The bedrock forums for global economic management are the Spring and Fall meetings of the International Monetary Fund (IMF) and World Bank Group. These take place at the level of Finance Ministers and Central Bank Governors, the political leaders who focus on the economic and financial policies that have a direct impact on the daily lives of 8 billion humans on Planet Earth (and all other forms of animal and plant life).
You are likely to hear and read more about the G-7 and G-20 Summits that bring the President of the USA together with his counterparts in other big countries. These forums started focusing on economic and financial issues—respectively in the 1970s and in 2008— but they have increasingly focused on other sources of global tension, like Russia’s attack on Ukraine and climate change. It is worth focusing on the IMF/World Bank meetings because they can be seen as dress rehearsals for the Summits. It rarely happens that a priority issue at a Summit meeting has not been thoroughly debated at the preceding IMF/World Bank meetings.
The range of issues mentioned at a typical IMF/World Bank meeting is exhausting. It goes far beyond my interests and you would be quickly bored if I tried to write about more than a few of them. For the meetings that are taking place this week, April 10-16, the four I have selected are the outlook for the global economy, the many “debt-distressed” countries, the war in Ukraine, and reform of the World Bank.
The Global Economic Outlook. The IMF has the preeminent mandate for assessing the health of the global economy and recommending policy measures to improve global economic well-being. For each Fall and Spring meeting, the IMF produces a World Economic Outlook report that has become a benchmark for all other forecasts. This Spring’s WEO was previewed by IMF Managing Director Kristalina Georgieva on April 6. Here is her two-sentence summary: “
So far, we have proven to be resilient climbers. But the path ahead—and especially the path back to robust growth—is rough and foggy, and the ropes that hold us together may be weaker now than they were just a few years ago.
Foggy is right, as I see it. The word I more often use is “uncertainty”. I see more uncertainty about the future now than at any other decade since I graduated from college—in 1963, as the Vietnam war was ramping up. The economic problem caused by uncertainty is that it depresses investment required to make life better. In my lifetime, good investment has come from two distinct sources: public sector investment in research that yielded advances like the internet, and private sector investment in everything from airplanes to office buildings to Covid-19 vaccines. These sources are driven by cost-benefit analysis and profit forecasts, respectively. Uncertainty makes both calculations unreliable and tilts investment against long-term and innovative activities that have a bigger impact on well-being in favor of short-term, status quo activities.
The IMF calculates that global GDP growth dropped from 6.1 percent in 2021 to only 3.4 percent in 2022, and is forecasting growth below 3 percent in 2023. People who know me well will remember that GDP growth, in my opinion, is a lousy measure of economic progress. Household well-being is a much better measure, although economists have not yet agreed on a good way to measure it. I agree with the trend, however: lower GDP growth and some weakening of household well-being.
It's not just the war in Ukraine that is making the outlook grim. A bigger factor is inflation in the high-income countries fueled in large part by ballooning budget deficits during the Covid-19 pandemic. The monetary (interest rate) and fiscal (budget) policies required to reduce inflation to a sustainable level have a dampening effect on employment and household income and investment.
The IMF also points to turmoil in the global finance industry illustrated by the collapse of Silicon Valley Bank in March and followed by the forced rescue of Credit Suisse by its main Swiss competitor UBS. The bloom is off the rose in the cryptocurrency world and there is growing interest in Central Bank Digital Currencies as an alternative.
Finally, the IMF stresses the importance of doing more to stop global warming and alleviate poverty in low-income countries. This is rhetoric; the IMF can only exhort. The action required will have to come from national governments and individual people.
Debt-distressed Countries. My only true claim to expertise is in this area. Eighteen years in the US Treasury Department and seven years at the Institute of International Finance made it possible for me to write what has been called “the bible” on the process of restructuring (including writing off) the debt of countries that do not have enough foreign currency to make the interest and principal payments on loans from multilateral institutions, government agencies, banks, bondholders, and other creditors. (Sovereign Debt Restructuring, the Case for Ad Hoc Machinery, Brookings Institution Press, 2003)
Since joining the Treasury Department in 1975, I have witnessed four sovereign debt crises. The fifth one is now taking shape. The first crisis began in the mid-1970s when commercial banks made too many loans to developing countries like Ecuador and Zaire (now the Democratic Republic of the Congo). This crisis carried into the 1980s, becoming known as the “Latin American Debt Crisis”. Overcoming this crisis required commercial banks to substantially write down their loans to these countries, which they resisted mightily until incentives were provided by the public sector.
