Economic Turmoil


Since the start of the pandemic, low-income countries have benefited from some attenuating measures. Domestic policies, together with low interest rates in advanced economies mitigated the financial impact of the crisis on their economies. No doubt 2022 will be much more challenging with the tightening of international financial conditions on the horizon. Countries will need to transition to strong programs, and for low-income countries that need comprehensive debt treatment, the Common Framework will be critical to unlock IMF financing.
Advanced economies in the G20 should extend and improve their debt relief initiative, warning that many countries face a dire crisis without the help. We may see economic collapse in some countries unless G20 creditors agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated and it is critical private creditors also offer relief. The G20 Debt Service Suspension Initiative (DSSI) expires at the end of the year, and without a renewal, countries would face financial pressure and spending cuts just as new Covid-19 variants are spreading and interest rates are expected to rise.
Debt challenges are pressing and the need for action is urgent. The recent Omicron variant is a stark reminder that the pandemic will be with us for a while. Advanced economies in the Group of 20 announced the program last year amid the Covid-19 pandemic, which hit poor countries the hardest, hampering the ability of those governments to service their debt and support their people. The G20 twice extended the DSSI, but the IMF and World Bank have been urging creditors to do more to help with the burgeoning debt load. There are 73 countries eligible for relief under the program.
Now the massive stimulus pumped in during the pandemic has left the global economy vulnerable to another financial crisis. Policymakers must tread carefully as they combat a global surge in inflation because unprecedented stimulus during the pandemic has encouraged investors to take excessive risks, causing valuations of some assets to become overly stretched. The policymakers are confronted with a challenging trade-off: maintaining near-term support for the global economy while preventing unintended consequences and medium-term financial stability risks.
The developing countries should view ‘economic turbulence’ due to slow world economic growth The world economy will be in for a rocky ride this year, with low global growth and possible financial market turbulences set to affect developing economies. The world’s economy to grow at a slower pace of just 3 percent in 2015, down from the 3.8% estimated last year. In 2016, growth is expected to accelerate to 3.6%. Risks for a serious global slowdown are alarmingly high.
Last year, developing economies grew by 4.4% and advanced economies by 1.3%. The IMF expects these ratios to flip this year—with developing countries growing at 5.3% (down from an estimated 5.7% in 2014), and advanced economies at a mere 0.9%. In 2016, developing countries are projected to grow by 5.8%, down from 6.4% last year, while the United States is expected to see the growth of 2.6%, up from 2.1%. “Advanced economies will likely be weighed down further by investment cutbacks and a sharp decline in their export growth.
In emerging market and developing economies, growth will be supported by lower oil prices but pulled down by weaknesses in commodity exporters. The United States is the world’s largest economy followed by China, Japan, Germany, and Britain. The euro area together would form the world’s second-largest economy.