Thursday, April 7, the director of the FMl Kristalina Georgieva gave a speech specifying the policy of the Fund in the face of the indebtedness of certain countries and positioning it in relation to the Sino-American rivalry. Referring to growing tensions between Beijing and Washington, she warned of the economic repercussions of increased economic fragmentation.
- The Fund’s chair said long-term trade fragmentation – including restrictions on migration, capital flows and international cooperation – could reduce global gross domestic product by 7%, the equivalent of production annual combined of Germany and Japan (7,000 billion dollars). Disruptions to tech trade could lead to losses of up to 12% of GDP for some countries.
- The IMF forecasts global growth to remain around 3% over the next five years – the lowest medium-term growth forecast since 1990, below the 3.8% average of the past two decades.
Kristalina Georgieva also addressed the problem of the most indebted countries.
- About 15% of low-income countries are already in debt distress and 45% are highly vulnerable to debt; moreover, about a quarter of emerging economies are high risk and face borrowing rate spreads similar to a default.
- At the end of 2020, the Paris Club, composed mainly of traditional Western creditor countries, had joined forces with China, India and Saudi Arabia, new donors, to agree on a roadmap called ” Common framework” aimed at restructuring the debt of poor countries on a case-by-case basis.
- The process, however, has encountered delays, with Beijing being reluctant to grant relief. China, which is now the largest official creditor in the world, opposes a reduction in the face value of the debts it owns.
Among the countries affected by the Chinese blockade, Zambia has been waiting for more than two years to restructure its debt.
- Zambia was the first African country to default on its debt since the pandemic; on August 31, 2022, the Fund had approved a $1.3 billion rescue package, of which $185 million would be immediately available.
- The country is however forced to obtain the backing of its official creditors to reduce its debt. The latter being under the leadership of China and France, the president of the IMF thus declared that she would put pressure on the two countries to obtain an agreement.
- As a result of restructuring delays, the Zambian currency (the kwacha) lost 45% of its value against the euro; inflation, which has reached a record level of 9.9% over the past three months, is also discouraging investment.
The IMF had already warned last January against the risks of economic fragmentation, in a report with the authors of which we had spoken on the subject of the governance of globalization.
Next week’s meetings are also the first of several sessions to be held this year where multilateral financial institutions are expected to clarify their role in responding to the challenges posed by climate change. Among the proposals on the table today, the Bridgetown initiative is at the heart of the debate.