IIn Washington it was the week of the four Ws – war, strikes, weakness and warnings. Some biannual meetings of the International Monetary Fund and the World Bank are boring, forgettable affairs; it wasn’t one of them.
The first W – the war in Ukraine – dominated the meetings and could also dominate the next meeting of the two institutions in the autumn. Despite pleas to stop the fighting, there is no sign of it.
This will have dire consequences for Ukraine, Europe’s poorest country before the Russian invasion. The World Bank estimates the cost of destroyed buildings and infrastructure alone amounts to 60 billion dollars (£46.7bn). The IMF says the economy could contract by almost 40% this year and that Kyiv will need external support $5 billion a month just to keep the country going.
Russia will also suffer severe damage from its aggression, but the effects of the war are not limited to the two protagonists. It leads to more expensive energy and food, while the resulting higher inflation and slower global growth mean there is both a humanitarian and an economic justification for ending the war.
Hence the second W: the symbolic stand-out by the British, Americans and Canadians when the Russian representatives at the meeting of G20 finance ministers and central bank governors began to speak. Russia retaliated by blocking the release of a communiqué at the end of the IMF’s Main Policy Committee meeting, which traditionally requires unanimity.
These diplomatic maneuvers revealed weaknesses in the multilateral system—the third W. The G20 gained prominence during the global financial crisis and would replace the G7 as the premier international forum for economic policymakers.
That made sense. The G7 represented only the larger 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 2009 London Summit, but later failed to deliver on its promise. It has become a forum for debate where countries discuss the pressing issues of the day – the need to make vaccines widely available or the lack of an effective mechanism to provide debt relief – but then fail to find the solutions needed. There is much emphasis but little common purpose, as demonstrated last week. Not all G20 members are ready to publicly express their displeasure with what Russia is doing in Ukraine.
Which brings us to the fourth and final W: The air in Washington was full of warnings last week. The IMF warned that the recovery from the pandemic would be much slower than expected and that central banks would have a harder time calibrating the right level of interest rates. The World Bank warned against it getting hungry as a result of higher food prices, potentially leading to social unrest. Both the IMF and the World Bank warned of an increasing debt crisis.
The outlook for developed countries like the UK is poor, where cost of living pressures are already starting to weigh on confidence and spending. The prospects for poorer parts of the world are even worse at a time when some central banks – including the US Federal Reserve – are becoming increasingly restrictive.
Krishna Guha, an analyst at investment bank Evercore, says: “The bigger takeaway from the IMF and World Bank meetings … is the acute vulnerability of non-commodity exporting emerging markets to a perfect storm of unfinished, high-debt pandemic recovery that War shock to energy and food prices, risk of China growth freeze and Fed tightening.”
That’s a reasonable summary, and echoes the UN’s warning that weaker global demand, insufficient international policy coordination, and rising debt levels from the pandemic will unleash financial shockwaves that send some developing countries into a downward spiral of bankruptcy, recession, and arrest become development.
Achim Steiner, an administrator at the UN Development Programme, says he is “extremely concerned” about the scale of the crisis and the speed at which it is unfolding. “We are ill prepared for this. As a result of the pandemic, many poor countries have run out of fiscal space and have their backs to the wall.” Nearly 70 countries, he adds, are facing the “perfect storm” of rising energy costs, soaring food prices and higher debt-service costs.
A fifth W was notable for his absence from Washington last week and that’s winning. The IMF drew some solace from pledges of $40 billion to its Resilience and Sustainability Trust — which aims to help poor countries deal with the climate crisis and other structural challenges — but Ukraine alone will be more than that to need.
Every finance minister and central bank governor knows that the war is a disaster for the global economy and the costs will only increase the longer it lasts. It’s easy to see what defeat looks like: stagflation and declining living standards in developed parts of the world; Hunger, food riots and debt defaults in the poorer parts.
It’s harder to see what victory looks like than Pyrrhic one. An immediate ceasefire and Russian withdrawal would lead to lower energy and food prices, lower inflation and make it easier for central banks to limit the extent of interest rate hikes. A prolonged war of attrition is a more likely scenario, and that will ultimately result in weaker demand, a collapse in energy prices and much lower inflation rates.
For now, however, the best the IMF and World Bank can offer is damage control. The prospects are bleak and getting bleaker.