The second crisis emerged in the early 1990s as a result of the IMF, the World Bank, and other multilateral development banks lending too much money to low-income countries during the rough decade of the 1980s. The problem here was that these institutions were treated as “preferred creditors”, meaning they had seniority over other creditors and maintained a policy of never writing down or writing off loans they made. To solve this problem, the US and other high-income countries made grants to the defaulting countries to make it possible for them to meet their obligations to these preferred creditors. At the same time, the high-income countries adopted a broad policy of not making new loans to low-income countries.
The third crisis occurred toward the end of the 1990s when Russia and Argentina defaulted on bonds they had issued in the US, European, and Japanese capital markets. The well-established principles for restructuring (writing down) debt owed to foreign government agencies and commercial banks did not work well for bond debt because there were so many holders who had purchased these bonds in secondary markets at a substantial discount. This aspect of debt restructuring remains a serious complication, although as many as a dozen bond restructurings have been concluded in the past 20 years.
The fourth crisis was precipitated by the Global Financial Crisis in 2007-2008 that began with the collapse of the market in the US for a certain kind of mortgage that was supposed to have risk-free features but turned out to be very vulnerable to default. The new feature in this crisis was having it target high-income countries in Europe, especially Greece. Some fantastic financial gymnastics were required to avoid defaults in the impacted countries, but their creditworthiness was largely restored within five years.
The imminent crisis now is once again targeting low-income countries, but also a group of middle-income countries. The proximate cause of debt distress in these countries was the Covid-19 pandemic that began in early 2020, producing a global recession. The outstanding new feature of this crisis is that China has emerged as the number one creditor in most of these countries, Sri Lanka and Zambia, for example. The problem is that China is reluctant to restructure its loans through the Paris Club process that has operated since 1956. For at least some of its loans, it wants to be treated as a preferred creditor.
The problem of debt-distressed low-income countries was big enough that the G-20 was compelled to declare a suspension of principal and interest payment to all creditors of these countries beginning in May 2020. The suspension was subsequently extended to the end of 2021. Recognizing that the suspension was simply kicking the can down the road, the G-20 announced at its November 2020 Summit a “Common Framework” for debt restructuring after the end of the suspension period.
The Common Framework has had a troubled beginning. Only one deal under the Common Framework was concluded in 2022, with Chad.
It will be interesting to see how this debt issue will be addressed this week. There will be strong political pressure to complete restructurings more quickly. But there is also a tricky side issue: the preferred creditor status of the IMF and the MDBs. That’s because debt owed to these creditors by low-income countries once again has become too heavy for a number of them. The problem is that the high-income countries appear to be less enthusiastic about making grants to bail out the multilaterals. I have suggested that the time may have come for the multilaterals to restructure in the Paris Club/Common Framework process, but I can’t believe the US and other key countries are ready to take that step.
Ukraine. The war in Ukraine divides the world of finance ministers and central bank governors into two camps. In one camp are the ministers and governors from the US and other advanced democracies in Europe that are deeply invested in a Ukraine victory to preserve the post-World War II order. In the other camp are ministers and governors from the rest of the world whose countries are suffering from high energy prices, disrupted grain and fertilizer deliveries, and other impacts of the war. Disagreements over how to proceed will be muted, however, because policies on the war in Ukraine are the responsibility of Foreign Ministers who do not participate in the IMF/World Bank ministerial meetings. The IMF recently announced an unprecedented $15 billion four-year program of financial support for Ukraine. The size of the program is exceptional and disbursing funds to a country at war required exceptional guarantees from the US and other key members that the IMF would be fully repaid.
World Bank reform. Ever since the World Bank was established in 1944, its president has been an American. The current president, David Malpass, was nominated by President Trump. His tenure has been controversial, but not terrible. Unexpectedly, he announced his resignation a few months ago, a year before his 5-year term ends. The US lost no time announcing a new nominee: Ajay Banga, who grew up in India and achieved prominence as the CEO of Mastercard. This leadership change comes at a moment of growing pressure on the World Bank to refocus its work in two directions: one is on “global public goods” like climate change; the other is to use its funding more catalytically to boost private-sector funding to low-income and middle-income countries. While the developing country members of the World Bank in the past have nominated non-American candidates to the position of President, none have been nominated so far. That is probably because of Ajay Banga’s ethnic origin. He is likely to begin a 5-year term on July 1 with strong support across the World Bank’s membership. The challenge for him will be to adapt his private sector skills to the very public sector culture of the World Bank.