Georgieva: The world economy is facing the biggest test since World War II

The International Monetary Fund has warned of “geo-economic fragmentation” as officials and business leaders gather at the World Economic Forum in Davos, CNBC reports.

In a blog post ahead of this week’s event, IMF Managing Director Kristalina Georgieva said the world economy was facing “the biggest test since World War II”, with the Russian invasion of Ukraine exacerbating economic hardships. of the coronavirus crisis, dragging growth and driving inflation to decades high.

Rising food and energy prices are pushing households around the world, while central banks are tightening monetary policy to curb inflation, putting further pressure on heavily indebted nations, companies and households.

Combined with financial market instability and the persistent threat of climate change, the IMF said the world was facing a “series of disasters”.

“However, our ability to respond is hampered by another consequence of the war in Ukraine, the sharply increased risk of geo-economic fragmentation,” Georgieva said.

“Tensions over trade, technology and security have been rising for many years, undermining growth and confidence in the current global economic system,” he said.

She added that uncertainty around trade policies alone reduced global GDP by almost 1% in 2019, according to an IMF survey, while the agency’s survey also shows that about 30 countries have reduced trade in food, energy and other basic goods.

Georgieva warned that further economic consequences would have huge global costs, affecting people across the socio-economic spectrum, and said that only technological fragmentation could lead to losses of 5% of GDP for many countries.

Carmine Di Sibio, global president and chief executive of EY, told CNBC on Monday that the economy was “at the center” of discussions between big business in Davos.

“The economy is the top debate, inflation is a big concern,” he said.

Although the volume of corporate deals has slowed, Di Sibio said EY still sees signs of “strong enough activity” and that business leaders are still considering options for transforming their businesses.

“The transformation that companies are going through – the transformation in terms of technology, supply chains, etc. – still exists and we are doing a lot around that,” Di Sibio said.

Solutions

To tackle the growing fragmentation, the IMF initially called on governments to reduce trade barriers to alleviate shortages and lower prices for food and other commodities, while diversifying exports to improve economic resilience.

“Not only countries but also companies need to diversify imports to secure supply chains and maintain the huge business benefits of globalization,” Georgieva said.

Second, the IMF has urged collaborative efforts to tackle debt, as about 60% of low-income countries now have significant debt vulnerabilities and will need restructuring.

“Without decisive co-operation in debt relief, both themselves and their creditors will be in a worse position, but a return to debt sustainability will attract new investment and stimulate inclusive growth,” Georgieva said.

“That’s why the G20’s common debt management framework needs to be improved without delay,” he added.

Third, the IMF has called for the modernization of cross-border payments, as inefficient payment systems are an obstacle to economic growth. The IMF estimates that the average cost of 6.3% of international remittance payments means that about $ 45 billion a year is diverted to intermediaries and away from low-income households.

“Countries could work together to develop a global public digital platform – a new payment infrastructure with clear rules – so that everyone could send money at minimum cost and maximum speed and security. It could also link different forms of money, including “of the central banks’ digital currencies,” Georgieva said.

Finally, the IMF called for the urgent closure of the “gap between ambition and political action” on climate change, advocating an integrated approach to the green transition that combines carbon pricing and renewable energy investment with compensation. those negatively affected by climate change.