2021 WEO – to 6 percent, but at the same time pointed out that most of the momentum in growth is expected to come from advanced economies – led by the US since it is expected to grow in the current year by 6.4 percent – along with China primarily, which is expected to grow in 2021 by 8.4 percent. This will indeed be a sharp economic recovery overall in view of the fact that in 2020 the world’s economy contracted by 3.3 percent. Having said that, global economic recovery is expected to slow down to 4.4 percent in 2022. Moreover, as the title rightly points out that the nature of recovery shows divergent growth prospects between developed world leading the recovery, while most developing countries, which are indicating only slim-to-moderate economic growth prospects in the current and next few years.

In South Asia, WEO expected India to make a very strong growth comeback during FY2020/21, whereby it is likely to register real GDP growth of 12.5 percent, but going down – yet remaining on the higher side – to 6.9 percent in FY2021/22. On the other hand, Pakistan is expected to show a moderate recovery from FY2019/20 at negative 0.4 percent to 1.5 percent, and 4 percent in FY2020/21, and FY2021/22, respectively. At the same time, Bangladesh is expected to show strong economic growth in both 2021 and 2022, by possibly registering real GDP growth at 8.6 percent (from negative 1 percent growth in 2020), and 6 percent, respectively.

Indicating the underlying reasons for this divergence in growth prospects between advanced and most of emerging/low-income countries, IMF’s chief economist Gita Gopinath pointed out in a press briefing with regard to April 2021 WEO that ‘Additional fiscal support in large economies, particularly the United States, has further improved the outlook. … Recoveries are also diverging dangerously across and within countries as economies with slower vaccine roll out, more limited policy support and more reliant on tourism do less well. … Swift policy action worldwide, including 16 trillion dollars in fiscal support, prevented far worse outcomes. Our estimates suggest last year’s severe collapse could have been three times worse had it not been for such support. … However, unlike after the 2008 crisis, this time it is emerging markets and low-income countries that are expected to suffer greater scarring given their more limited policy space.’

At the same time, she indicated that upbeat global growth recovery projections faced challenges/risks. In this regard, she pointed out: ‘Faster progress with vaccinations can uplift the forecast, while a more prolonged pandemic with virus variants that evade vaccines can lead to a sharp downgrade. Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways. This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.’

Perhaps, growth outlook for the developing world could have been far better if there was lesser practice of ‘vaccine nationalism’ by rich countries – and to a lesser extent food and oil nationalism – much greater debt moratorium/relief from rich creditor countries, and under a far better multilateral spirit where, for instance, it would have been a lot more beneficial to developing countries had the IMF provided meaningful support in terms of enhanced special drawing rights (SDRs) allocation a lot earlier. All of this would have made available greater and much-needed fiscal space to developing countries, and would have enabled them in terms of a both better health sector response to the pandemic, and greater stimulus spending overall would have enhanced economic recovery outlook.

At the same time, more equal access to vaccine through higher production and much lower prices by removal of intellectual property rights (IPRs) on Covid-related vaccines would have helped significantly reduce divergence in growth prospects among countries. In that sense, the IMF and the World Bank should use the spring meetings platform more vigorously for reaching better outcomes with regard to IPRs by actively bringing on board the World Trade Organization (WTO) and the World Health Organization (WHO), and meaningfully pursuing this; including working towards reaching an agreement that allowed for open-source research so that a far more informed Covid vaccine is reached at, one which is better capable of dealing with evolving Covid-variants.

A November 5, 2020 New York Times (NYT) article ‘How the wealthy world has failed poor countries during the pandemic is a bit dated, but it is still highly relevant as not much has changed since then, pointed out that weak public health sectors came under a lot more stress during the pandemic in developing countries like Pakistan, whereby ‘Pakistan was alarmingly short of doctors and medical facilities long before anyone had heard of Covid-19. Then the pandemic overwhelmed hospitals...’ Unfortunately, however, while multilateral institutions like the IMF and the World Bank provided little support to developing countries even though, according to IMF’s own estimate, emerging markets – to which Pakistan belongs – formed around 60 percent of global economy.

Hence, while the IMF in its current WEO report talks about divergent growth prospects, this gap with regard to significant divergence in terms of economic growth rates between rich and poor countries could have been far less in the presence of greater support from rich, advanced countries and multilateral institutions. In the absence of such support, the divergence may well turn out to be quite a long-term phenomenon.

