Latest Covid-19 wave to slow pace of global economic recovery, IMF chief says

Tackling global debt is a priority, the IMF’s Managing Director Kristalina Georgieva says, in first interview of the year

The latest surge of Covid-19 infections will slow the pace of the global economic recovery, the International Monetary Fund's Managing Director Kristalina Georgieva said in her first media interview this year.

Last October, the Washington-based lender predicted global output growth of 4.9 per cent this year, but the world economy which was rebounding in the last quarter of 2021 will slow as a result of soaring Covid-19 cases that are crimping growth in the largest economies, Ms Georgieva said, in an exclusive interview with The National. The estimate will be revised downwards to reflect this, she said.

“We were hoping to have more momentum in the recovery in 2022, already in the last month of the previous year we have seen this momentum weakening, because the two big engines of growth of the world economy, the US and China, were slowing down, and then we got hit by Omicron”, Ms Georgieva explained.

“There is no doubt that this is going to add to economic disruptions, and it would add to uncertainty. We are currently calculating the exact impact … but I can say already that unfortunately vis-à-vis our latest outlook in October, there would be downgrades.”

IMF economists meet every three months and update their growth estimates, which will be released in the fund's World Economic Outlook later this month.

The world will have to adapt to a “shock-prone world”, in addition to ensuring greater global co-operation, said Ms Georgieva, who is a proponent of working collaboratively.

Despite the dent to growth, the IMF chief said there is much to be optimistic about.

“We have learned how to function with the pandemic still around us, we have deployed our scientists to provide protections for our people, we are now more effective with each wave that comes and the restrictions it causes are milder”.

While Ms Georgieva was optimistic that the impact of the virus will be less severe, she said there are other concerns and “uncertainty".

The IMF’s priorities for 2022 include helping people and countries deal with the fallout from the pandemic for a third year, Ms Georgieva said.

“We are stepping into 2022 having already used a great deal of our capacity to protect people and our economy”, she said, adding that the recovery is quite uneven, with different countries in different positions.

Ms Georgieva explained: “2020 was tough but from a policy standpoint it was somewhat easier, we had universal recommendations, monetary policy accommodation, fiscal policy support to protect the most vulnerable”. That is no longer applicable as countries are at different stages, and there is a concern about “divergence within countries and across countries”, something Ms Georgieva has been warning about for some time.

She noted that divergence is “deepening” due to “unequal access to vaccines”, even though the Covax alliance has delivered 1 billion doses — but delivery has been an issue.

Another issue has been access to finance, although she stressed that the fund was willing to support those who need it.

“During this crisis we have provided nearly $170 billion of financing to 90 countries”.

“We did something remarkable which is bring the membership together for a historic $650bn special drawing rights allocation, this is a shot in the arm in the global economy,” she said. Of that, $60bn of support to the Middle East region, $17bn in lending and the rest part of drawing rights.

One aspect of the “dangerous divergence” is youth unemployment, the IMF chief said.

“When we look at unemployment in the region, we look at who is most hit: youth, women and foreign workers. And youth is the most significantly impacted component, so what is necessary are labour market policies that benefit young people”. She stressed the importance of the “social compact” to ensure the growth of youth employment and entrepreneurship.

Ms Georgieva spoke passionately about her concerns regarding inequality.

“It breaks my heart … after decades of convergence with poorer countries, decades of convergence for countries catching up with the better offs, we [now] see the opposite, advanced economies and a small number of emerging markets are already reaching their pre-pandemic levels, but everyone else is falling behind”.

And at the same time, she cited rises in inflation, debt and social unrest that must be “wrestled".

Ms Georgieva is clearly concerned about global debt, calling it a “very serious problem — it was serious before the pandemic and of course it has become more serious since”, as it is the fastest increase of debt levels since the Second World War.

In 2020, the world reached record debt levels, totalling $226 trillion. The managing director said that some low income countries are now in debt distress, and for some emerging markets raising money is becoming increasingly difficult, meaning steps will have to be taken.

“We know the [US Federal Reserve] is going to advance their plans for monetary policy normalisation”, Ms Georgieva said, as she highlighted a number of further measures.

“I want to give credit to the Saudi G20 presidency for putting in place the so-called common framework to address unsustainable debt and for giving the president of the World Bank and myself the opportunity to press for debt service suspension. The debt service suspension ended in December of last year, that makes the common framework very very important and yet it still needs to deliver on the scale required”.

