Facing Crisis Upon Crisis: How the World Can Respond
IMF News, April 14, 2022
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- Authors: Kristalina Georgieva
- Published: April 14, 2022
Introduction
- Speaker: Kristalina Georgieva, IMF Managing Director.
- Location and date: Washington, DC, April 14, 2022.
- Core framing: The world faces a crisis on top of a crisis—first the pandemic, and now Russia’s invasion of Ukraine—compounded by a growing risk of fragmentation of the world economy into geopolitical blocs.
- Human impact highlighted:
- Over 11 million displaced people from Ukraine.
- The war is hitting the world’s most vulnerable people hardest, exacerbating existing struggles from lower incomes and higher energy and food prices.
- Key systemic risk: Fragmentation into different trade and technology standards, payment systems, and reserve currencies would incur painful adjustment costs, with poor countries and poor people bearing the brunt.
Bigger Challenges, More Difficult Choices
- Pre-war and pandemic context:
- In January, the IMF cut its global growth forecast to 4.4 percent for 2022.
- Since then, the outlook deteriorated substantially due to the war, inflation, financial tightening, and frequent, wide-ranging lockdowns in China.
- IMF will be projecting a further downgrade in global growth for both 2022 and 2023.
- Scope of impact:
- The impact of the war will contribute to forecast downgrades for 143 economies this year—accounting for 86 percent of global GDP.
- Prospects vary greatly across countries: catastrophic economic losses in Ukraine; a severe contraction in Russia; spillovers via commodity, trade, and financial channels for many others.
- Commodity and inflation effects:
- Before the war, Russia and Ukraine provided 28 percent of global wheat exports.
- Russia and Belarus supplied 40 percent of exports of potash.
- Grain and corn prices are soaring; food insecurity is a grave concern.
- For advanced economies, inflation is reaching a four-decade high and is now projected to remain elevated for longer than previously estimated.
- Medium-term and distributional consequences:
- Output for most countries is now expected to take even longer to return to its pre-pandemic trend.
- Most emerging and developing countries face scarring from the pandemic, including job losses and learning losses—costs borne mostly by women and young people.
- Elevated uncertainty: The outlook is extraordinarily uncertain—beyond normal range—with risks that the war and sanctions could escalate, new Covid variants could emerge, and crops could fail.
- Policy dilemma posed succinctly: How can policymakers rein in high inflation and rising debt, while maintaining critical spending and building foundations for durable growth?
Policy Action to Safeguard the Recovery and Build Resilience
- Immediate priorities (enumerated):
- End the war in Ukraine.
- Confront the pandemic.
- Tackle inflation and debt.
- End the war / support Ukraine and neighbors:
- IMF emergency financing to Ukraine: $1.4 billion to help meet immediate spending needs.
- IMF launched a special account to provide a secure way to deliver further funding to Ukraine.
- Preparations underway, with international partners, for massive reconstruction efforts.
- Support to neighbors: example—Moldova, a country of just 2.6 million people which has already welcomed over 400,000 refugees.
- IMF is stepping up support for the 20 percent of our member countries experiencing fragility or conflict.
- Confront Covid:
- IMF staff and partners’ recent analysis: a comprehensive toolkit (vaccines, testing, anti-viral treatments) can be deployed for a modest $15 billion this year, and $10 billion each year thereafter.
- Principle: health security is economic security.
- Tackle inflation:
- Central banks should act decisively, monitor the economy closely, adjust policy appropriately, and communicate clearly.
- Emerging and developing economies face added risk from spillovers of monetary tightening in advanced economies, including higher borrowing costs and risk of capital outflows.
- Country-level tools recommended include extending debt maturities, exchange rate flexibility, foreign exchange interventions, and capital flow management measures—aligned with the Fund’s recently updated institutional view.
- International efforts needed to help economies move safely through the monetary tightening cycle.
- Liquidity importance:
- IMF lending—currently over $300 billion.
- Last summer’s $650 billion SDR allocation.
- Low-income countries are using up to 40 percent of their SDRs on Covid-related priorities, like vaccines and other essential spending.
- Address debt:
- Spending must be carefully prioritized—on safety nets, health, and education—and targeted to the most vulnerable.
- A credible medium-term fiscal path, including equitable tax policies, is key to preserving debt sustainability while delivering support.
- For many countries—especially among the 60 percent of low-income nations already in or near debt distress—debt restructuring will be required.
- The G-20’s Common Framework for debt treatment must be improved with clear procedures and timelines for debtors and creditors, and expanded to other highly-indebted vulnerable countries that can benefit from creditor coordination.
- Timely and orderly debt resolution is in the interest of both debtors and creditors.
- Structural transformations to seize:
- Green transition:
- Actions required: carbon pricing, investment in renewables, and compensation/new opportunities for those adversely affected by the green transition.
- These measures can bolster energy security.
- IMF action: creation of a new Resilience and Sustainability Trust to provide affordable longer-term funding and catalyze private investment to address macro-critical challenges such as climate change—and future pandemics.
- Digital revolution:
- Priorities: reskilling workers, unlocking innovations such as central bank digital currencies, and strengthening regulatory frameworks around crypto-assets.
- Over 100 of our member countries are actively investigating this area; the IMF is assisting with policy advice and capacity building.
- The digital future is presented as delivering new sources of productivity, growth, and jobs.
Conclusion: Indivisible
- Synthesis of risks: In seven weeks the world experienced a second major crisis—a war on top of a pandemic—risking erosion of progress made recovering from Covid, and threatened further by fragmentation into geopolitical and economic blocs.
- Interconnected consequences stressed: war in Europe can create hunger in Africa; pandemics and emissions are global in impact.
- Core prescription: The only effective remedy is international cooperation; efforts to solve global challenges must be indivisible.
- Institutional role: With near universal membership, the IMF positions itself as a tried and tested platform for global collaboration, providing policy advice and financing to those hardest hit.
- Historical resonance: Quote from Bretton Woods context—U.S. Treasury Secretary Henry Morgenthau’s “elementary economic axiom”: “Prosperity, like peace, is indivisible.”
- Closing: The challenges are indivisible; so must be our efforts to solve them. Thank you.
Source: Speech by Kristalina Georgieva, “Facing Crisis Upon Crisis: How the World Can Respond,” Washington, DC, April 14, 2022.