Sri Lanka a ‘warning sign’ for countries with high debt levels and limited policy space – IMF

IMF chief Kristalina Georgieva on Saturday warned officials from the Group of 20 major economies to take urgent action to combat inflation, warning that the “exceptionally uncertain” global economic outlook could turn worse if higher prices persisted.

Georgieva, speaking at a G20 finance officials meeting in Indonesia, said: “I wish the global economic outlook was as bright as the sky in Bali, but unfortunately, it is not. The outlook has darkened significantly, and uncertainty is exceptionally high. Downside risks about which the IMF had previously warned have now materialized.”

She pointed out that Russia’s intensifying war in Ukraine had increased pressure on commodity and energy prices, and global financial conditions were tightening more than expected.

“And continuing pandemic-related disruptions and renewed bottlenecks in global supply chains are weighing on economic activity,” remarked Georgieva.

“As a result, later this month we will project a further downgrade to global growth for both 2022 and 2023 in our World Economic Outlook Update. Moreover, downside risks will remain and could deepen – especially if inflation is more persistent – requiring even stronger policy interventions which could potentially impact growth and exacerbate spillovers particularly to emerging and developing countries,” she noted.

“Countries with high debt levels and limited policy space will face additional strains. Look no further than Sri Lanka as a warning sign,” she cautioned.

“Emerging and developing countries have also been experiencing sustained capital outflows for four months in a row. They now suffer the risk of reversing three decades of catching up with advanced economies and instead falling further behind,” she added.

The IMF chief said to navigate this extraordinarily challenging environment, there are three priorities:

*First, countries must do everything in their power to bring inflation down. Failure to do so could risk the recovery and further damage living standards for vulnerable people.

“The good news is that central banks are stepping up. Monetary policy is increasingly synchronized: more than three-quarters of central banks have raised interest rates and have done so 3.8 times. Central bank independence is critical for the success of these policy actions, as is clear communication and a data-driven approach,” stated Georgieva.

*Second, fiscal policy must help – not hinder – central bank efforts to tame inflation. This is a complex task. With growth slowing down, some people will need more support, not less. So fiscal policy needs to reduce debt while providing targeted measures to support vulnerable households facing renewed shocks, especially from high energy or food prices.

*Third, a fresh impetus for global cooperation will be critical to confront the multiple crises the world is facing.

“We need G20 leadership particularly to address the risks from food insecurity and high debt. Here, I welcome the focus on food security issues during these meetings. Food insecurity means hunger for millions of people,” observed Georgieva.

“Yet it is a solvable problem. Together with heads of the UNFAO, World Bank, WFP and WTO, the IMF is calling on the international community to step up and work together to support those in immediate need, remove export restrictions, promote food production, and invest in climate-resilient agriculture,” she added.

According to her, a strong global leadership is needed to tackle the scourge of high debt, which has reached multiyear highs.

More than 30% of emerging and developing countries are at or near debt distress. For low-income countries that number is 60%. And with tightening financial conditions and exchange rate depreciations, the debt service burden is a harsh – and for some countries – unbearable burden.

“In that environment, it is paramount for the G20’s Common Framework (CF) to deliver on its promise. I am encouraged that the three creditor committees for Chad, Ethiopia, and Zambia are meeting this week. We need results. The whole world is watching, she noted.

Georgieva pointed out that new rules and timelines should be established for the CF. “Also it is important to expand coverage to non-DSSI countries. I urge the G20 to come together on a way forward and to do so swiftly. The debt situation is deteriorating fast and a well-functioning mechanism for debt resolution should be in place, she added.

The IMF chief urged G20 leaders to reinvigorate collective efforts to deliver on common global ambitions. “This includes making progress on SDR channeling to amplify the effect of the IMF’s recent $650 billion SDR allocation,” she stated.

Lauding the G20 in helping establish the Resilience and Sustainability Trust (RST) with close to $40 billion in pledges, Georgieva said: “Now is the time to turn those pledges into actual contributions for the new Trust to be operational by the Annual Meetings in October.

“The need to support our vulnerable member countries to address longer-term structural challenges, especially those related to climate change and pandemics, could not be more pressing,” she added.

(Trade Arabia News Service)