The World Is Facing Its Biggest Test Now

IMF Managing Director Kristalina Georgieva has revealed that, the global economy faces its biggest test since the Second World War. She made this declaration during a Bloomberg Television interview on the first day of the season of the World Economic Forum (WEF) in Davos, Switzerland, on Monday May 23.

In consolidating the Russia-Ukraine war, the Covid-19 pandemic and the spike in instability in financial business sectors and industrious threats from environmental change, the IMF said the world faces a likely intersection of disasters.

The International Monetary Fund has cautioned against “geoeconomic discontinuity” as policymakers and business leaders meet at the World Economic Forum in Davos, Switzerland.

Spiraling food and energy prices are crushing families all over the world, while banks are tightening monetary policy to rein in inflation, exerting further pressure on indebted nations, companies and families.

According to Georgieva, their capacity to answer is hampered by one more outcome of the conflict in Ukraine — the forcefully increased risk of geoeconomic discontinuity.

“Tensions over trade, technology standards, and security have been growing for many years, undermining growth—and trust in the current global economic system.”

She added that vulnerability around trade policies alone cut global GDP by practically 1% in 2019, as per IMF research, and the D.C.- based organization’s monitoring additionally demonstrates that about 30 countries have confined trade in food, energy and other key items.

Georgieva cautioned that further deterioration would have huge global costs, hurting individuals across the socio-economic spectrum, and said tech discontinuity alone could prompt losses of 5% of GDP for some nations.

To address the developing fracture, the IMF has right off the bat called for governments to bring down trade barriers to mitigate deficiencies and lessen the costs of food and other commodities, while diversifying commodities to improve on monetary versatility.

In order to address the growing fragmentation, the IMF has firstly called for governments to lower trade barriers to alleviate shortages and reduce the prices of food and other commodities, while diversifying exports to improve economic resilience.

“Not only countries but also companies need to diversify imports—to secure supply chains and preserve the tremendous benefits to business of global integration,” Georgieva said.

“While geostrategic considerations will drive some sourcing decisions, this need not lead to disintegration. Business leaders have an important role to play in this regard.”

Also, the IMF urged collaborative efforts to deal with debt, as roughly 60% of low-income countries currently have significant debt vulnerabilities and will need restructuring.

“Without decisive cooperation to ease their burdens, both they and their creditors will be worse off, but a return to debt sustainability will draw new investment and spur inclusive growth,” Georgieva said.

“That is why the Group of Twenty’s Common Framework for Debt Treatment must be improved without delay.”

Thirdly, the IMF called for a modernization of cross-border payments, with inefficient payment systems posing a barrier to inclusive economic growth. The institution estimates that the 6.3% average cost of an international remittance payment means around $45 billion annually is diverted toward intermediaries and away from lower-income households.

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“Countries could work together to develop a global public digital platform—a new piece of payment infrastructure with clear rules—so that everyone can send money at minimal cost and maximum speed and safety. It could also connect various forms of money, including central bank digital currencies,” Georgieva said.

Finally, the IMF called for an urgent closing of the “gap between ambition and policy” on climate change, arguing for a comprehensive approach to the green transition that combines carbon pricing and renewable energy investment with compensation for those adversely affected by climate change.

Credit: CNBC LLC.