The IMF’s Return to Center Stage – InsideSources
The International Monetary Fund logo (AP Photo/Itsuo Inouye)
Those who dismiss the International Monetary Fund as an institution that has long since lost its usefulness have paid no heed to the alarming deterioration in economic fundamentals in emerging markets, first as a result of the COVID-19 pandemic and now in the wake of the Ukrainian Invasion.
Nor did they pay attention to the resurgence of inflation in the advanced economies. This comeback is now forcing the world’s major central banks to start turning off the monetary policy taps that have so far kept emerging markets afloat without the need for major support from the IMF.
As the music of easy global liquidity begins to stop playing and emerging economies sink into debt, it will only be a matter of time before these economies come knocking on the door of the IMF for large-scale financial assistance. scale.
Before Russia invaded Ukraine, the COVID-19 pandemic had taken a heavy toll on emerging market economies. Not only have these economies suffered from deep economic recessions and high unemployment rates. They also found that their public finances were seriously compromised. According to World Bank estimates, never before have emerging market economies been so heavily indebted as they are today.
Russia’s invasion now threatens to aggravate emerging market debt vulnerabilities. It will not do so simply by leading to a likely default on Russia’s external debt as a result of Western sanctions. It will also happen in the wake of soaring international oil, grain and metal prices that have come in the wake of the Russian war.
The very rapid rise in energy and food prices will be a particularly severe blow to many over-indebted emerging countries in Africa and Asia that are highly dependent on energy and food imports. From a global economic perspective, large emerging economies are of particular concern, including Egypt, India, South Africa and Turkey, all of which are overly dependent on energy and food imports.
Russia’s energy and food price shock will also likely accelerate the pace at which the Federal Reserve and European Central Bank will be forced to raise interest rates to put the inflation genie back in the bottle. Already before the Russian invasion, consumer price inflation in the United States and Europe was reaching multi-decade highs of around 8%. According to the Organization for Economic Co-operation and Development, if prolonged, the Russian commodity price shock could add 1 1/2 percentage points to US inflation and 2 percentage points to European inflation.
Over the past two years, in response to the COVID-induced global economic downturn, the world’s major central banks have flooded the world with liquidity by purchasing a staggering $10 trillion in total government bonds and from the private sector. This has allowed emerging market economies to easily finance their gaping budget deficits on relatively easy terms. It also largely saved them from having to go straight to the IMF for conditional financing.
With the Federal Reserve now looking to shrink the size of its bloated balance sheet by $95 billion a month and the European Central Bank preparing to exit its bond-buying program soon, emerging market economies will now be faced with much more difficult international liquidity. the environment than before. This will leave them with little choice but to turn to the IMF for help, especially if investors lose their appetite for risk following the bursting of global bubbles in stock, housing and credit markets. generated by years of ultra-accommodative monetary policy.
If ever the IMF will be needed, it will be in the coming period. Let’s hope the IMF is ready to play its traditional role of lender of last resort to emerging markets effectively again. not least because these economies now make up about half of the global economy.