A global debt storm looms amid political uncertainty

The global economy is intricately tied to politics and peace and Israel's war on Gaza raises geopolitical tensions in an already tense global climate

A global debt storm looms amid political uncertainty

Khaled Kassar

last update on 17 Oct 2023

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), scored a goal in a friendly football match organised last Sunday at the Grand Marrakech Stadium in solidarity with Morocco and the children affected by the recent earthquake in the country, on the eve of the opening of the annual meeting of the Fund and the World Bank, she continued the show throughout the week, moving gracefully from one hall to another.

She distributed her ever-present smiles in Bab Ighli, where the meetings took place. She delivered subtle or direct financial, monetary, and political messages, focusing on the Fund's traditional recipes regarding structural reforms and resorting to debt under the usual conditions.

She also highlighted the importance of the role of youth and greater involvement of women in the economic and labour market, especially in the face of an exhausted international economy plagued by conflicts, wars, pandemics, climate change, water shortages, rising prices, inflation, and debt costs, low growth, growing inequality between countries, fires, increasingly frequent fires, floods and natural disasters.

Georgieva wore colourful and patterned Moroccan clothing all the time. She constantly encouraged the quiet audience to applaud whenever she liked a statement or a position consistent with the IMF objectives. She greeted the "crowd" by raising her hands, reminiscent of political leaders at election rallies.

She was proud of Morocco as a "model student" among the institutions of "Bretton Woods," which received praise for its economic and development policies that no other country had received in the past four days.

EPA — International Monetary Fund Director Kristalina Georgieva at the summit.

At the same time, she criticised, blamed, and reprimanded the worst examples of failed countries such as Zambia, Ghana, and Lebanon (although yesterday, during the afternoon session, Georgieva announced to the audience the debt restructuring agreement with Zambia, which we will return to in a subsequent article about the African economy and its concerns).

In addition, she rebuked Egypt and called for further devaluation of the Egyptian pound and the withdrawal of state institutions from the economy; "otherwise, the situation will worsen."

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF) rebuked Egypt and called for further devaluation of the Egyptian pound and the withdrawal of state institutions from the economy; "otherwise, the situation will worsen."

Morocco praised

Of course, Georgieva could not have scored a goal in the friendly soccer match without a pass from the Minister Delegate in charge of the Budget, the President of the Royal Moroccan Football Federation, and the Chairman of the 2030 World Cup Committee, Fouzi Lekjaa.

The mutual praise between her and the Moroccan Minister of Economy and Finance, Nadia Fettah Alaoui, was radiant. All of this was meant to convey the IMF's basic message and emphasise that the Kingdom of Morocco model is currently a source of pride for the Fund, which cannot achieve similar accomplishments in other countries.

There is no doubt that Morocco excelled in hosting the world's largest annual economic and financial gathering despite the devastating 6.8 magnitude earthquake that occurred just one month before the meetings.

Its experience offers "inspiring lessons for other economies," especially in the Arab world and Africa. "Morocco had a remarkable journey to economic stability and development" over the past three decades.

Still, Morocco's "quest for strong, resilient, and inclusive growth is far from complete … The benefits of economic development remain elusive for a significant part of Morocco's population, particularly young people and women, given their high unemployment rate and the presence of a still-large informal sector.

What stands out from its experience is its policymakers' recognition that addressing these issues will require a new series of bold and ambitious reforms, as outlined in the book "Morocco's Quest for Stronger and More Inclusive Growth, published by the IMF on the eve of the meetings.

Policymakers recognise that addressing these issues will require a new series of bold and ambitious reforms, as outlined in the book "Morocco's Quest for Stronger and More Inclusive Growth, published by the IMF on the eve of the meetings.

War on Gaza changes calculations

For four days, IMF and World Bank officials and a panel of experts bombarded us with hundreds of numbers, ratios, approaches, and forecasts that took months of preparation, not to mention the lessons learned from years ago.

However, the significant, unanswered question, to which there is no real and realistic answer, is, what are the economic and reform programmes being discussed for the Middle East?

At the same time, the past and current security and military threats continue to fuel wars, instability, and "uncertainty," especially in the countries situated on the geographical borders of Palestine, primarily Lebanon, Syria, and Egypt, which are at the heart of an ongoing and open confrontation during these sad days.

The elaborate "financial and monetary language" and economic diplomacy are not useful here, nor are the titles of the bright sessions that have long characterised the senior officials of the IMF and the World Bank, who have successfully applied the equation "not to arouse the feelings of debtors or compromise the interests of creditors" in Marrakech.

However, they did not devote adequate discussion and analysis to the region's political and security factors, although World Bank President Ajay Banga stated: "The Israel-Gaza conflict is a global economic shock that will make it harder for central banks to achieve soft landings in many economies if it spreads," noting that "It's a humanitarian tragedy and it's an economic shock we don't need."

Reuters — Saudi Finance Minister Mohammed Al-Jadaan speaking at the "Reform Priorities to Address Debt" session with World Bank President Ajay Banga.

Undoubtedly, the ongoing conflict is at odds with Banga's efforts to promote better development and a better environment, especially as he is the first president of the bank to come from the Global South. In his presence and words, he reassures the poorer countries that he can influence leaders of the north, as he said.

While experts were discussing in the sessions the fate of the global economy, the financial and structural reforms countries need, how to control chronic inflation and the continuous rise in interest rates, and the continuation of this situation with the war launched by Russia against Ukraine, news broke about the new conflict in Gaza to add additional burden to the global economy.

