• Thu. Sep 28th, 2023

G20 finance heads face reform calls from Global South | Business and Economy

Zurich, Switzerland – The guardians of the global economy are meeting at the International Monetary Fund (IMF) this week to discuss a daunting set of challenges – slowing global growth, banking sector vulnerability and growing calls for multilateral reform.

Alongside the IMF’s annual spring meetings with the World Bank in Washington, DC, finance ministers and central bank governors (FMCBG) of the Group of Twenty, or G20, will meet on April 12-13th.

While problems facing the global economy will be at the top of the agenda, tensions related to the war in Ukraine may make it difficult to produce an agreed plan of action.

“To shore up confidence in the global financial system, G20 officials are likely to discuss providing temporary backstops for bank deposits,” Edward Glossop, the assistant director of macroeconomics at Ernst & Young, told Al Jazeera.

“It seems inevitable that the Fed [United States Federal Reserve] will seek to extend daily swap lines [currency exchanges between major central banks, usually transacted on a weekly basis] until the end of April, to keep an ample supply of money flowing through global markets,” Glossop added.

In January, the World Bank lowered its 2023 growth forecast for the global economy to just 1.7 percent, down from 3 percent. Last week, meanwhile, IMF chief Kristalina Georgieva predicted the world will face years of anaemic growth.

Washington-based lenders have warned that interest rate rises aimed at taming inflation are causing financial turbulence across the world’s banking system.

Over the past 13 months, the US Federal Reserve has raised its benchmark rate by 4.5 percentage points, with other major central banks following suit.

Higher interest rates, which lower the value of fixed-rate assets and raise the probability of default for variable-rate instruments, have been blamed in part for the collapses of Silicon Valley Bank and Signature Bank. Market jitters quickly spread to Europe, resulting in multinational investment bank UBS’s shot-gun takeover of long-struggling Credit Suisse in March.

“The cheap money period came to an end when central banks started raising interest rates to try and lower consumer prices. Global risk appetite has since fallen,” Glossop said.

Elsewhere, the Federal Reserve’s recent tightening cycle has prompted international investors to move funds into US financial assets and away from riskier developing-country investments, rattling their economies.

In particular, it has led to greater refinancing costs and widespread currency depreciations against the greenback. On top of higher import bills, falling currency values make existing foreign debt repayments more expensive.

This has spurred calls for the G20, whose member states represent 85 percent of global gross domestic product (GDP) and two-thirds of the world’s population, to work towards debt relief for developing countries.

Argentina’s former Finance Minister Martin Guzman says central banks are hurting developing countries by raising interest rates [File: Agustin Marcarian/Reuters]

“In an effort to contain inflation at home, the Fed and its counterparts will continue to do harm to developing countries if they persist with interest rate rises,” Martin Guzman, Argentina’s former minister of finance, told Al Jazeera.

Last December, the World Bank estimated that low-income countries would face $62bn in external debt servicing this year, a 35 percent annual rise.

“Part of this increase was due to currency dynamics but the extent obviously varied between creditors,” Guzman said.

Approximately 66 percent of low-income-countries’ official debt is owed to China, the world’s largest sovereign creditor. At the last FMCBG meeting, the Reuters news agency reported that India tabled a proposal imploring bilateral lenders – including China – to take losses on outstanding loans.

China, meanwhile, has challenged multilateral lenders such as the IMF and World Bank for not accepting haircuts on their loans.

“Beijing has maintained that debt relief efforts [among all creditors] should be joint and comprehensive,” Guzman said. “So this week’s FMCBG will a good opportunity to discuss the common framework.”

The G20’s common framework is an attempt at coordinating sovereign debt relief among its members and request the same restructuring terms from private lenders. So far, only four countries have signed on. None has yet completed their debt negotiations.

Guzman went on to note that “improved guidelines, such as suspending debt repayments during negotiations and extending the common framework to middle-income countries [as opposed to just low-income nations] would help to validate the initiative”.

Apart from multi-lateral debt relief, observers are also calling for internal reform at international financial institutions (IFIs) and multilateral development banks (MDBs).

Kristalina Georgieva
IMF chief Kristalina Georgieva has warned the world could face years of anaemic growth [File: Michael Reynolds/EPA-EFE]

For Avinash Persaud, the climate envoy for Barbadian Prime Minister Mia Mottley, “the present moment offers an ideal opportunity to restore trust in multilateralism, especially in IFIs and MDBs”.

“For starters, fund quota limits are too small for emergency lending,” Persaud told Al Jazeera, alluding to IMF programmes such as the Resilience and Sustainability Trust, where country funding is capped at 150 percent of their capital commitments into the fund.

“This curbs the amount of lending for fiscal and climate emergencies. Instead, the fund should be seeking to play a similar role as the Fed of recent weeks, namely, a stopgap creditor with few lending conditions.”

Persaud also dismissed the World Bank’s “cautious” approach to risk tolerance.

“The Bank can raise billions of more dollars for developing countries by adjusting its loan-to-equity ratio by just 1 percent,” he said.

His remarks were echoed in a G20 July report which found that, by changing their lending ratios slightly, MDBs could unlock hundreds of billions of dollars in new lending capacity.

Still, Persaud sees this year’s leadership change at the World Bank as “positive”.

In February, Ajay Banga was nominated to head the organisation after his predecessor, David Malpass, quit the role amid accusations of being a climate-change denier, which Malpass denied.

“Stakeholders are beginning to change their minds on questions about developing-country debt and the environment,” Persaud said. “Banga’s appointment shows that. He will have a brief moment to shake things up at the start of his tenure. Let’s hope the G20 support him.”

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