Can IMF deal with current economic recession in the world?
At the annual meetings of the International Monetary Fund (IMF) and the World Bank next week, the world is facing a perfect storm of escalating stagflation with very high risks of global recession and financial crises.
The COVID-19 pandemic and Russia’s war on Ukraine have caused significant economic disruptions, including shortages and increases in energy, fertilizer and grain prices. But untimely policies and a lack of coordination between major countries have exacerbated these problems and pushed the global economy into the abyss.
The current economic crisis is something the IMF is designed to deal with, which is to promote policy coordination between major countries to ensure the stability of the international monetary system.
That is why the governing body, the International Monetary and Financial Committee (IMFC), made up of finance ministers and central bank governors of the member states, must put together a coherent plan to help the world deal with the current perilous situation.
Can IMF deal with current economic recession in the world?
This is particularly urgent as the Group of Twenty (G20) – once the most important forum for cooperation and policy coordination – has fallen into disruption due to the geopolitical wrangling between China and Russia against the US and Europe. If the IMFC fails to seize the opportunity, the IMF risks making headlines only by announcing downward revisions of growth estimates.
Promoting coordination and stabilizing exchange rate movements
Among the policy failures that exacerbated stagflation was the US Federal Reserve, which was slow to tighten monetary policy as inflation began to pick up, focusing on current rather than projected inflation paths. Then it escalated more aggressively than expected, sending shockwaves through the rest of the world.
Meanwhile, the newly formed UK government passed a massive package of tax cuts with no funding or fees, even though the national debt is around 100% of gross domestic product. This led to market turmoil, with the pound sterling falling to record lows against the dollar and historic selloffs in the UK government bond market, prompting the Bank of England to intervene and restore order.
These uncoordinated and even contradictory policies have seriously undermined consumer, business and investor confidence, caused sharp falls and increased volatility in financial markets and depressed economic activity.
The British pound, in particular, has depreciated by more than 20% since the start of the year, falling to record lows against the dollar. The yen also weakened 20%, prompting the Bank of Japan to intervene significantly in currency markets for the first time in decades, while the euro fell more than 15%.
The IMFC must fulfill its mandate of promoting the stability of the international monetary system – in this case by coordinating coherent policies and avoiding excessive exchange rate movements. At the very least, major member countries should recognize the international implications of their domestic policies aimed at containing inflation. They should work with other countries to find ways to manage the fallout from these measures – including measures such as foreign exchange intervention and temporary capital controls.
The IMF should support these countries which badly need it. It has about $140 billion in outstanding loans to 44 member countries and has introduced a new food shock window under its emergency lending instruments, the Rapid Credit Facility (RCF) and the Rapid Financing Instrument, both of which have weak conditionality. But while these steps are welcome, the IMF should do more to help its poor members meet extraordinary challenges.
In particular, the seven poor countries identified by the World Bank as victims of a combined food and debt crisis (Afghanistan, Eritrea, Mauritania, Somalia, Sudan, Tajikistan and Yemen) should have quick access to the Food Shock Window / RCF. Above all, IMF should work to bring relief to debt stressed states in the world.
