International Monetary Fund (IMF) recently released the July 2022 update of one of its flagship reports ‘World Economic Outlook’ (WEO).
The title ‘Gloomy and more uncertain’ of the report for this particular update is indeed quite representative of difficult economic situation globally, especially of the developing countries. Here, the WEO July update points out: ‘A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize.
Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations. Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide — especially in the United States and major European economies — triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting Covid-19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine. The baseline forecast is for growth to slow from 6.1 percent last year to 3.2 percent in 2022, 0.4 percentage point lower than in the April 2022 World Economic Outlook.’
Moreover, IMF’s chief economist in a blog article ‘Global economic growth slows amid gloomy and more uncertain outlook’ on July 26 highlighted stagflationary situation facing both developed and developing countries, in general, was basically due to supply-side shock. He pointed this out as: ‘Despite slowing activity, global inflation has been revised up, in part due to rising food and energy prices.
Inflation this year is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies — upward revisions of 0.9 and 0.8 percentage points respectively — and is projected to remain elevated longer. Inflation has also broadened in many economies, reflecting the impact of cost pressures from disrupted supply chains and historically tight labour markets.’
This realization calls into question the over-board reliance on monetary tightening — which has been vigorously happening overall in both global north-, and south — and lesser focus on reducing the supply-side causes of ‘imported inflation’, which in turn feeds into cost-push channel of inflation.
On the contrary, while there is realization, for instance, by the WEO update that global economic situation is ‘gloomy and more uncertain’, yet there is a serious lack of emphasis on the needs for rolling back neoliberal mentality, whereby, there remains lack of regulation effort by rich, advanced countries, and multilateral institutions towards reducing excessive profiteering that is taking place over and above the purely economic dynamics of global supply shock, on the one hand and on the other, not reducing capital market liberalization to bring down volatility of portfolio investment that has significantly contributed to an appreciated US dollar; which in turn has contributed to lowering of foreign exchange reserves of developing countries overall.
There is also little emphasis on dealing with the fast deteriorating debt sustainability situation of developing countries, which have received, for instance, little financial support during the pandemic in the shape of special drawing rights (SDRs) and mostly a short time-horizon moratorium on multilateral/bilateral debt, while no plans as yet have been laid out by the likes of IMF and treasuries of rich, advanced countries on dealing with a huge private debt burden that developing countries are facing.
On both these counts, renowned economist, Jayati Ghosh, gave very pertinent comments in her recent interview with ‘Democracy Now’ media channel. According to her, ‘…Ukraine war is generally blamed for all these big, massive increases in the price of the food and fuel, but that’s only part of the explanation.
A very large role has been played by profiteering of big companies, and financial speculation in the commodities markets, and these are things that can easily be controlled by regulation. So, rich country governments are choosing not to control, that they are blaming supply shortages, and the war, when more than half of the inflation actually comes from these other forces. And then they are doing nothing about this massive, emerging debt crisis.’
Moreover, in her recent Guardian published article ‘There is a global debt crisis coming — and it won’t stop at Sri Lanka’, and taken together with her interview comments, she pointed out the inaction of main global economic players in meaningfully supporting developing countries in cushioning their foreign exchange reserves, which overall have continued to deplete to make some sort of stimulus spending during the continuing pandemic, and face much higher inflation due to weakening of domestic currency — both due to making debt repayments/paying surcharges, and in making more expensive imports – inflates its imported component.
In the article, she pointed out: ‘The half-hearted attempts at debt relief, such as the moratorium on debt servicing in the first part of the pandemic, only postponed the problem. There has been no meaningful debt restructuring at all.
The IMF bewails the situation and does almost nothing, and both it and World Bank add to the problem through their own rigid insistence on repayments and the appalling system of surcharges imposed by the IMF. The G7 and “international community” have been missing in action, which is deeply irresponsible given the scale of the problem and their role in creating it.’
Although the dollar continues to rise, and there is no meaningful debt relief programme in place to help countries by multilaterals, especially in terms of dealing with private debt – not to mention the significant rise in Pakistan’s credit default swap (CDS) rating in recent months – the acting governor of State (or central) Bank of Pakistan (SBP) insists that the country has little to worry in terms of meeting financial liabilities, as was pointed out in a recent Financial Times (FT) article ‘Pakistan’s financing worries are ‘overblown’ insists central bank governor’ as ‘“On the external debt servicing side, the next 12 months — while they look challenging — are not as dire as I think some people make them out to be,” Syed said. “Especially as we have the cover of the IMF programme during what is going to be a very difficult 12 months globally.”’
Having said that, while it is true that Pakistan has continued to receive meaningful support in terms of mostly being provided with debt moratorium in debt repayments to bilateral countries — like from the Middle East and China — yet as per the breakup on debt repayments as highlighted in a recent article ‘Forex market turmoil and possibility of turmoil’ in Business Recorder (BR) by noted economist, Dr Waqar Masood Khan, whereby ‘Of its debt of about $98 billion as on 30-6-2021, Pakistan owes $42 billion (43%) to multilaterals (IMF, World Bank, ADB, etc.), $31 billion (32%) to bilateral creditors, of which $11 billion is owed to Paris Club countries and $20 billion to other bilateral, of which China is the largest at $18 billion and the remainder to the UAE and KSA; Bonds and Sukuk are about $9 billion (9%) and commercial loans are $10 billion (10%) most of these are also from China.’
Hence, there is still around $19 billion that is owed to private creditors, and overall as well, a debt moratorium, and that too for a short-term, will only delay the burden for a little while, and is not a meaningful solution, which should be more on the lines of debt relief, since it will be difficult to increase exports in the wake of high import prices due to global supply shock, and also because of higher cost of capital at home, not to mention the traditional economic institutional reform bottlenecks of developing countries, especially where there is also high political instability.
Overall, during the last decade or so, the debt portfolio of developing countries has significantly shifted to private/commercial lending, but there is no meaningful step being taken by rich bilaterals and multilaterals to facilitate developing countries in dealing with this, even as they face very high imported inflation, and stimulus needs in a pandemic; and given many of these countries from Latin America, to Africa, to the Middle East, to Asia have seen this lack of focus contributing to both economic, and political instability, and both feeding each other in turn.
Therefore, while it is important that lopsided enhanced SDR allocation from last August gets relocated — meaningfully and quickly — to developing countries, fresh SDR allocation is already made.
Moreover, the notorious IMF surcharges are immediately stopped from being accrued going forward, and as Jayati Ghosh rightly demanded in her same interview that an international, dedicated debt management body is made, whereby she pointed out in this regard: ‘…what was done during the pandemic was a debt moratorium, that is to say you don’t have to pay interest payments now, for a year or a year-and-a-half or something. They’re all due now.
They didn’t change the value of the debt. Now, debt restructuring that is reducing the debt, writing-off a part of the debt is something that happens regularly in all credit markets… this is not being done for sovereigns…right now what you need to do is have a global system for debt restructuring, and force a debt write-off. …Enforce a significant debt relief that involves cutting down of the absolute values of debt. It was done for Germany in the 1950s. For some reason it can’t be done to developing countries today. …The most obvious solution is to have some kind of a global debt authority that will buy up distressed debt.’
Copyright Business Recorder, 2022
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7