‘World Bank Plans $170 Billion Financing to Ease Multiple Crises’ – Larry Elliott (economics editor, The Guardian)
According to the World Bank’s President, David Malpass, a $170 billion package of financial assistance is being prepared in response to the overlapping global crises of war, pandemic, and inflation, which are wreaking havoc on the world’s poorest countries.
David Malpass cautioned that Russia’s invasion of Ukraine has contributed to the difficulties already being felt as a result of the Covid-19 problem and rising living costs, and that immediate aid was needed.
$50 billion would be spent over the next three months under plans that will be addressed with World Bank member states at the Washington-based organization’s spring conference this week, with a further $120 billion in loans supplied the following year.
Malpass told reporters, “I’m deeply concerned about developing countries. They are facing sudden price increases for energy, fertiliser, and food, and the likelihood of interest rate increases. Each one hits them hard.”
The World Bank President estimated that the global economy will grow by 3.2% this year, down from 4.1% in January, due to increasing food and energy prices, higher interest rates, the war in Ukraine, and China’s coronavirus-related shutdowns.
“People are facing reversals in development for education, health, and gender equality,” Malpass said. “They’re facing reduced commercial activity and trade. Also, the debt crises and currency depreciations have a burden that falls heavily on the poor.
“Food crises are bad for everyone, but they are devastating for the poorest and most vulnerable. There are two reasons. First, the world’s poorest countries tend to be food importing countries. Second, that food accounts for at least half of total expenditures in household budgets in low-income countries, so it hits them hardest.”
Malpass said central banks should not rely exclusively on interest rates to tackle inflation. “Central banks need to use more tools under current policies.
“The inequality gap has widened materially, with wealth and income concentrating in narrow segments of the global population. Rate hikes, interest rate hikes, if that’s the primary tool, will actually add to the inequality challenge that the world is facing.”
The World Bank and the International Monetary Fund are both concerned about the number of countries having difficulty paying their creditors at a time when global economy is faltering, and interest rates are rising.
Malpass stated that the common framework – a mechanism for assisting countries with their debt burdens – needed to be improved, as it has been criticised for being too slow and limited in scope. “Due to high debt and deficit levels, countries are under severe financial stress”, he said.
Record Debt
Deficits grew and debt grew even quicker during the pandemic than they did in the early years of earlier recessions, including the two most severe: the Great Depression and the Global Financial Crisis of 2007/8. Only the two World Wars of the twentieth century compare in scale.
Borrowing increased by 28 percentage points to 256% of GDP in 2020, according to the IMF’s Global Debt Database. About half of the increase came from the government, with the rest coming from non-financial firms and people. Public debt currently accounts for about 40% of global GDP, the highest level in six decades.
The share of the rise accounted for by emerging markets and developing countries (excluding China) was quite minor. Despite the fact that their public debt is still well below that of the 1990s, debt in these economies has progressively increased in recent years. This was due in part to their capacity to access private markets, as well as their enhanced creditworthiness and the development of their domestic debt markets. The cost of servicing has also risen dramatically. Around 60% of low-income countries are presently in or on the verge of collapse.
Sovereign Debt
When a country is unable to pay its debts, a Sovereign debt crisis emerges. However, this does not occur overnight—there are numerous warning indicators. When a country’s leaders ignore these indicators for political reasons, it frequently leads to a disaster.
The first sign occurs when the country discovers that it is unable to obtain low interest rates from lenders. Investors become anxious that the country may default on its debts due to concerns that it will be unable to pay the government bonds (debts).
As lenders become more concerned, they demand higher and higher rates to compensate for their risk. The higher the yields, the more expensive it is to refinance the country’s Sovereign debt. It will eventually be unable to continue to roll over debt. As a result, it defaults. Fear among investors becomes a self-fulfilling prophecy.
With Sovereign debt risks rising, and financial constraints resurfacing as a policy concern, a global cooperative strategy is required to reach a resolution of debt issues and avoid ‘avoidable’ defaults.
Austerity Policies
Austerity policies include cuts to government spending, tax increases, or a combination of the two. These drastic measures are being implemented in order to reduce budget deficits and avoid a debt crisis.
Governments are unlikely to implement austerity measures unless they are compelled to by bondholders or other lenders. These actions have the effect of a contractionary fiscal policy. They stifle economic expansion. This makes raising the funds needed to pay down Sovereign debt much more difficult.
Government initiatives must change as a result of austerity measures. For instance, they:
· Limit the terms of unemployment benefits.
· Extend the age of retirement and health-care benefits eligibility.
· Wages, perks, and working hours for government employees will be reduced.
· Reduce the amount of money allocated to impoverished people’s programmes.
Austerity measures also include tax reforms. For instance, they:
· Raising income taxes, particularly on the wealthy, is a good idea.
· Target tax evasion and fraud.
Privatise government-owned businesses. These are industries that are thought to be critical to the state’s interests. Utilities, transportation, and telecommunications are among them. They can be sold to raise money to pay off debt.
· Value-added taxes should be raised.
Other austerity measures reduce regulations to lower business costs. They require governments to:
· Remove some of the safeguards against unjust dismissal.
· The minimum wage should be reduced or eliminated.
· Increase the number of hours that employees work.
Some Sovereign debtors overcome their economic problems very quickly and at minor ‘human rights’ costs for their people, while others remain trapped by debts for years struggling with overwhelming debt burdens and exacerbating economic problems and human suffering!
Why Countries Agree to Austerity Measures
To prevent a Sovereign debt crisis, countries implement austerity measures. Creditors get concerned that the country will default on its debt at this point. When the debt-to-GDP ratio exceeds 77%, it is considered insolvent. According to a World Bank analysis, this is the tipping point. It was discovered that when the debt-to-GDP ratio exceeds 77% for an extended period of time, economic growth is slowed. Every percentage point of debt above this level reduces the country’s economic development by 1.7%.
For emerging market countries, the tipping point is 64%. If the debt-to-GDP ratio is higher, annual growth will be slowed by 2%. As a result, creditors begin to demand higher interest rates to compensate for the increased risk.
Why Austerity Measures Rarely Work
Austerity policies, despite their good intentions, exacerbate debt and hinder economic progress. The
International Monetary Fund (IMF) published a report in 2012 claiming that the Eurozone’s austerity measures may have impeded economic growth and exacerbated the debt crisis. The EU, on the other hand, backed the measures.
The order in which austerity measures are implemented is crucial. When a country is trying to recover from a recession, it’s not a good time. Cuts to government spending and layoffs will stifle economic development and raise unemployment. The government accounts for a significant portion of GDP. Similarly, boosting corporation taxes at a time when businesses are struggling can only result in additional job losses. Raising income taxes will deplete consumer funds, leaving them with less to spend.
When the economy is in the boom phase of the business cycle, austerity measures are most effective. The budget cuts will keep growth at a healthy 2 to 3% and prevent a bubble. Simultaneously, it will reassure public debt investors that the government is fiscally responsible.
Current Global Debt (April 2022) Exceeds $200 Trillion according to the IMF!!
Online sources: thebalance.com, worldbank.org, theguardian.com, blogs.imf.org
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