UNCTAD, the United Nations World Trade Organization (WTO), downgraded its forecast for global economic growth for 2022 to 2.6% from 3.6% due to the war in Ukraine and changes in macroeconomic policies made by the countries in recent years. months.
According to its Trade and Development Report released on March 24, UNCTAD (https://unctad.org/system/files/official-document/tdr2021-update1_en.pdf) said that while Russia is experiencing a deep recession this year, growth is expected to slow significantly in parts of Western Europe and Central, South and Southeast Asia.
Stricter monetary policy
He points out that the ongoing war in Ukraine is likely to strengthen the trend of monetary tightening in advanced countries after similar moves that began in late 2021 in several developing countries due to inflationary pressures, with spending cuts also expected in the coming budgets.
Worries
The report’s authors express concern that a combination of weakening global demand, inadequate international policy coordination and rising debt levels from the pandemic could create financial waves that could push some developing countries into a downward spiral. development.
“The economic impact of the war in Ukraine will exacerbate the ongoing global economic slowdown and weaken the recovery from the COVID-19 pandemic,” said UNCTAD Secretary-General Rebecca Greenspan.
He added: “Many developing countries have struggled hard to recover from COVID-19 and are now facing strong headwinds from the war. “Whether it leads to unrest or not, a deep social stress is already spreading.”
Restrictions on growth
The report emphasizes that even without ongoing turmoil in financial markets, emerging economies will face severe growth constraints. During the pandemic, their public and private debt reserves have increased.
Rising prices and exchange rate volatility
It is also stressed that the war has exerted further upward pressure on international energy and commodity prices, burdening household budgets and adding to production costs, while trade disruptions and the effects of sanctions are likely to have a very adverse effect on long-term investments.
As the disruption caused by the pandemic seemed to subside, the geopolitical crisis has dealt a blow to domestic confidence. “The additional pressure of price increases is intensifying calls for a political response from advanced economies, including the fiscal front, threatening a larger-than-expected slowdown in growth,” the UNCTAD report said.
Food and fuel
Rising food and fuel prices will have a direct impact on the most vulnerable in developing countries, resulting in hunger and hardship for households that spend the bulk of their income on food. But the loss of purchasing power and the real costs will eventually be felt by all.
“The risk for many of the developing countries, which are heavily dependent on food and fuel imports, is deeper as higher prices threaten livelihoods, discourage investment and widen the spectrum of widening trade deficits,” the report said.
Shocks in the markets
Analysts also say that the uncertainties created by the war in key international markets are further worrying: an environment of volatile capital flows, exchange rate volatility and rising borrowing costs, especially for less developed and middle-income, middle-income developing countries. external debt payment difficulties.
Rising interest rates in advanced economies, along with erratic movements in global financial markets, could, the report warns, prove to be a disastrous combination for emerging economies. Volatility in commodity, foreign exchange and bond markets as investors seek safe havens has already led to capital flight along with higher risk premiums for the financial obligations of emerging economies.
Fixed-Income Securities pressures
Bond yields in developing countries have been rising since September 2021. The increase is widespread and is a clear signal of tighter financial conditions. Since the outbreak of the conflict in Ukraine, yields for developing countries have increased by an additional 36 basis points, on average, with countries heavily dependent on food imports experiencing higher increases.
The report warns that traditional financial ratios, such as current account balances and foreign reserves, do not provide a complete picture of the vulnerability to changing external financial conditions. Financial integration measures are a better measure, as many large emerging economies are vulnerable to sudden reversals in financial flows.
The report identifies short-term public debt service needs as a growing concern. Developing countries are projected to require $310 billion to meet external debt service requirements in 2022 – equivalent to 9.2% of external external debt balance by the end of 2020.
Policies in advanced economies lead to economic slowdown
According to the report, the major advanced economies are about to reverse the stimulus imposed during the pandemic by tightening interest rates, easing central bank asset purchases and ending business and household licensing, transportation and support programs.
The report warns that these changes will weaken global demand and limit growth, with investment already halted in some countries. The threat of a sharper drop in investment and growth can not be ruled out if interest rates rise too quickly and the climate challenge “slips off the headlines”. This is the wrong political trend at the wrong time.
The report notes that developing countries, which have borne the brunt of the cost of dealing with the pandemic, face additional demand constraints and balance of payments obligations as a result of recent policy changes in advanced economies.
Policy recommendations
UNCTAD recommends the following policy actions to protect the global economy:
- Greater and more favorable multilateral financial support for developing countries, so that they can 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 smooth restructuring of public debt of developing countries in times of severe economic pressure. - Wider use of Special Drawing Rights to replenish official reserves and to provide liquidity in a timely manner to avoid serious deflationary adjustments.
- More efficient and less ad hoc exchange agreements between central banks to support developing countries’ currencies and deal with financial crises.
- Sectoral policies, including price controls and subsidies, to address supply-side pressures and rising inflation.
- UNCTAD’s rapid assessment of the impact of the war in Ukraine on trade and development has confirmed a rapid deterioration in the outlook for the global economy, based on rising food, fuel and fertilizer prices, increased financial instability, and the sale of sustainable complex global supply chain restructurings and growing trade.
