‘When they gather in Washing-ton next week for the International Monetary Fund and World Bank Group annual meetings, the world’s finance ministers face what has been labelled a polycrisis: Challenges ranging from increased interest rates, climate change and an epically strong dollar, to food-supply shortages, high inflation and a still-prevalent pandemic all combine to threaten not just the global economy but also the livelihoods of hundreds of millions.’ – An excerpt from The Washington Post published article on October 5, 2022 titled ‘IMF-World Bank meetings are the last stop before a coming economic storm’, and written by Lawrence H. Summers, and Masood Ahmed
The International Monetary Fund (IMF) and World Bank annual meetings that will be held between 14-16 October perhaps could not have come at a more perilous time for global economy. With climate change-caused catastrophic events such as unprecedented flooding in Pakistan that left one-third of the country inundated, and in the process affected the lives and livelihood of around 33 million people have only exacerbated global economic issues already suffering a serious global supply shock created through the pandemic, and this mainly food and energy crisis accentuated by the war in Ukraine. Having said that, an over-reaction in terms of over-reliance on a tight monetary policy to check strong inflationary headwinds has ushered in strong recessionary under-currents globally — both in the global North and South.
The IMF in its latest World Economic Outlook (WEO) report titled ‘Countering the cost-of-living crisis’, released earlier this month, revised downward the global economic growth outlook for the current year from 3.4 percent in July to 3.2 percent currently.
WEO report pointed out in this regard: ‘Our latest forecasts project global growth to remain unchanged in 2022 at 3.2 percent and to slow to 2.7 percent in 2023 – 0.2 percentage points lower than the July forecast – with a 25 percent probability that it could fall below 2 percent. More than a third of the global economy will contract this year or next, while the three largest economies – the United States, the European Union, and China – will continue to stall. In short, the worst is yet to come, and for many people 2023 will feel like a recession.’
Highlighting the acute nature of global economic issues, a recent Financial Times article ‘IMF forecasts “very painful” outlook for global economy’ highlighted IMF’s concerns as pointed out in WEO, and otherwise, as ‘The IMF has said there is a growing risk that the global economy will slide into recession next year as households and businesses in most countries face “stormy waters”. …In an interview with the Financial Times, Pierre Olivier Gourinchas, the IMF’s chief economist, said there was as much as a 15 per cent chance global growth could fall below 1 per cent eventually.
This level would likely meet the threshold of a recession and would be “very, very painful for a lot of people”. “We are not in a crisis yet, but things are really not looking good,” he said, adding that 2023 would be the “darkest hour” for the global economy.’
So it is in this overall global economic context of dealing with the fast unfolding existential threat of climate change crisis – and one of its main manifestations in the shape of current pandemic, and preparing for likely future pandemics – serious food and fuel shortages, decades-high inflation, recession, and in particular a situation of serious debt distress, and lack of fiscal space by countries in the global South all make the current meetings of IMF and World Bank exceedingly important.
For the IMF, it is indeed very important to work towards quick release of enhanced special drawing rights (SDRs) allocation of the maximum available limit with it at $650 billion. The above reasons, among possible others, make an urgent case for such release.
In addition, IMF unlike the SDR allocation of $650 billion that it made in August 2021, in which it adopted the routine allocation formula of distributing according to individual country quota, should this time give more weightage to foreign exchange reserves cushioning needs of a particular country. This is important given in the previous allocation of August 2021, quota-based allocation resulted in most of $650 billion going to rich, advanced countries needing less of such support in the first place.
There has been rising global advocacy calling for a fresh SDR allocation in this regard. Recently, reportedly 140 civil society organizations made a plea for such a release, and also pointed towards the need to make the allocation on the basis of a more appropriate distribution formula.
In a letter that they wrote to IMF Board of Governors, they indicated, for instance, ‘While we support reforming how SDRs are allocated to better target vulnerable countries, including advancing a much-needed IMF quota reform, without the SDRs from last year’s issuance, many countries would likely be faring much worse today, and would be even less equipped to respond to the new crises that have emerged in 2022. … A new allocation of at least $650 billion would immediately make hundreds of billions of dollars available to nearly all low- and middle-income IMF member countries without debt or conditions and only requires political will on the part of the Fund’s board… They do not cost the IMF member governments anything; nor do they contribute to inflation.’
