World Bank-IMF meeting highlights bleak global outlook | Larry Elliot
IIn Washington, it was the week of the four Ws – war, walkout, weakness and warnings. Some biannual meetings of the International Monetary Fund and the World Bank are boring and easily forgettable affairs; it was not one of them.
The first W – the war in Ukraine – has dominated the meetings and may well dominate the next gathering of the two institutions in the fall as well. Despite calls for the fighting to stop, there is no indication that this is happening.
This will have disastrous consequences for Ukraine, the poorest country in Europe even before the Russian invasion. The World Bank estimates the cost of the crumbling buildings and infrastructure alone to be $60bn (£46.7bn). The IMF says the economy could shrink by nearly 40% this year and that Kyiv will need $5 billion in external support a month just to keep the country going.
Russia will also suffer serious damage from its aggression, but the impact of the war is not limited to the two protagonists. This leads to more expensive energy and food, while the resulting rise in inflation and slowing global growth mean that there is both a humanitarian and economic rationale for ending war.
Hence the second W: the symbolic walkout of the British, Americans and Canadians when Russian representatives spoke at the meeting of G20 finance ministers and central bank governors. Russia retaliated by blocking the release of a statement following the meeting of the IMF’s main policy committee, which traditionally requires unanimity.
These diplomatic maneuvers exposed the weaknesses of the multilateral system: the third W. The G20 rose to prominence during the global financial crisis and was meant to replace the G7 as the main international forum for economic policymakers.
It made sense. The G7 represented only the largest developed countries, while the G20 included a larger group of strategically important nations such as China, India, Brazil, Saudi Arabia and Russia.
The G20 got off to a good start at the London summit in 2009 but subsequently failed to deliver. It has become a forum where countries discuss the pressing issues of the day – the need to make vaccines widely available or the lack of an effective debt relief mechanism – but fail to find the solutions. required. There is a lot of grandstanding but few common goals, as was demonstrated last week. Not all G20 members are willing to publicly express their dissatisfaction with what Russia is doing in Ukraine.
This brings us to the fourth and final W: the air in Washington last week was loaded with warnings. The IMF has warned that the recovery from the pandemic will be much slower than expected and that central banks will find it harder to calibrate the right level of interest rates. The World Bank has warned that people will go hungry due to rising food prices, possibly leading to social unrest. The IMF and World Bank have warned of growing over-indebtedness.
The outlook is poor for developed countries like Britain, where cost of living pressures are already starting to weigh on confidence and spending. The outlook is even worse for the world’s poorer regions, however, at a time when some central banks – including the US Federal Reserve – are becoming increasingly hawkish.
Krishna Guha, an analyst at investment bank Evercore, said: “The biggest takeaway from the IMF and World Bank meetings […] is the acute vulnerability of non-commodity exporting emerging countries to a perfect storm of an incomplete pandemic recovery with high debt, the shock of the war on energy and food prices, the risk of a growth in China and Fed tightening.
It is a reasonable summary and echoes UN warnings that weaker global demand, insufficient international policy coordination and rising debt levels resulting from the pandemic will generate financial shock waves that will push some developing countries into a downward spiral of insolvency, recession and halted development.
Achim Steiner, administrator of the United Nations Development Programme, said he was “extremely concerned” about the scale of the crisis and the speed at which it was unfolding. “We are ill-prepared to deal with this. Due to the pandemic, many poor countries have run out of fiscal space and have their backs to the wall.” Nearly 70 countries, he adds, are facing the “perfect storm” of rising energy costs, rising food prices and mounting debt servicing.
A fifth W stood out for its absence in Washington last week, and it’s a winner. The IMF has been heartened by the $40 billion in pledges made to its Resilience and Sustainability Trust – designed to help poor countries deal with the climate crisis and other structural challenges – but Ukraine alone will have need more than that.
Every finance minister and central bank governor knows that war is a disaster for the global economy and that the longer it lasts, the higher the costs will rise. It’s easy to see what defeat looks like: stagflation and falling living standards in developed parts of the world; hunger, food riots and defaults in the poorest regions.
It’s harder to see what a victory looks like, other than a Pyrrhic victory. An immediate ceasefire and Russian withdrawal would lower energy and food prices, reduce inflation and make it easier for central banks to limit the scale of interest rate hikes. A protracted war of attrition is a more likely scenario, and it will eventually lead to weaker demand, collapsing energy prices, and much lower rates of inflation.
For now, however, the best the IMF and World Bank can offer is damage limitation. The outlook is bleak and growing bleak.