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Info Service on Finance and Development (Mar22/04) Geneva, 24 Mar (D. Ravi Kanth) – The Russia-Ukraine war coupled with the sudden tightening of monetary policies in the developed countries are expected to bring the global economic growth down to 2.6% in 2022, the United Nations Conference on Trade and Development (UNCTAD) cautioned on 24 March. In the latest update to its Trade and Development Report (TDR) 2021, UNCTAD provided a rather grim economic outlook, particularly for developing countries that would need US$310 billion to meet external public debt service requirements in 2022. The Ukraine crisis, which has brought shocks to commodity markets like cereals, fuels, fertilizers, and capital flows as well as continued disruptions in the global supply chains, seems to have worsened the prospects for any early recovery, following the COVID-19 pandemic that started in 2020. More ominously, a combination of weakening global demand, lack of proper policy coordination at the international level, and elevated debt levels arising from the pandemic, apparently generated financial shockwaves that could drown the developing countries in a downward spiral of insolvency, recession, and arrested development, warned UNCTAD. “The economic effects of the Ukraine war will compound the ongoing economic slowdown globally and weaken the recovery from the COVID-19 pandemic,” said UNCTAD Secretary-General, Ms Rebeca Grynspan. According to Ms Grynspan, “many developing countries have struggled to gain economic traction coming out of the COVID-19 recession and are now facing strong headwinds from the war.” She suggested that “a profound social anxiety is spreading” because of the prevailing economic conditions across countries. Ms Grynspan called for urgent “coordination” at several multilateral economic, financial, and trade institutions to avert the global economic crisis. In his introductory remarks on the latest TDR update at a press conference on 24 March, Mr Richard Kozul- Wright, Director of the UNCTAD Division on Globalization and Development Strategies, provided a detailed account of the worsening economic conditions stemming from the war in Ukraine, including the prospect of de-globalization. He suggested that the economic and financial reverberations from the war are rapidly unfolding with each passing day, causing further disruptions in the global supply chains. Mr Kozul-Wright expressed concern that instead of continuing with ameliorative public policy measures that were adopted during the pandemic, countries are turning to fiscal and monetary tightening. The latest TDR update warns that “in the face of long-standing structural problems and new geopolitical risks, macroeconomic tightening in the North, along with a general weakening of multilateral rules and practices, is set to stymie growth across developing economies, particularly those that are closely integrated into the global financial system.” “This will not only endanger their fragile recovery, but also undermine their long-term development,” the report argued. Mr Kozul-Wright drew attention to two immediate impacts of the war in Ukraine, namely exchange-rate instability, and surging commodity prices, particularly for food and fuel. He pointed out that sudden price increases would need a policy response in advanced economies, including on the fiscal front. The TDR update pointed out that the danger is “more profound” for many developing countries that are heavily dependent on food and fuel imports, including several middle-income economies, as higher prices threaten the livelihoods of millions of people. Further, despite the impressive growth of the world economy in 2021, “the post-pandemic world is looking increasingly fragile, with external shocks becoming more unpredictable and complex in nature.” The current economic dynamic based on a “two-speed” recovery path “will not only shift down a gear in terms of growth but will also see many developing countries lose ground to advanced countries, while their vulnerability to shocks is heightened by rising geopolitical tensions and deepening economic uncertainty.” Given the international conflict and heightened geopolitical risks, “finance is a central mechanism for transmission and amplification of these risks,” the TDR update suggested. The increasing scale of economic and trade sanctions on Russia has increased the downside risks of an international financial crisis or contagion effects, which would most adversely affect the developing countries, the TDR update said. The UNCTAD Secretary-General called for an enhanced level of disbursements from the International Monetary Fund (IMF)’s issuance of new SDRs (special drawing rights) of $650 billion in 2021. The developing economies were allocated around $275 billion so far. The UNCTAD report also said that given the ambiguous role of the United States Federal Reserve due to its national mandate, and “coordination” difficulties at the level of the IMF in times of complex crises, there is an urgent need for “governments to agree to the establishment (of) a rules-based system of multilateral policy coordination in finance.” It warned that “ad hoc, highly selective international initiatives, such as those that were deployed in 2008-09 and during the pandemic crises, cannot provide a reliable solution for all in the coming era of complex shocks that are global in impact.” More disturbingly, the Ukraine crisis has given a fillip to the fossil-fuel companies, reversing the global efforts at decarbonization. “But the intertwining of finance, food and fuel shocks stemming from the war in Ukraine is likely to be a preview of what is in store in an overheating world,” the report cautioned. The report calls for the reform of multilateral governance, suggesting that “mitigating this threat will require a profound change in the way the multilateral order safeguards global economic resilience on the one hand, and its ability to develop new policy mechanisms to respond to increasingly complex external shocks, on the other.” In short, the latest TDR update offered several policy recommendations, including the following policy actions: 1. Greater, more concessional and less conditional, multilateral financial support for developing countries to enable them to withstand financial and economic shocks and increase investment to support economic growth. 2. Immediate debt relief for Ukraine along with renewed discussions on a multilateral mechanism that promotes the fair and orderly restructuring of developing country sovereign debt during periods of severe financial stress. 3. More use of Special Drawing Rights to supplement official reserves and to provide liquidity on a timely basis to avoid severe deflationary adjustments. 4. More effective and less ad hoc swap arrangements between central banks to support developing country currencies and address financial crises. 5. Sector-specific policies including price controls and subsidies, to tackle the supply-side and mark-up pressures on inflation.
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