Moreover, a recent Bloomberg published article ‘Calls mount for new $650 billion IMF boost to help poor nations’ pointing towards the same letter highlighted: ‘About 140 organisations worldwide asked the International Monetary Fund to issue at least $650 billion more in reserves to help its member nations grapple with “multiple historic, overlapping, and generally worsening crises.” … Pressure is mounting on the IMF to act as the world’s most financially fragile countries, from Argentina to Ukraine, have burned through the extra IMF reserves they got last year, raising calls for a fresh injection to help them weather higher interest rates, food and fuel costs.
In July, key Democratic congressional allies urged President Joe Biden’s administration to support a new injection of resources for countries at the IMF to help them deal with the fallout from Russia’s invasion of Ukraine.’
It is October already, and the annual meetings should make a serious push for releasing the enhanced SDR allocation, and with a lot more appropriate distribution formula. Another priority area for the meetings should be to immediately cancel the ‘surcharge’ policy of IMF as fines on late repayments of IMF loans.
Given the enormity of economic challenges, including the climate change and the war in Ukraine, this is already an overdue needed policy action from the IMF. Hence, the US Treasury needs to give the nod of approval to the IMF for the release of enhanced SDR allocation at $650 billion, so that such allocation is immediately released.
These are important steps in weakening an otherwise significant imported inflation channel, and overall rising debt distress globally, especially as the US dollar has continued to gain much strength at the back of quick and heavy monetary tightening by the US Federal Reserve. Such an allocation is also important for expanding the fiscal space of developing countries for making needed health-, and climate-related expenditures.
With regard to cutting health expenditure, a recent Guardian published article ‘Half of poorest countries have cut health spending despite Covid, says Oxfam’ highlighted an Oxfam report as: ‘Many of the world’s poorest countries have cut health spending during the last two years, sometimes to make debt repayments to rich creditors, according to a report by Oxfam that shows inequality between rich and poor nations worsening during the coronavirus pandemic. Analysis of national budgets across 161 nations found that despite the biggest global health emergency in a century, half of low- and lower-middle-income countries cut health spending, while almost half cut their welfare budgets and almost three-quarters cut education spending.’
In addition, the IMF should also bring together major global treasuries, and discuss ways and means to rein in the current unwarranted hawkish monetary tightening stance, since the current inflationary buildup is both a supply-side phenomenon, and not just mainly a demand-side phenomenon. Urgent action is needed in this regard as developing countries have already seen a lot of capital flight. An important agenda item for World Bank at the annual meetings should be to improve its efforts with regard to allocations and overall focus for dealing with climate change crisis.
The commitment by the World Bank in this regard needs renewed vigour, especially in the wake of the recent controversial behaviour from its President, David Malpass, on climate change, as highlighted by a recent article ‘David Malpass is a climate and development failure’ as follows: ‘Malpass recently attracted media headlines after he appeared on a New York Times panel to discuss climate finance.
The moderator asked him three times about Al Gore’s claim that he was a climate denier and whether he agreed “man-made burning of fossil fuels is rapidly and dangerously warming the planet.” Three times he demurred, eventually declaring “I don’t even know—I’m not a scientist.” This was not the first time Malpass, who was nominated by former president Donald Trump for the World Bank job, has questioned or denied climate science.’
Overall, with regard to reported issues facing World Bank in terms of their climate-related lending actions, a recent Guardian published article ‘World Bank criticised over climate crisis spending’ pointed out: ‘The World Bank has come under fire for failing to show that its claimed spending on the climate crisis is real, in a report suggesting up to 40% of its reported climate-related spending is impossible to account for. Of $17.2 billion that the World Bank reported it spent on climate finance in 2020, up to $7 billion cannot be independently verified, according to research by Oxfam.’
Neoliberal, and austerity policies that form a strong basis of IMF and World Bank thinking, have particularly come under serious discussion since the Global Financial Crisis of 2008/09, need also to form an important point of discussion at the annual meetings, given the fundamental issues in the extent of practice of for instance regulation, and in terms of spending towards more climate change/disaster-resilient and much better hedged economies, especially in the global South.
A September 24 FT published article ‘Global climate leaders push for overhaul of IMF and World Bank’ highlighted the urgency of needed deep reform of the two Bretton Woods institutions, in the following words: ‘A rebellion against the status quo of the global financial architecture dating to the second world war gathered momentum in New York this week as developing world and climate leaders demanded action to help them deal with climate change. …Mia Mottley, the prime minister of Barbados, who has become the de facto leader of efforts by smaller, less wealthy nations to build a global coalition to secure funds to help tackle the ravages of climate change, called on Friday for “a new internationalism”.’
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