An increase in global military spending was expected, especially with the American and European mobilisation to help Israel deal with the new crisis and the aircraft carrier "Gerald Ford" heading to the Middle East. This has raised concerns among central banks, donor institutions, financial markets, oil markets, maritime passages, and others, as Banga hinted.

Any increase in inflation means that central banks may be forced to maintain high-interest rates, which would increase borrowing costs and reduce the ability of borrowers, individuals and companies to repay debts, leading to increased credit risk.

Global inflation is expected to fall steadily to 6.9% in 2023 from 8.7% in 2022 due to the tightening of monetary policy and the simultaneous decline in global commodity prices.

Since the first day, an IMF spokesperson said they are "closely monitoring developments in Israel and Gaza, and it was too early to assess any economic impact."

He added, "We are deeply saddened by the loss of lives."

Just yesterday, in response to a question, Georgieva commented, "We are very closely monitoring how the situation evolves, how it is affecting especially oil markets. It is too early to say. We have seen some market reactions and will closely monitor this."

"There is very clearly a new cloud on not the sunniest horizon at a time when the world economy is already facing major disruptions. A new cloud darkens this horizon that is not needed. Pray for peace."

The Director-General of the World Trade Organisation, Ngozi Okonjo-Iweala, also hoped the Israel-Hamas conflict could be ended quickly, warning it would have a "huge impact" on already weak global trade flows if it widened throughout the region, which "could significantly affect global economic growth."

If it spreads, the Israel-Gaza conflict is a global economic shock that will make it harder for central banks to achieve soft landings in many economies.

World Bank President, Ajay Banga

Limited resources of World Bank and IMF

These pessimistic reversal expectations came as the IMF had previously predicted in its Economic Outlook report for 2024 that economic growth in the Middle East and North Africa region would return to 3.4%, half a percentage point higher than the global growth of 2.9%.

This came after the region's growth fell to 2% in 2023 from 5.6% in 2022. Given the ongoing war developments, it is no longer clear whether these estimates will come true.

The geopolitical impacts on the growth rates were also expressed by Pierre Olivier Gourinchas, the chief economist at the IMF, who described the global economy as resilient so far despite "limping along," in his words.

Many other IMF experts consulted by Al Majalla made no secret their pessimism about the current events in Gaza and their potential consequences if they expand and involve regional and international powers.

Both institutions face financial resource constraints and increasing global financing needs on various fronts in this unprecedented international crisis.

This could tighten credit conditions and increase financing costs, which would be even more unfair to dozens of poor countries that do not have the capabilities to comply with these conditions; otherwise, they wouldn't have borrowed in the first place. This can cause anger and resentment among half of the world's population.

Despite the World Bank's five-fold decline in financing capacity compared to what it was in the 1960s, the Bank provided financial support worth $73bn in 2023 to 90 countries, with $34bn allocated for the poorest countries to confront the impacts of climate change and the COVID-19 pandemic.

This amount is relatively small compared to the actual needs of the Global South in this context and the food security dilemma, which costs these countries around $3tn annually.

Despite a fivefold decline in the World Bank's financing capacity compared to what it was in the 1960s, in 2023, the Bank provided $73bn in financial support to 90 countries, of which $34bn was earmarked for the poorest countries to address the impacts of climate change and the COVID-19 pandemic.

This amount is relatively small compared to the actual needs of the countries of the South in this context and the food security dilemma, which costs these countries around $3tn annually.

The World Bank allocated $34bn for the poorest countries to confront the impacts of climate change and the COVID-19 pandemic. This amount is relatively small compared to the actual needs of the Global South in this context and the food security dilemma, which costs these countries around $3tn annually.

Shared global solutions

The long message of King Mohammed VI to the participants of the annual meetings was clear in this regard. He said that what we are witnessing today, characterised by "geo-economic fragmentation and the rise of a sovereignty-driven sentiment — which can be explained, in part, by a desire to readjust the balance of both economic and political power at the global level - are jeopardising the significant progress multilateralism has enabled us to make over the last few decades."

He added, " The economic, social and political developments witnessed in recent years call for reforming the institutions and rules governing multilateralism."

"However, the basic principles underlying it ought to be consolidated, and the spirit that drives multilateralism, revitalised. Those principles remain necessary to preserve stability and world peace and boost synergies to meet the common challenges our planet and our people face. However, as we all know, global challenges call for global solutions."

Al Majalla — Saudi Finance Minister Mohammed Al-Jadaan during his intervention in the session "Reform Priorities for Addressing Debts".

"They can only be devised within a framework of unity and mutual respect between nations — a framework in which diversity is a valued component, a source of wealth rather than conflict, and in which the intrinsic characteristics of each state and each region are duly taken into account."

"Similarly, it is essential to revisit and improve the global financial architecture to make it more equitable and inclusive. These Annual Meetings are the best forum for dialogue and constructive debate on the proposed overhaul. Since it is our common destiny to live on this planet, there is no way for any country to shape its future without considering that of other countries."

There is no doubt that the lesson learned in the first days of the meetings, starting with the Gaza war, is that there can be no economy without peace and no structural financial reforms without linking them to regional decisions and understandings.

The connection is very close, and without it, the dialogues of the meetings in Marrakech will remain subject to the fluctuations and positions of major powers, waiting to see how the ongoing war in Gaza and its consequences will affect the situation and the resulting reshuffling of the cards and priorities, which would lead to changes in all the numbers and data, especially if the war between Israel and Hamas and its supporters continues and spreads to other countries, especially Lebanon.

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