The World Bank and IMF Annual Meetings will take place in Washington DC from 10-16 October, in what will be the first in-person convening of the meetings since before the Covid-19 pandemic. But this hardly marks a return to normality, as global economic turmoil risks boiling over.
As a World Bank policy note published on the eve of the Annual Meetings highlighted, the complex economic headwinds posed by the Covid-19 pandemic, Russia’s war in Ukraine, the global food and fuel price shocks (see Observer Summer 2022), and increasingly dire climate change impacts have resulted in a perfect storm: “To stem risks from persistently high inflation, and in a context of limited fiscal space, many countries are withdrawing monetary and fiscal support. As a result, the global economy is in the midst of one of the most internationally synchronous episodes of monetary and fiscal policy tightening of the past five decades.”
While the Bank stopped short of predicting a global recession as the most probable scenario in 2023, it noted this remains a distinct possibility if “additional increases in policy rates…trigger a sharp re-pricing of risk in global financial markets,” a scenario which would have “severe consequences for the long-term growth prospects of emerging market and developing economies that were already hit hard by the pandemic-induced global recession of 2020.” The note followed the IMF downgrading its global growth forecasts in July, when Pierre-Olivier Gourinchas, the IMF’s economic counsellor, noted, “The outlook has darkened significantly since April.…The world may soon be teetering on the edge of a global recession, only two years after the last one.”
Given this grim backdrop, a number of difficult issues will be foregrounded at the Annual Meetings, including the ongoing conflict in Ukraine, which – apart from being one factor contributing to global commodity price shocks – has added to further geopolitical fragmentation which may stymie progress on high-level policy discussions at the Annual Meetings. At the Spring Meetings, the G20, IMFC and Development Committee failed to release communiqués (see Dispatch Springs 2022), as Russia’s participation in these meetings – and the protests of the United States and European countries that ensued – effectively prevented this. A similar scenario seems likely to prevail this time around.
The Annual Meetings will also see discussions around a range of other critical issues, including in the Civil Society Policy Forum, such as the BWIs’ response to the energy, food, and climate crises; the need for concrete solutions to growing sovereign debt distress; the forthcoming IMF quota review; and the BWIs’ approach to mainstreaming gender in their work. Civil society organisations will also meet on 15 October for a side event at the Institute for Policy Studies to discuss the implications of IMF policy and governance deficits in the context of the ‘poly-crisis’ facing the world economy and threatening the most vulnerable.
The Bank and Fund struggle to mobilise in the face of the crisis
Both the World Bank Group and IMF have recognised the economic, fiscal and environmental crises the global economy now faces, but missing from their analysis is that the current framework and programmes they prescribe are implicated in the crisis of growing poverty and hunger in the Global South, which predates the war in Ukraine.
Given the scale of the debt crisis now threatening states in the Global South (see Observer Autumn 2022), the IMF may not have the reserves to act as a lender of last resort at the scale required. As noted in a 25 September Financial Times (FT) article, “The IMF’s total commitments, including loans agreed but not yet disbursed, already stand at more than $268 [billion].” The article quoted Professor Kevin Gallagher of Boston University, who noted, “only so many countries” could receive IMF support without “snapping the IMF balance sheet.” The situation is made worse by the IMF’s counter-productive surcharges, which punish countries most in need of finance (see Inside the Institutions, What are IMF surcharges?). While the IMF’s board approved a new food shock borrowing window on 30 September, the financing is only available to countries without an existing IMF programme.
Whilst the G20 leaders communiqué in October 2021 hailed a global commitment to rechannel $100 billion in IMF Special Drawing Rights, including via the IMF’s new Resilience and Sustainability Trust (RST; see Observer Summer 2022), those flows have been slow to materialise, with thus far only Spain formalising its commitment to capitalise the RST on the eve of its launch at the Annual Meetings. As Mark Plant noted in a blog for the Center for Global Development on 19 September, “No vulnerable country has received a single recycled SDR, yet – almost a year after the pledge of the G20 to recycle $100 billion.”
Meanwhile, a new report published by Boston University’s Global Development Policy Center and the V20 – a group of 55 developing economies exposed to the fallout from climate change – found that debt service payments of that bloc are set to rise to $69 billion by 2024 (up from $61.2 billion in 2022), with 40 per cent of this bloc’s total debt held by the World Bank and its multilateral development bank peers. Despite repeated calls by World Bank President David Malpass for forgiveness or restructuring of bilateral and private debts in countries that are in distress, this apparently remains a non-starter for the Bank itself, notwithstanding the fact that it remains a significant creditor to many countries in debt distress.
In a July report detailing its response to the current crises, the Bank set out its four key goals: Addressing food insecurity, protecting people and preserving jobs, strengthening resilience, and strengthening policies, institutions and investments (see Observer Autumn 2022). However, the Bank’s strategy for Green, Resilient, Inclusive Development (GRID), which incorporates its earlier Maximising Finance for Development framework, has been heavily criticised by civil society for its focus on the need for Global South states to de-risk private sector investment (see Dispatch Annuals 2020). The Bank’s crisis response report sets out that it will not change its fundamental reliance on Development Policy Financing (DPF; see Background, What is World Bank Development Policy Financing?), which is likely to be used to imbed reforms the Bank considers necessary to create a business enabling environment. Overall, the Bank’s approach has failed to deliver on urgently needed economic transformation or to decrease countries’ commodity dependence (see Observer Summer 2022).
