The International Monetary Fund warns of risks to emerging countries as a result of too rapid rise in interest rates to curb inflation

The pandemic has led to unprecedented increases in sovereign debt. This is one of the weaknesses in the global economy that the International Monetary Fund pointed out on Tuesday when updating its forecasts for the coming years. “Financially speaking, many countries’ room to maneuver has already been eroded by the constrained spending associated with Covid-19. Debt levels have increased significantly as exceptional budget support is expected to be withdrawn in 2022-23.”notes Pierre-Olivier Gorinchas, director of research at the International Monetary Fund, who fears it “The war in Ukraine and the looming rise in interest rates around the world will further reduce the financial capacity of many countries, especially developed and emerging oil and food importers.”.

slowing global growth

As a result, this accumulation of not only sovereign debt but also private debt makes the global economic recovery more uncertain today, and tests the resilience of the financial system, according to estimates of the fund, which has revised its growth forecast downward. % in 2022 and 2023. So far, the IMF has forecast an increase of 4.4% this year and 3.8% next year.

The war in Ukraine will make it difficult for many emerging market governments to repay their foreign creditors, fueling fears of potential crises. With inflation already high, the sanctions imposed by Western countries on Russia have driven up the prices of food, energy and other commodities at a time when many major central banks have been raising interest rates, and interest in controlling inflation, which has reached record levels around the world. Already, before the invasion of Ukraine, food prices rose, as evidenced by the FAO index, which reached an all-time high in February.

Today, countries such as Pakistan, Egypt, Tunisia and Argentina are on the brink of a social explosion due to the high prices of basic commodities that burden the poorest families.

Sri Lanka example

Like Sri Lanka, which is sinking into a serious crisis, after failing to pay its foreign debts. He requested emergency financial assistance from the International Monetary Fund, and imposed fuel quotas to stem social outrage. The Ministry of Finance justified its default due to the war in Ukraine which is on top of the pandemic. Tourism, a vital sector of the country’s economy and state revenue, has not been able to restart.

“The flaws are foreseeable. There will be crises. With such shocks (War in Ukraine), tMaybe “warned Kenneth Rogoff, a Harvard economist who specializes in sovereign debt, during a recent International Monetary Fund roundtable.

Although the institution does not anticipate a global debt crisis at this point, the stakes are high. “According to the International Monetary Fund’s global debt database, borrowing jumped 28 percentage points to 256% of GDP in 2020. Of this increase, the rest comes from non-financial businesses and households. Today, public debt accounts for nearly 40% of total GDP. Global GDP. Debt, an average that has not reached nearly sixty years.”referenced last week by Vitor Gaspar and Sila Pazarbasioglu, on the IMF blog.

Because, unlike advanced economies that are still benefiting from low interest rates, emerging countries are facing increasing difficulties in managing their debt. About 60% of low-income countries were already at high risk of debt distress in 2020, up from 30% in 2015, according to the International Monetary Fund, with potential defaults and debt restructuring.

In addition, many emerging economies have borrowed from China to finance themselves. Thus, the share of the external debt of the Asian giant owed by 73 heavily indebted poor countries increased from 2% in 2006 to 18% in 2020. (see chart)While lending to the private sector increased from 3% to 11%, according to International Monetary Fund data. Meanwhile, the combined share of traditional creditors – multilateral institutions such as the International Monetary Fund, the World Bank or even the “Paris Club” of mostly wealthy Western governments – has simultaneously fallen from 83% to 58%.

Incorporate some form of flexibility

In the face of this growing uncertainty, Kenneth Rogoff, in an article he wrote last month for the International Monetary Fund, warned of the policies that need to be implemented, particularly in relation to the fight against inflation: “Today, the most important macroeconomic lesson to take away is that when crafting responses to the most recent major economic shock, whether it be the financial crisis, the pandemic, or the war now in Europe, policymakers (not to mention academic economists) need to remember that while things are improving dramatically A year after a catastrophic event, it can only get worse, so you should build monetary and fiscal policies in a form of flexibility, and not be satisfied with the extreme policy that has become fashionable recently.. Cash specifically targeting the Federal Reserve or the Bank of England.