The International Monetary Fund and World Bank concluded their annual meetings in Morocco on Sunday. At the meeting, economists predicted that substantial debt challenges in developed economies would pose risks to the global economy.
Debt concerns arose as, in recent weeks, U.S. bond yields experienced an increase. Major economies like the U.S. and China have been dealing with debt crises recently. The U.S. nearly went into default a few months ago as bipartisan leaders debated about raising its debt limit. Meanwhile, China experienced a slump in one of its biggest sectors, real estate.
Aside from the major developed countries, developing and emerging economies face additional challenges due to higher interest rates, a stronger U.S. dollar and geopolitical tensions.
Turkish Finance Minister Mehmet Simsek presented a reform plan addressing the country’s key structural issue of reducing inflation. Meanwhile, Kenya is taking measures to avoid falling into debt distress by planning a buyback of a quarter of its $2 billion international bond, boosting the 2024 bond’s value by 1.2 cents in dollars.
Zambia reached a debt restructuring memorandum of understanding with creditors, including China and France. At the same time, Sri Lanka reported reaching an agreement with the Export-Import Bank of China for around $4.2 billion of debt.
One policy area that can be affected is the fight against climate change. Vitor Gaspar, head of the IMF’s fiscal division, warned that subsidy-based policies were not working for the program. It will also lead to higher debt if carbon pricing is not used to generate revenue.
Meanwhile, Nobel prize-winning economist Joseph Stiglitz said that developing nations needed grants and subsidies to foster green growth and employment. Stiglitz underlined that the fight against global warming requires the participation of less affluent countries, but expecting them to create a comparable act is unrealistic.
Instead, he suggested that wealthy nations should back the yearly creation of $300 billion in IMF special drawing rights (SDRs) to fund a global transition towards environmentally sustainable practices.
Global economic growth to slow down
IMF chief economist Pierre-Olivier Gourinchas described the global economy as “limping along, not sprinting.”
The latest IMF outlook predicts a decrease in global economic growth, dropping from 3.5 percent in the previous year to three percent this year and 2.9 percent in the following year. This figure means a 0.1 percent point reduction from the earlier 2024 estimate.
At the same time, predictions indicate that global inflation will decrease from 6.9 percent this year to 5.8 percent next year.
The IMF warns central banks that high interest rates could put borrowers in precarious positions, with five percent of banks globally vulnerable to stress if rates remain high for longer. Meanwhile, 30 percent of banks could be vulnerable if the global economy enters a prolonged period of low growth and high inflation.
Many economists have talked about how the conflict in the Middle East might affect the global market if it escalates and more countries are involved. This might be a fresh threat as the world is only recovering from the shocks of COVID-19 and the Russia-Ukraine war.
There have been concerns about a broader conflict and its potential impact on oil supplies from leading producers like Saudi Arabia and the UAE. French finance minister Bruno Le Maire told the Financial Times that the global economy would face “big consequences” if the conflict escalated.
IMF and World Bank leaders have been criticized for their delayed response to the associated risks, including potential increases in energy prices, trade disruptions and a potential refugee crisis.