The G20 also published a review of the Capital Adequacy Frameworks for Multilateral Development Banks, including the World Bank, in July, proposing they take steps to ‘optimise their balance sheets’, such as reducing their reliance on their Triple AAA credit ratings to increase their lending capacity in response to the global crises (see Observer Autumn 2022). However, in practice implementing these recommendations at the World Bank is unlikely to be straightforward. According to Reuters, the World Bank initially moved to block the release of the review – suggesting Bank management may be less than supportive of the review’s recommendations – while according to insiders any move away from the Bank’s Triple AAA credit rating could have implications for shareholders’ callable capital, which could pose questions about their own risk appetite. Critical civil society observers, meanwhile, have also expressed doubts about the proposal to increase the Bank’s lending capacity, given the its heavy reliance on the GRID approach.
The BWIs’ limp response to the current crisis led Barbados Prime Minister Mia Mottley to remark at the UN General Assembly (UNGA) in September that the World Bank and IMF, “no longer serve the purpose in the 21st century that they served in the 20th century.” Mottley used her platform at UNGA to propose a new Bridgetown Agenda, which would include a fresh $650 billion SDR allocation, $1 trillion in wealthy countries’ SDRs being channelled through the MDBs, and for the IMF to pause surcharges, among other proposals. While perhaps not a perfect plan, it’s certainly more innovative than anything emanating from 19th Street.
One reform that could make the IMF more fit for purpose in the face of the current crisis would be a more equitable redistribution of its quotas – which determine, inter alia, voting power within the Fund, borrowing limits, and the amount of SDRs developing countries would receive as part of any new allocation (see Observer Autumn 2022). However, despite the G24 calling in its Spring Meetings communiqué for a timely conclusion to the IMF’s 16th review of quotas by the end of 2023 in order to more equally distribute IMF quota shares (see Dispatch Spring 2022), this process – according to insiders’ whispers – already looks like a possible casualty of the ongoing geopolitical fragmentation.
Malpass’s latest misstep poses potentially fatal threat to his leadership, as BWIs’ out-dated gentleman’s agreement again rears its head
The Annual Meetings are also almost certain to feature ongoing criticism of World Bank President David Malpass. At a New York Climate Week event on 20 September, Malpass refused to affirm that he accepted the scientific consensus on climate change, despite being repeatedly pushed to do so by New York Times reporter David Gelles. When asked whether he accepted man-made emissions were causing climate change, Malpass quipped, “I don’t even know: I am not a scientist.”
Malpass’s remarks led to widespread criticism, including from influential US Congresswoman Maxine Waters, who chairs the House Committee on Financial Services, and from White House Press Secretary Karine Jean-Pierre. Numerous individuals and civil society organisations called for him to resign or be replaced in the wake of his remarks, including former head of the UNFCCC Christina Figueres. On 27 September, scientists gathered outside the World Bank’s headquarters in Washington DC to read the latest, harrowing climate science from the Intergovernmental Panel on Climate Change, in a protest attended by seasoned climate activist and author Bill McKibben. On 29 September, 25 US Democratic party congressional representatives called for the Biden administration to seek Malpass’s “removal or forced resignation.”
While Malpass has attempted to walk back his comments, he has a long history of public statements that have earned him a reputation as a climate sceptic – including during his first town hall with civil society at the 2019 Annual Meetings, where he similarly remarked, “I am not a scientist,” when confronted by civil society advocates about whether the World Bank’s investments in fossil fuels were aligned with a 1.5°C future.
Malpass was nominated for his current role in 2019 by then-US President Donald Trump, as a result of the unofficial gentleman’s agreement whereby the US chooses new World Bank Presidents (see Background, What is the gentleman’s agreement?), an anachronistic tradition which has seen each of the Bank’s 13 presidents to date be an American man. If Malpass’s leadership poses specific challenges for the World Bank being seen as a credible institutional leader on climate change and other global challenges, his leadership is also worryingly symptomatic of the BWIs’ wider institutional inertia and governance failures, which remain stumbling blocks to modernisation and reform at both institutions.
Civil society launches End Austerity Campaign as world faces further fiscal tightening
According to a report issued on 28 September by a coalition of civil society organisations involved in the newly-launched End Austerity Campaign, by next year 85 per cent of the world’s population will live under austerity measures in 149 countries, 94 of them in the Global South.
This new round of austerity, undertaken on the advice or with the active encouragement of the IMF and World Bank in response to the economic and fiscal shocks of the Covid-19 pandemic and the fallout of the war in Ukraine, will compound the social and economic damage from austerity imposed between 2010-2019, in the aftermath of the 2008 global financial crisis. According to Nabil Abdo of Oxfam International, a member of the campaign, “Austerity is designed to dismantle public healthcare and education and labour regulations. It enriches the wealthy and big corporations at the expense of the rest of us.”
Further, the projected austerity cuts currently are severe: 51 countries are projected to spend less as a proportion of their GDP in 2022-23 than in 2018-19, with a reduction of 4.1 per cent on average. These cuts will have a disproportionate impact on the living standards of billions, disproportionately affecting women and the most vulnerable, as social spending and protections are pared back and real wages squeezed, with important human rights consequences, as detailed in a 2019 UN report.
However, there are fiscally and economically viable alternatives to austerity that would avoid or mitigate its damaging social and economic consequences. These measures, detailed in the End Austerity Campaign’s report, include increasing progressive tax revenues, restructuring or eliminating debt, eradicating illicit financial flows and adopting a more accommodating macroeconomic framework, and have been adopted successfully in various combinations by countries around the world as alternatives to austerity.
With the world on the brink of an extended economic downturn, such policy alternatives are needed now more than ever.