Economic experts at the International Monetary Fund (IMF) and the World Bank Group are urging governments in emerging markets and developing economies to start considering innovative solutions to combat the fallout from the novel coronavirus pandemic.
Managing director of the IMF, Kristalina Georgieva, said global economies are starting to feel the knock-on effects of the pandemic, referring specifically to interest rate hikes, inflation and rising debt.
The G20's Debt Service Suspension Initiative, which came to an end in December 2021, has plunged many poorer nations back into high-debt circumstances, forcing policymakers in emerging markets to consider stricter austerity measures.
The IMF managing director said her team is also working to introduce new instruments which will provide financial assistance to more countries over the long term. She noted that international lending agencies like the fund will have to play their part in the coming months to provide sustainable solutions.
“One way to address the limitations of the common framework is to expand it to cover countries that would need some form of debt treatment. We can move on that only with the agreement of the countries that are in the common framework. If that is not done then the question is, what are the other instruments?”
“Our ambition is to create an instrument that is focused on policy support and it is in a way piloting the transmission of Article IV to what we support with financing. My expectation is that we will have the design by the spring meetings,” Georgieva continued.
Ayhan Kose, director of Prospects Group at the World Bank, agrees, stating that “we saw the single highest increase in debt in 2020. Debt is high, at record levels when you look at both public and private debt. Having these high debt levels limit the Government's ability to implement fiscal policy to allocate spending for health, education, infrastructure and climate-related projects. That problem is an even bigger issue for low-income developing countries. Some of these countries are experiencing debt distress and they need help from the global community.”
Nevertheless, he's urging policymakers to start thinking about what they can do at the national level which may be helpful in the recovery period.
“It is absolutely essential for national policymakers and the global community to be proactive. At the country level, national policymakers need to carefully withdraw fiscal and monetary policy, think about the consequences of their decisions and at the same time communicate clearly what they are trying to do. That means having a medium-term plan, how they are going to overcome certain excesses accumulated because of the pandemic, how they are going to create the revenues and how they are going to improve the public expenditure efficiency. Beyond that, in the medium and long term there's a lot to be done in terms of reforms, policy interventions when it comes to health, education, infrastructure and digital services.”
Kose highlighted that by the end of 2023, advanced economies are going to go back to their pre-pandemic trend output levels. However, he noted that emerging market and developing economies are flying low, pointing out that at the end of 2023 the output levels are gonna be still four per cent below pre-pandemic levels.
Aside from the high-debt levels, inflation is forcing many developing countries to go back to the drawing board, a move which Kose fully encourages.
“Inflation is a problem almost everywhere. When you look at the global economy and the advanced economies last year we saw the highest rate of inflation since 2008. For emerging market, developing economies we saw the highest rate of inflation since 2011. Emerging market and developing economies central banks are trying to contain inflationary pressures. One third of these central banks already raised interest rates. On the one hand, growth is slowing, on the other hand, inflationary pressures are there, debts and deficits are quite sizable and monetary authorities need to get ahead of inflation so they have to increase interest rates.”
With that said he's advising fiscal authorities to “think about how they are going to reduce the debt and deficit at the same time. This will require a concerted effort to withdraw the policy in a calibrated fashion, thinking through how they can basically expand the revenue base, how they can have more efficient spending for public investment projects and ultimately implementing the type of reforms necessary to improve overall productivity of the economy.”
In the meantime, Georgieva admitted that while the fund would “prefer for countries not to have to come to us to be able to meet their financial needs through domestic borrowing, revenue mobilisation and external financing, we have to be prepared as there may be more turbulence.”
She said, “As the crisis manager our job is to always think of the worst-case scenario, be prepared for it and of course, pray it is not going to happen. In this year, there could be a movement around debt that is more pronounced and there could be some of this divergence impact already affecting countries.”
She revealed that the IMF anticipates increase demand for IMF financing as financial conditions tighten in member states.