Declining global economy hits poor countries hard

The International Monetary Fund has said the war in Ukraine following Russia’s invasion has triggered a costly humanitarian crisis that demands a peaceful resolution. The economic damage from the conflict will contribute to a significant slowdown in global growth in 2022.

 A severe double-digit drop in Gross Domestic Product for Ukraine and a large contraction in Russia are more than likely, along with worldwide spillovers through commodity markets, trade, and financial channels. Even as the war reduces growth, it will add to inflation. The IMF said last week that fuel and food prices have increased rapidly, with vulnerable populations—particularly in low-income countries— most affected.

 Elevated inflation will complicate the trade-offs central banks face between containing price pressures and safeguarding growth. Interest rates are expected to rise as central banks tighten policy, exerting pressure on emerging markets and developing economies.

 Consequently, the IMF said in the matter of a few weeks, the world has yet again experienced a major, transformative shock. Just as a durable recovery from the pandemic-induced global economic collapse appeared in sight, the war has created the very real prospect that a large part of the recent gains will be erased. 

The IMF says the long list of challenges calls for commensurate and concerted policy actions at the national and multilateral levels to prevent even worse outcomes and improve economic prospects for all.

 “Multilateral efforts to respond to the humanitarian crisis, prevent further economic fragmentation, maintain global liquidity, manage debt distress, tackle climate change, and end the pandemic remain essential. The adverse consequences from the current geopolitical conflict are a reminder of the importance of global cooperation,” said the IMF.

In her opening remarks for the Spring Meetings Press Conference in Washington, DC, on April 20, 2022, the managing director of the IMF, Ms Kristalina Georgieva said: “ We meet at a consequential moment for the world—facing a crisis upon a crisis. The war on top of the pandemic. It is like being hit by another storm before we have recovered from the last one. The result is a massive setback for the global recovery.”

“We reduced our global growth forecast to 3.6 percent for both this year and 2023— with downgrades for 143 countries. This is caused largely by Russia’s invasion of Ukraine and the shock waves it has sent around the world,” she added.

The IMF said this is 0.8 and 0.2 percentage points lower for 2022 and 2023 than in the January World Economic Outlook Update. Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. 

In Uganda, the Bank of Uganda said in the Monetary Policy Statement of April that the economy continues to recover from the Covid-19 pandemic related downturn.

The Deputy Governor of Bank of Uganda, Mr Michael Atingi-Ego said annual growth of the real gross domestic product (GDP) was estimated at 5.2 percent in quarter to December 2021 from 3.5 percent in the quarter to September 2021.

“The full reopening of the economy and the diminished impact of the pandemic unlocked the factors that had held back economic activity. Nonetheless, there are indications that the risk of weakening growth momentum due to adverse global factors that was flagged in February 2022 may have materialised,” he said.

Mr Atingi-Ego added: “Consequently, economic growth is now projected in the range of 5.5 percent – 6.0 percent in 2022 from 6.0 percent earlier projected. The most recent high-frequency economic indicators pointed to a weakening of the domestic growth momentum in March 2022. The spike in global geopolitical tensions and supply chain disruptions are likely to hinder the stability and growth of the economy.”

The International Monetary Fund said on April 20 at the release of the World Economic Outlook for 2022 at the World Bank/IMF Spring Meetings in Washington DC that the war in Ukraine has triggered a costly humanitarian crisis that, without a swift and peaceful resolution, could become overwhelming. Global growth is expected to slow significantly in 2022, largely as a consequence of the war.

The advanced economies growth is 3.3 percent, United States of America’s growth is forecast at 3.7 percent, Euro Areas 2.8 percent, United Kingdom 3.7 percent, Canada 3.9 percent, Japan 2.3 percent, Emerging Market and Middle Income, Low Income developing countries 4.6 percent, Sub Saharan Africa 3.8 percent.  

Inflation is expected to remain elevated for longer than in the previous forecast, driven by war-induced commodity price increases and broadening price pressures. For 2022, inflation is projected at 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected in January.

Although a gradual resolution of supply-demand imbalances and a modest pickup in labour supply are expected in the baseline, easing price inflation eventually, uncertainty again surrounds the forecast.

Conditions could significantly deteriorate. Worsening supply-demand imbalances— including those stemming from the war—and further increases in commodity prices could lead to persistently high inflation, rising inflation expectations, and stronger wage growth.

 If signs emerge that inflation will be high over the medium term, central banks will be forced to react faster than currently anticipated—raising interest rates and exposing debt vulnerabilities, particularly in emerging markets.

Fiscal policy amid rising interest rates and a cost-of living squeeze: the IMF said Fiscal policies should depend on exposure to the war, the state of the pandemic, and strength of the recovery.

The IMF revealed that following a huge and necessary fiscal expansion in many countries during the pandemic, debt levels are at all-time highs and governments are more exposed than ever to higher interest rates.

The need for consolidation should not prevent governments from prioritising spending with well-targeted support for the vulnerable—including refugees, those struggling because of commodity price spikes, and those affected by the pandemic.

Tomorrow’s economy

Beyond the immediate challenges of the war and the pandemic, policymakers should not lose sight of longer-term goals. Pandemic disruptions have highlighted the productivity of novel ways of working. Governments should look to harness positive structural change wherever possible, embracing the digital transformation and retooling and reskilling workers to meet its challenges.

The IMF points out that Carbon pricing and fossil fuel subsidy reform can also help with the transition to a cleaner mode of production, less exposed to fossil fuel prices—more important than ever in light of the fallout of the war on the global energy market.

Dr Pierre-Olivier Gourinchas Economic Counsellor and Director of Research of the IMF said in this difficult and uncertain environment, effective national-level policies and multilateral efforts have an ever more important role in shaping economic outcomes.

“Central banks will need to adjust their monetary stances even more aggressively should medium- or long-term inflation expectations start drifting from central bank targets or core inflation remains persistently elevated,” he said.

Dr Pierre said as advanced economy central banks tighten policy and interest rates rise in those countries, emerging market and developing economies could face a further withdrawal of capital and currency depreciations that increase inflation pressures.

 He augured that clear central bank communications on the drivers of inflation and forward guidance on the outlook for monetary policy, supplemented—when appropriate—with capital flow management measures in line with the IMF’s revised Institutional View on capital flows, will be essential to minimize the risk of disruptive adjustments.

“Importantly, these risks and policies interact in complex ways, at short, medium, and longer horizons. Rising interest rates, the need to protect vulnerable populations against high food and energy prices, or increased defense spending, make it more difficult to maintain fiscal sustainability,” he said.  

 “Geopolitical fragmentation worsens all these trade-offs by increasing the risk of conflict and economic volatility and decreasing overall efficiency. 

[email protected]