The recovery from the Covid-19 pandemic remains “hobbled” and the world economy could sustain as much as $5.3 trillion in losses over the next five years if the vaccine divide is not reduced, according to the International Monetary Fund.
“We are unable to walk forward properly — it is like walking with stones in our shoes,” the IMF's managing director Kristalina Georgieva said in her curtain-raiser speech on Tuesday before the fund's annual meetings with the World Bank in Washington next week.
“Risks and obstacles to a balanced global recovery have become even more pronounced: the stones in our shoes have become more painful.”
In July, the fund projected the global economy would grow 6 per cent this year, but divergence in vaccination among countries is producing uneven recoveries, and rising inflation and high debt levels have led the fund to adjust its forecast, with growth now expected “to moderate slightly this year”, Ms Georgieva said.
Economic output in advanced economies like the US, China and Europe is projected to return to pre-pandemic trends by 2022, but most emerging and developing countries will take many more years to recover, she said.
“In many other countries, growth continues to worsen, hampered by low access to vaccines and constrained policy response, especially in some low-income nations. And this divergence in economic fortunes is becoming more persistent,” Ms Georgieva said.
The delayed recovery will make it “more difficult to avoid long-term economic scarring” from job losses that have affected young people, women and informal workers the hardest.
Headline inflation rates have increased rapidly in a number of countries with some more affected than others, according to the fund.
While the IMF expects price pressures to subside in most countries in 2022, some emerging and developing economies will continue to see price pressures.
A particular concern with inflation is the rise in global food prices, which have surged by more than 30 per cent over the past year, Ms Georgieva said.
“Together with rises in energy prices, this is putting further pressure on poorer families,” she said. “More generally, inflation prospects remain highly uncertain. A more sustained increase in inflation expectations could cause a rapid rise in interest rates, and a sharp tightening of financial conditions. This would pose a particular challenge for emerging and developing economies with high debt levels.”
Global public debt has increased to almost 100 per cent of gross domestic product as governments have rolled out trillions of dollars in fiscal stimulus to cushion the impact of the pandemic on their economies, according to the IMF.
“Many started the pandemic with very little fiscal firepower. Now they have even less room in their budgets — and very limited ability to issue new debt at favourable terms. In short, they face tough times and are caught on the wrong side of the fiscal financing divide,” Ms Georgieva said.
Looking ahead, overcoming the challenges requires greater vaccination, calibration of government policies and speeding up necessary reforms, she said.
Richer nations must deliver vaccines
Ms Georgieva called for a sharp increase in the delivery of vaccine doses to the developing world.
“Richer nations must deliver on their donation pledges immediately. We must boost vaccine production and distribution capabilities; and remove trade restrictions on medical materials,” she said.
“In addition to vaccines, we must also close a $20 billion gap in grant financing for testing, tracing and therapeutics. If we don’t, large parts of the world will remain unvaccinated and the human tragedy will continue. That would hold the recovery back. We could see global GDP losses rise to $5.3tn over the next five years.”
With rising inflation risks, central banks should be prepared to act quickly if the recovery strengthens faster than expected, she added.
“Calibrating policies also means carefully tailoring fiscal measures. The longer the pandemic persists, the tighter the fiscal constraints will become, forcing difficult trade-offs between lifelines to people, near-term support to the economy and advancing long-term structural goals,” Ms Georgieva said.
The fund chief called on governments to accelerate the reforms needed to transform economies by focusing on climate change, technological change and inclusion.
The upside of succeeding towards a greener economy and focusing on renewable energy, new electricity networks, energy efficiency and low carbon mobility could raise global GDP by about 2 per cent this decade and create 30 million new jobs, according to fund estimates.
Ms Georgieva reiterated previous calls for closer multilateral co-operation to overcome the challenges the world faces.
The fund has provided $118bn in new financing to 87 countries and debt service relief to poor states.
“We have all learned so much from the past 18 months,” Ms Georgieva said. “This extraordinary crisis has divided us but it has also armed us with knowledge that allows us to think differently about our future.”