Finance ministers and world central bank governors will spend a lot of time discussing the depressing global outlook and risky market conditions at the annual meetings of the International Monetary Fund and World Bank next week. But don’t forget the Fires in the Fund inbox.
The Federal Reserve fights inflation with big rate hikes, leading to a possible hard landing in the United States. The European Central Bank is in hawkish inflation-fighting mode. Russia’s barbaric invasion of Ukraine is weighing on global energy and commodity prices and supplies. The oil price cap is still in the works. The European recession is imminent.
China is facing a major downturn amid a pandemic, excessive debt and housing problems. The UK’s clumsiness has sent global financial markets into a loop. Many emerging markets face tough choices between rate hikes and currency depreciation. Are national central banks collectively doing too much, creating heightened risks of financial instability, and could they be on the verge of backsliding?
The IMF’s flagship publications will provide many first-rate analyzes of these realities. But what happens is up to ministers and governors. National political orientations now seem largely locked in place. Don’t expect a coordinated macro meeting strategy.
We can expect an increase in requests for IMF financing, but the jury is out. Many underperforming emerging markets already have Fund programs. Stronger emerging markets, no doubt impacted by deteriorating global conditions, now often have healthier fundamentals, healthy reserves, floating currencies and local currency-denominated debt. Storms can be weathered without systemic contagion. However, IMF resources for emerging markets are adequate.
Participants in the Annual Meetings will also discuss their vision of the IMF – its role in climate, inequality and gender. Can it be a major precautionary lender?
Yet the IMF can make a big difference on multiple pressing and intractable operational issues – fires in the inbox – that it now faces. These should not be overlooked.
Two-thirds of low-income countries are over-indebted. The G20 common framework for compelling China to provide meaningful debt relief for unsustainable LICs remains deeply troubled. Zambia, Chad and Ethiopia signed up. Ethiopia is mired in civil war; Chad is sui generis. Zambia could be the key. China joining Zambia’s creditors’ committee and offering financing assurances is hopeful. But it took eight months to approve the Zambia program. When will a concrete debt relief agreement be concluded and delivered? Why would a finance minister sign the framework when a real deal has yet to be reached and China is dragging its feet?
Only the IMF may have the power to speak out and get things done. But it seems more committed to quiet diplomacy and unwilling to deploy its own loans under official arrears. Tackling today’s over-indebtedness is incompatible with China’s long game.
This could also apply to Sri Lanka. A schedule was agreed by staff in early September. Yet, for board approval, funding assurances are required. This puts the ball in the court of China and the private sector. How long does Sri Lanka have to wait?
The IMF is stepping up its lending to LICs. But to keep LIC lending rates at zero, the Fund needs significant grant resources from major creditors. So far, this exercise is quite insufficient.
Ukraine needs large-scale aid to fund soldiers’ pensions and salaries – not just military hardware – lest the country print money and inflation rise. Already, it has tapped into its reserves and devalued its currency amid rising inflation. American help arrived. The delivery from Europe, despite the commitments, was insufficient. More is urgently needed.
The IMF provided Ukraine with $1.4 billion in rapid support in March. It is currently developing a “food shock window” to provide unconditional funding to many members, including an additional $1.4 billion to Ukraine. This disbursement will largely refinance Ukraine’s exposure to the IMF in the coming months – Western aid will not repay the IMF.
Given the war, the Fund rightly views support for large-scale IMF programs as risky. So, in addition to the disbursement of the food shock, the IMF is implementing a new program monitoring tool with Board input, which could lead to a formal program perhaps earlier next year.
The IMF is the world’s first responder. Ukraine needs urgent help now to mobilize domestic financing and foreign inflows from multilateral, bilateral and private sector creditors, including debt relief. The IMF’s strategy is hesitant. He must lead, be visibly seen as the leader and act boldly.
Argentina, with its $30 billion exposure, remains a thorny challenge. The inflation tax can help Argentina achieve its fiscal goals. But inflation has soared to nearly 80%, with some analysts suggesting it could hit 100% this year. The parallel exchange rate is almost 100% more depreciated than the official rate. Yet the program continues quietly with the Fund lowering the bar for refinancing itself, waiting with crossed fingers for a new government that could bring progress.
One of the highlights is the IMF staff-level agreements with Barbados and Costa Rica on the first loans from the Resilience and Sustainability Facility – a facility providing longer-term support to countries integrating change climate change in their budgets. The Fund’s climate program must be carefully defined, in line with its mandate. The development of the RSF has caused controversy. Anyway, the RSF is launched and others are lining up.
The above challenges are just a few of many. Amid the collective turmoil over the global economy and the Fund’s vision, don’t lose sight of the nasty operational fires in the Fund’s inbox.
Mark Sobel is the U.S. President of OMFIF.