The post-pandemic growth that everyone was waiting for is not going to happen—certainly not this year. The UNCTAD has downgraded its global economic growth projection for 2022 to 2.6% from 3.6%. The reasons—you guessed it: the Ukraine war and changes in macroeconomic policies made by countries in recent months.
The estimate has been made in the March 2022 Trade and Development Report Update titled Tapering in a Time of Conflict, published on Thursday.
The Ukraine Fallout
The ongoing war in Ukraine is likely to reinforce the monetary tightening trend in advanced countries following similar moves that began in late 2021 in several developing countries due to inflationary pressures, with expenditure cuts also anticipated in upcoming budgets. UNCTAD is worried that a combination of weakening global demand, insufficient policy coordination at the international level and elevated debt levels from the pandemic, will generate financial shockwaves that can push some developing countries into a downward spiral of insolvency, recession and arrested development.
Poorer nations are going to face the brunt: developing economies will face severe constraints on growth. "During the pandemic, their public and private debt stocks have increased. And issues that receded from view during the pandemic, including high corporate leverage and rising household debt in middle-income developing countries, will resurface as policy tightens," the report said.
A lot of things, the report insists, will happen:
- Disruptions to trade and the effects of sanctions are likely to have a chilling effect on long-term investment.
- The added pressure of price increases is intensifying calls for a policy response in advanced economies, including on the fiscal front, threatening a sharper than expected slowdown in growth.
- Soaring food and fuel prices will have an immediate effect on the most vulnerable in developing countries, resulting in hunger and hardship for households who spend the highest share of their income on food.
- But the loss of purchasing power and real spending will ultimately be felt by everyone.
- Of growing concern are the uncertainties generated by the war in key international markets: an environment of volatile capital flows, exchange rate instability and rising borrowing costs, particularly for least developed and middle-income developing countries, with the risk of serious external debt payment difficulties.
- Rate hikes in advanced economies, alongside disorderly movements in global financial markets, could prove a devastating combination for developing economies.
- Developing countries may require US$ 310 billion to meet external public debt service requirements in 2022 – equivalent to 9.2 per cent of the outstanding stock of external public debt at the end of 2020.
- Countries vulnerable to a sudden stop due to a combination of large rollover pressures and a large debt service to export ratio: Pakistan, Mongolia, Sri Lanka, Egypt and Angola.
- The main advanced economies are on course to reverse the stimuli enacted during the pandemic, by tightening policy rates, unwinding central bank asset purchases and closing down furlough programmes, transfers and support to businesses and households.
- This is happening even though inflation has not yet led to sustained wage growth, making the threat of wage-price spirals unfounded.
- The shifts will weaken global demand and dampen growth, with investment already stalling in some countries. The threat of a sharper drop in investment and growth cannot be ruled out if interest rates rise far too quickly. "This is the wrong policy trend at the wrong time," the report said.
UNCTAD's Policy Recommendations
- 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.
- 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.
- More use of Special Drawing Rights to supplement official reserves and to provide liquidity on a timely basis to avoid severe deflationary adjustments.
- More effective and less ad hoc swap arrangements between central banks to support developing country currencies and address financial crises.
- Sector-specific policies including price controls and subsidies, to tackle the supply-side and mark-up pressures on inflation.
