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War in Europe, broken supply chains and spiralling food and fuel prices slow post-pandemic recoveries in emerging markets
As their spring meetings get under way in Washington DC, the International Monetary Fund and the World Bank are putting together financing facilities worth over US$500 billion to help countries hardest hit by the pandemic and Moscow's war on Ukraine over the next two years (AC Vol 63 No 8, Looking for funds as war disrupts trade).
IMF loans to member states currently total around $250bn, a quarter of its total lending capacity. Egypt is now the IMF's biggest borrower after Argentina (AC Vol 63 No 7, Back to the IMF…again).
Adding to that, the IMF launched its Resilience and Sustainability Trust (RST) this month. It will be financed mainly out of the $650bn worth of Special Drawing Rights, the IMF's reserve currency, issued last year. Two other facilities also draw on rich countries transferring some of their SDRs to low-income countries hardest hit by the crisis: the Poverty Reduction and Growth Trust (PRGT) and the Post-Catastrophe Debt Relief Trust (PCDRT).
World Bank President David Malpass said on 18 April that it is planning a $170bn crisis response fund running from this month to June 2023, with about $50bn to be disbursed over the next three months.
Both organisations are also preparing resources to fund more ambitious debt relief and restructuring packages. Their main concern is the $35bn that the most heavily-indebted poor countries are due to pay in debt servicing this year. About 60% of low-income countries – including Zambia, Ethiopia and Tunisia – are at high risk of or already in debt distress, the IMF reports.
The scale of IMF and Bank funding points to the seriousness of the unfolding economic damage of Russia's war on Ukraine. Both institutions are already committing more funds to ameliorate the financial effects than they had disbursed during the pandemic.
They reckon the effects of the war on top of the slowdown caused by the pandemic will be more severe than the financial crisis of 2007-08 which ripped across western economies. But this time many developing economies lack the reserves to shore up their national currencies, let alone protect social welfare budgets.
At the launch of the Spring Meetings (18-24 April) IMF managing director Kristalina Georgieva spoke of the rocketing food and fuel prices in tandem with broken supply chains as 'a crisis on top of a crisis' (AC Vol 61 No 10, Keeping the food flowing).
The immediate deadly risks centre on food security, exacerbated by climate change, she said. In the Horn of Africa alone, the World Food Programme estimates the combination of the worst drought in 40 years and the supply crisis caused by Russia's war will push another six million into extreme hunger by the end of the year from present estimates of 14m (AC Vol 63 No 7, Trade curbs and price spikes deepen food crisis).
After its $650bn issue of SDRs, the IMF is looking for ways to redistribute some funding to those economies struggling most with the cost of fuel, food and debt service.
Last year, the Group of 20 biggest economies (G20) agreed in principle to transfer some $100bn of SDRs from its members to the hardest pressed economies. But they didn't agree a formula for burden-sharing nor did they overcome the national political obstacles. For example, the United States Congress rejected the transfer idea, and Germany's parliament restricts the government's ability to reallocate federal bank reserves.
Some IMF member states are calling for another 'exceptional issue' of SDRs this year but consensus on that is likely to prove elusive. Top officials in the IMF and World Bank are stepping up pressure on the G20 countries during the Spring Meetings to agree a more ambitious plan on debt relief and restructuring than its Common Framework initiative which expired last December.
A stumbling block here is the coherence of the G20 in the face of the geopolitical rivalries around Russia's war. The key question is whether Russia will attend the G20 meeting this week, either in-person or virtually.
US officials have suggested they will boycott the meeting if Russia seeks to attend, encouraging other rich western economies to follow suit. Such tactics will make progress on a multilateral approach to debt restructuring and other emergency finding still more problematic.
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