Debt, Inflation, War Weigh Down Global Economy-IMF

• Emerging Markets, Developing Economies To Record Modest Decline In 2023, 2024.
• Reasons For Nigeria’s Cut in Growth Projection Revealed
• IMF Warns High-Interest Rates Will Put Some Borrowers In More Precarious Positions

The International Monetary Fund (IMF) and the World Bank have projected a decline in global economic growth on the basis of debt, inflation the ongoing war in Russia and Ukraine and lately, the breakout of hostility between Israel and Palestine.

Rising from a weeklong Spring Meeting in Marrakech, Morocco the annual meetings of the International Monetary Fund and World Bank wrapped up on Saturday.

According to Reuter’s report, discussions in the Moroccan city of Marrakech ranged from the prospects for a world economy weighed down by debt, inflation and conflict to the growing wealth gap between rich and poor countries and floundering efforts to tackle climate change.

“Global recovery remains slow, with growing regional divergences and little margin for policy error. The baseline forecast is for global growth to slow from 3.5 per cent in 2022 to 3.0 per cent in 2023 and 2.9 per cent in 2024, well below the historical (2000–19) average of 3.8 per cent.

Advanced economies are expected to slow from 2.6 per cent in 2022 to 1.5 per cent in 2023 and 1.4 per cent in 2024 as policy tightening starts to bite. Emerging markets and developing economies are projected to have a modest decline in growth from 4.1 per cent in 2022 to 4.0 per cent in both 2023 and 2024.

Global inflation is forecast to decline steadily, from 8.7 per cent in 2022 to 6.9 per cent in 2023 and 5.8 per cent in 2024, due to tighter monetary policy aided by lower international commodity prices. Core inflation is generally projected to decline more gradually, and inflation is not expected to return to the target until 2025 in most cases” the report titled Navigating Global Divergences stated.

Monetary policy actions and frameworks are key at the current juncture to keep inflation expectations anchored. concerns about geoeconomic fragmentation while Chapter 3 of the report assesses how disruptions to global trade in commodities can affect commodity prices, economic activity, and the green energy transition.

Global inflation is seen dropping from 6.9% this year to a still-high 5.8% next. Central bankers signalled readiness to end interest rate hikes if events allow, hopeful that inflation can be finally tamed without too hard a landing.

Most agreed it was too early to say how Middle East strife would affect a global economy which IMF chief economist Pierre-Olivier Gourinchas described as “limping along, not sprinting”.

The heavy debt burdens of advanced economies – from the United States to China and Italy – was a recurrent theme in the meetings, which came after financial markets in recent weeks pushed U.S. bond yields higher. Italian central bank governor Ignazio Visco said there was an impression markets were “reevaluating the term premium” as investors become more nervous about holding longer term debt.

JPMorgan chair of global research Joyce Chang put it another way. “The bond vigilantes are back, and the Great Moderation is over,” she told a panel of the two-decade era of relative economic calm before the 2008/09 financial crisis.

One policy area where this could have a knock-on effect is the fight against climate change. Vitor Gaspar, head of the IMF’s fiscal division, warned current subsidies-based policies were failing to deliver net zero emissions and that scaling them up would explode public debt. “Countries will need a new mix of policies with carbon pricing at the centre,” the Fund concluded.

Looking beyond the major developed economies, higher policy rates, a strong dollar and geopolitical uncertainties are adding to challenges for the rest of the world.

Turkey was in the spotlight as Finance Minister Mehmet Simsek pitched its reform plan. “The biggest structural issue is to bring inflation down. And they’re working on it,” said Murat Ulgen, Global Head of Emerging Markets Research at HSBC.

Kenya is looking to avoid slipping into debt distress and its central bank governor told Reuters it plans a buyback of a quarter of its $2 billion international bond maturing in June – pushing its 2024 bond up 1.2 cents on the dollar.

One debt restructuring deal emerged: Zambia finally agreed a debt rework memorandum of understanding with creditors including China and France.

Progress on Sri Lanka was less clear. Sri Lanka said on Thursday it reached an agreement with the Export-Import Bank of China covering about $4.2 billion of debt, while talks with other official creditors are stalling.

High interest rates will put some borrowers in more precarious positions, the IMF warned in its Global Financial Stability Report. Around 5% of banks globally are vulnerable to stress if those rates remain higher for longer, it estimated, and a further 30% of banks – including some of the world’s largest – would be vulnerable if the global economy enters a prolonged period of low growth and high inflation.

The Ukraine war, growing trade protectionism and tensions between the United States and China are all making consensus-building tougher: In the end, there was not enough agreement to issue the usual final communique at the end of the meetings.

There was much talk ahead of Marrakech on revamping the IMF and World Bank to better reflect the emergence of economies like China and Brazil. A U.S. proposal to boost IMF lending power but save a review of shareholdings in the fund till later won broad support. A pact announced on Saturday spoke of a “meaningful increase” in quotas by end-2023 but gave few other details. Anti-poverty groups were sceptical of what had been achieved.

“The big theme this week is G7 countries papering over the cracks of shattered promises,” said Kate Donald, Head of Oxfam International’s Washington DC Office. “Despite the wringing of hands about the billions of dollars needed to tackle poverty and climate breakdown, there has been no sign of new money.”

On the home front, The Matrix gathered that the International Monetary Fund (IMF) was compelled to lower its estimate of Nigeria’s economic growth for the year 2023 due to the simultaneous effects of demonetization and rising inflation.

The Fund reports that Nigeria’s economic growth projection for 2023 has been lowered from its previous projection of 3.3% to 2.9%.

“For Nigeria, in particular, we have a growth forecast that goes from 3.3 per cent this year [2022] to 2.9 per cent next year [2023], before going up to 3.1 per cent in 2024. There is a downward revision for this year.”

“Partly, this is because of the demonetization, the high inflation, and the shocks to agriculture and hydrocarbon output. That is coming on top of those external headwinds,”

IMF bemoaned the negative effects of high inflation on consumption of goods and services across the continent of Africa.

“Inflation is peaking but is still in double digits for more than 40 per cent of the economies. We see African growth at 3.3, 4 per cent. That’s above the global average, but it’s below the potential that Africa has and that it needs to catch up more quickly toward higher income levels.”

“The shocks hitting growth are diverse, but there are several external ones coming from the higher food and fertilizer prices still from the war in Ukraine; the funding squeezes‑‑harder to get capital; and the still very high spreads, therefore, for several economies; and exchange rate pressures,” the statement titled World Economic Outlook: Navigating Global Divergences revealed.