The International Monetary Fund (IMF) had bad news for the global economy this past week. It lowered the global growth rate to 2.7% for next year, warned of sovereign defaults on debts, and forecast recession and gloom for markets.
“It is tough, but we can deal with these challenges,” Kristalina Georgieva, managing director of the IMF, told an audience at the weeklong annual meeting of the IMF and World Bank multilateral lenders in Washington.
“For many people, 2023 will feel like a recession,” IMF chief economist Pierre Olivier Gourinchas tweeted Tuesday as he laid out some gloomy numbers for the global economic outlook.
World Bank President David Malpass, the IMF’s Kristalina Georgieva and many leading economists counted several factors for the global economic slowdown. The war in Ukraine, the pandemic, inflation, China’s slow economy, climate change and the strong U.S. dollar, they said, had triggered the risk of a recession, with chances that the “worst is yet to come,” The Financial Times reported on the multilateral lender’s latest global outlook.
Growing high-cost debt
The economists consider high-cost debt and many countries’ increasing hardships in repaying their debts bitter realities. They feared sovereign defaults and expected more debt restructuring requests in the emerging and developing economies.
Gita Gopinath, IMF’s first deputy managing director, said that about 60% of low-income countries were either in debt stress or facing a high risk of debt stress.
Elena Duggar, chairperson of Moody's Macroeconomic Board, predicted that sovereign default rates would pick up over the next couple of years.
“We already have six sovereign defaults this year in 2022,” Duggar said. In a typical year, she said, one or two sovereign defaults could be expected. A sovereign default happens when a country fails to repay its debts.
“We do have many countries, several of whom are from sub-Sahara, where it [sovereign default] is a challenge,” Gopinath said.
As she spoke, chanting could be heard from some members in the hall, saying “cancel all debts, reparations now.” Some protesters outside the bank’s building also were calling for transparency in debt mechanisms.
The high cost of borrowing is of significant concern. IMF chief Georgieva said at the outset of the annual event that rising interest rates would start becoming an issue.
The United Nations underscored the global debt crisis in its report Tuesday and called for debt relief for 54 countries around the world. Pakistan, Tunisia, Chad, Sri Lanka and Zambia are viewed as facing the most immediate risk of sinking into a deepening debt crisis.
The IMF said Saturday it reached a staff level agreement with Tunisia under the Extended Fund Facility (EFF) for a $1.9 billion rescue package.
The IMF also resumed its support program for Pakistan and approved $1.7 billion for Islamabad in August.
The country’s finance minister Ishaq Dar told Reuters Friday he would seek rescheduling of some $27 billion in non-Paris Club debt most of which is owed to China.
Impact on prices
Gourinchas has anticipated a 9.5% global inflation rate for the remaining months of 2022. He expects it to decrease to 4.1% in 2024.
However, his predictions for next year are gloomy, and he calls it a year of recession for many people in the world.
“Inflation remains the most immediate threat to current and future prosperity by squeezing real income and undermining macro stability,” he tweeted Monday.
The inflation rate in many developing countries, however, does not match what the fund’s chief economist forecast for the globe. In September, grocery prices in the U.K. climbed to 13.9%, the Financial Times reported Tuesday.
On Tuesday, Egypt recorded a 15% jump, the highest level of inflation in the last four years, according to the state-run central agency for public mobilization and census.
The World Bank expects the inflation rate will rise to 23% in Pakistan next year, a country with around $130 billion of debt.