Gita Gopinath, in the same press briefing, pointed out with regard to divergent economic recovery paths of countries, and the impact of this in terms of lost output, living standards, and poverty levels in the following words: ‘Now these diverging recovery paths are likely to create wider gaps in living standards across countries compared to pre pandemic expectations. The average annual loss in per capita GDP over 2020 to 24 relative to pre pandemic forecasts is projected to be 5.7 percent in low income countries and 4.7 percent in emerging markets. While in advanced economies, the losses are expected to be smaller at 2.3 percent. Such losses are reversing gains in poverty reduction, with an additional 95 million people expected to have entered the ranks of the extreme poor in 2020 compared with pre pandemic projections.’

With the IMF reportedly only disbursing $107 billion to middle-income and poor countries, perhaps this projected output loss could have been curtailed with better financial support, allowing in turn greater stimulus spending, from multilateral institutions like the IMF. In this regard, a recent article ‘How has the IMF fared during the pandemic?’ published in The Economist, pointed out a serious lack of support by the IMF, even when compared with how it performed during the time of far lesser crisis in the shape of Global Financial Crisis of late 2000s.

The article highlighted in this regard: ‘Since March 2020 the fund has doled out $32bn in emergency financing and offered $74bn through other schemes. Yet the support pales in comparison with the scale of the covid-19 crisis. The fund lent more in the year to September 2009, during the global financial crisis; the 85 countries receiving help today make up only around 5% of global GDP. The fund had expected an early wave of rapid financing to give way to more structured programmes with more strings attached. But so far only 12 new deals have been approved. Last April the IMF thought take-up of the SLL [short-term liquidity line] could be up to $50bn. It has, in fact, been zero.’ At the same time, a recent Oxfam International study indicated that the IMF even discouraged spending by countries during the pandemic in many of its current programme countries whereby, as per the study, during March-September 2020, in the 91 loans, under standby arrangements that it negotiated with 81 countries, it required of programme countries, in 76 of those loans to make reductions in their public expenditure!

An article in Financial Times recently called for adopting greater ambition by the IMF and the World Bank during their spring meetings. In this article ‘IMF’s spring meeting lack ambition for a world in crisis’, the writer, Mark Lowcock, indicated that probable initiatives from the IMF like issuing SDRs up to $650 billion in the coming months, and ‘extended pause on debt service payments for the poorest countries’, among other steps may very well likely to be agreed during the spring meetings, yet ‘they will be only marginally helpful for countries where the end of the pandemic remains far off. They certainly will not prevent IMF managing director Kristalina Georgieva’s warning of a “dangerous divergence” between economies from becoming a reality.’

Among other steps that Lowcock suggested include firstly, the IMF and World Bank sustaining the increased lending levels reached last year, for the next five years, and secondly ‘a fundamental restructuring or write-down of debt is required for a significant number of developing countries.’

In the same press briefing, Gita Gopinath pointed out that ‘Now policymakers will need to continue supporting their economies while dealing with more limited policy space and higher debt levels than prior to the pandemic. This requires better targeted measures to leave space for prolonged support of needed. With multi speed recoveries, a tailored approach is necessary with policies well calibrated at this stage of the pandemic, the strength of the economic recovery and the structural characteristics of individual countries. … Fiscal support should be well targeted to affected households and firms, and monetary policy should remain accommodative while proactively addressing financial stability risks.’

This thought process presents a rather oblivious attitude of the IMF to ground realities facing developing countries with little fiscal space – given little debt relief/moratorium from creditor countries, quite low level of financial assistance received from multilateral institutions during the pandemic, and lack of needed understanding in programme conditionalities by IMF – on one hand, and on the other, with the phenomenon of ‘triple nationalism’ – vaccine, food, and oil – bringing strong inflationary currents to developing countries dependent on these imports.

The developing countries being in a high debt situation and facing a significant build-up in inflationary pressures, it will, therefore, not be possible for the country to remain accommodative in its fiscal and monetary policy stances in the near future in the context of high level of fiscal stimulus demands during the pandemic, and at the same time, both provide stimulus, and attain macroeconomic stability; without much needed accommodation shown by the IMF in its current programme with the country – especially in terms of internalizing understanding that inflation is at least equally a fiscal/governance related phenomenon in developing countries like Pakistan, and therefore, if anything, that policy rate needs to be revised downward from its current level – in addition to lack of financial support it has provided in terms of enhanced SDR allocation, over and above the loan amount under the programme.

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021