In Washington was the week with the four Ws – war, strikes, weakness and warnings. Some biannual meetings between the International Monetary Fund and the World Bank are boring, easily forgettable affairs; this was not one of them.
The first V – the war in Ukraine – dominated the meetings and could very well also dominate the next gathering of the two institutions this autumn. Despite calls for the struggles to stop, there is no sign that this is happening.
This will have serious consequences for Ukraine, Europe’s poorest country even before the Russian invasion. The World Bank estimates that the cost of destroyed buildings and infrastructure alone is $ 60 billion (£ 46.7 billion). The IMF says that the economy may contract by almost 40% this year and that Kiev will need external support of 5 billion. USD per month just to keep the country in operation.
Russia will also suffer serious damage as a result of its aggression, but the impact of the war is not limited to the two main characters. This leads to more expensive energy and food, while the consequent higher inflation and slower global growth means that there is both a humanitarian and an economic rationale for ending the war.
Hence the second W: the symbolic exclusion of the British, Americans and Canadians as the Russian representatives began to speak at the meeting of G20 finance ministers and central bank governors. Russia retaliated by blocking the issuance of a communiqué at the end of the meeting of the IMF’s main political committee, which traditionally requires unanimity.
These diplomatic maneuvers highlighted weaknesses in the multilateral system – the third W. G20 came to prominence during the global financial crisis and was to replace the G7 as the primary international forum for economic policy makers.
This made sense. The G7 represented only the major developed countries, while the G20 included a broader group of strategically important nations such as China, India, Brazil, Saudi Arabia – and Russia.
The G20 got off to a good start at the London Summit in 2009, but has subsequently failed in its promise. It has become a voice shop where countries discuss today’s pressing problems – the need to make vaccines widely available or the lack of an effective mechanism to provide debt relief – but then fail to come up with the necessary solutions. There are plenty of grandstands, but few common purposes, as was demonstrated last week. By no means are all G20 members willing to publicly express dissatisfaction with what Russia is doing in Ukraine.
This brings us to the fourth and final W: the air in Washington last week was filled with warnings. The IMF warned that the recovery from the pandemic would be much slower than expected and that central banks would find it more difficult to calibrate the right level of interest rates. The World Bank warned that people would go hungry as a result of higher food prices, which might result in social unrest. Both the IMF and the World Bank warned of rising debt problems.
The outlook is bleak for developed countries such as the UK, where the pressure on the cost of living has already begun to weigh on confidence and spending. However, the outlook is even worse for poorer parts of the world at a time when some central banks – including the US Federal Reserve – are becoming more and more hawkish.
Krishna Guha, an analyst at investment bank Evercore, says: “The major takeaway from IMF and World Bank meetings … is the acute vulnerability of non-commodity-exporting emerging market countries to a perfect storm of an unfinished high-debt pandemic recovery, the war shock to energy and food prices, the growth risk of China’s lockdown and the tightening of the Fed. “
It is a reasonable summary and echoes warnings from the UN that weaker global demand, insufficient international political coordination and rising debt levels from the pandemic will generate financial shock waves that will push some developing countries into a downward spiral of insolvency, recession and arrests development. .
Achim Steiner, an administrator of the UN Development Program, says he is “extremely concerned” about the scale of the crisis and the speed with which it is unfolding. “We are ill-prepared to deal with this. As a result of the pandemic, many poor countries have no financial leeway left and have their backs to the wall.” Nearly 70 countries, he adds, are facing the “perfect storm” of rising energy costs, rising food prices and heavier debt service costs.
A fifth W was notable for his absence in Washington last week, and that’s a win. The IMF took some comfort from the $ 40 billion in pledges given to its Resilience and Sustainability Trust – designed to help poor countries tackle the climate crisis and other structural challenges – but Ukraine alone needs more than that.
Every finance minister and central bank governor knows that war is a disaster for the global economy and the cost will increase the longer it lasts. It is easy to see what the defeat looks like: stagflation and declining living standards in the developed parts of the world; hunger, food riots and debt default in the poorer parts.
It’s harder to see what victory looks like, except for a pyrrho. An immediate ceasefire and Russia’s withdrawal will lead to lower energy and food prices, reduce inflation and make it easier for central banks to limit the extent of interest rate rises. A longer war of attrition is a more likely scenario, and it will ultimately lead to weaker demand, a collapse in energy prices and much lower inflation rates.
So far, the best that the IMF and the World Bank can offer is harm reduction. The outlook is bleak and becoming more and more bleak.