The one week (10th Oct-16th Oct 2022) “Annual Meetings” of the International Monetary Fund (IMF) and the World Bank held in Washington DC amid the multiple crises and challenges due to the Ukraine war. In a meeting on 11th Oct, 2022, IMF highlighted the Global Economic Outlook and warned that “the worst is yet to come” for global economy. According to the International Monetary Fund, growth will be 3.2% this year and 2.9% in the next. It is predicted that more than a third of the global economy will shrink in 2023 as the world is already suffering from the highest inflation in decades, by 2026 the economic growth will be lower by $ 4 trillion. According to the IMF managing director, the world’s economy has been transitioning from a setting with low-interest rates and low inflation to one that is “more volatile and more fragile.” At the meeting World Bank, the International Monetary Fund and other leading economists identified a number of causes for the global economic downturn. They emphasized that the likelihood of a recession has been increased by the war in Ukraine, the COVID-19 pandemic, strong dollar, inflation, China’s slow growth and climate change.
The IMF has projected that most of the problems will rise in the financial system’s that have more fragile markets, such as in developing countries. But it is also concerning that less secure lenders like the major Western banks and financial services could also experience a crisis. The IMF report is the most recent distinctive alert that the global financial system is not only having the risk of recession but also of a financial meltdown. To combat inflation and the growing demands for greater wages, almost all the central banks around the world are increasing interest rates at serious levels. Many central banks throughout the world are tightening monetary policy, similar to how the Federal Reserve raised interest rates in the United States. Although the tightening of monetary policy is not a mistake, but was done too late that is causing greater economic harm than the benefit. The United Nations Conference on Trade and Development (UNCTAD) urged the central banks to make decisions in order to prevent a global recession, warning that financial tightening ran the risk of sending the world into a prolonged period of stagnation. The IMF predicts that despite concerted efforts by central banks to bring it under control, global inflation will peak late this year and “stay elevated for longer than previously predicted.”
The inflation and recession needs wide ranging demand and supply side policies, policymakers should consider the measures that can help to follow a path during the challenging times. Monetary policy must be constantly applied to the demand side in order to quickly restore price stability. Medium-term debt sustainability must be given top priority in fiscal policy, along with providing special assistance to the most vulnerable ones. Policymakers must be prepared to handle any potential repercussions of the simultaneous worldwide removal of growth-promoting policies. On the supply side, steps must be put in place to loosen the restrictions on trade networks, energy markets and labor markets.
Research Associate, Pakistan House