So far, only three countries — Chad, Zambia and Ethiopia — have asked for the common framework and Ms Georgieva said it has been difficult to implement.

“We need to make the process more predictable and timely”, she said, adding that some countries which are not eligible for debt service suspension may face trouble soon and there needs to be swift action to support them. “We have to discuss all instruments that the world has for debt resolution, that have been applied in the past, or discussed but not applied in the past”. She noted that the issue of debt is “at the top of our agenda”.

Inflation is currently a concern “because it is impacting populations and businesses”, said Ms Georgieva, and inflation could lead to the tightening of financial conditions.

“What we are mostly expecting is that by the end of 2022, early 2023, the inflationary pressures recede”. While she said she is “cautiously optimistic” that supply chain disruptions will be resolved to ease inflation, Ms Georgieva warned that other developments, like “climate shocks” could have an impact on food prices.

She had a clear message for central banks: “Our view is central banks are now in a place where they have to use their instruments to push inflation, and more importantly inflation expectations, down. As they do that, we know there will be a spillover impact on the recovery, growth and on emerging markets in developing markets with lower denominating debt”.

She sent a further message to central banks: “communicate your intentions early and clearly, based on data”. And her message to “countries with high levels of debt, already now work on a rational response, meaning if you can stretch maturities, push payments down the road, do it, improve the transparency, look at ways where currency mismatches can be addressed”.

In addition to inflation and debt, the world is facing the need to mitigate against any energy supply problems, Ms Georgieva said.

Energy prices need to be “relatively predictable and relatively stable”, she said, adding “we saw with the 2020 drop in demand and price, hitting oil exporters, and then the reverse with oil prices hitting oil importers, this is what is most dangerous in our view”.

“A stable price that balances demand/supply and also provides an equilibrium between the interests of consumers and of producers, this is the price that counts the most”. She stressed the importance of “forward guidance over a long period of time” on energy prices to allow for stability.

Having started her career at the World Bank Group in 1993 as an environmental economist, Ms Georgieva has long been an advocate of climate action. “I am so thrilled that Egypt and Abu Dhabi are the hosts of the next Cop [meetings], as I suspect this will help us to lift the potential to adaptation, for the region climate shocks are already devastating, and to solidarity, helping countries that are faced with tremendous challenges”. She said that the fund will be there to support the region and to accelerate the energy transition, “but in a fair and inclusive manner”.

When she assumed her position as managing director of the IMF in October 2019, Ms Georgieva could not have imagined that her time in office would be largely consumed by dealing with a global pandemic and its many repercussions.

Speaking about what she has learnt during this period, she said “the most important lesson is when in crisis, work fast to diagnose what is this crisis”. However, she quipped “this was a crisis like no other, we cannot apply lessons from the global financial crisis automatically”.

She added: “I believe that the IMF has been exemplary in diagnosing this crisis and proposing measures for the world”. A second lesson Ms Georgieva has learned is to “lean forward and help the most vulnerable, be quick on your feet, and the fund has been remarkably fast” in reacting. And the third lesson the managing director spoke of, which she described as “probably the most important”, is “work with others to build resilience for further shocks. Take this pandemic as a very stark reminder that we are in a more shock-prone world, and because we are interconnected, these shocks very quickly cross borders”.

She said “climate shocks” are such an example. She added that institutions like the IMF should “think about economic resilience in a more comprehensive manner. Build resilience for people … think about resilience of the economy in a more people-centric manner, how do we secure jobs, how do we secure small business, how do we provide support to the economy … and of course to think about resilience of climate, we cannot afford to continue to use our resources without thinking of future generations”.

Towards the end of the interview, Ms Georgieva spoke about how she has adapted to the pandemic, including working from home. “We had a test on March 13 [2020] on whether we can work from home, and boom, the next thing that happened, we were working from home”.

Ms Georgieva noted that the “adaptability of technology is remarkable and the big winner of this crisis is digitalisation”.

However, “what we have to recognise is that we must move to a hybrid model”, she said. “We are social beings, not interacting person-to-person has a cost”.

The IMF was set to pilot a hybrid model of work in January but it has been postponed due to Omicron, however Ms Georgieva said: “it will inevitably come, adaptability, agility, lifelong learning for the future, this is what is demanded from all of us, and we have just proven we, as people, are remarkably creative and adaptable”.

Still, a smiling Ms Georgieva stressed: “we are also social beings and if we want to retain a positive working environment it does require human interactions of the kind that built this non-tangible capital that is the strength of the collective, us being more effective than the sum of individuals are”.