The world’s finance ministers, central bank governors and many private financial leaders will descend on Marrakech, Morocco on 9 October for the 2023 World Bank-International Monetary Fund annual meetings.
It will be a sombre affair. The global economic outlook isn’t bright. US-China tensions and Russia’s barbaric war against Ukraine underscore growing global fragmentation and dim prospects for finding global solutions. Morocco’s recent tragic earthquake will further cloud the mood. The IMF will release its semi-annual World Economic Outlook and Global Financial Stability Report, highlighting that global growth is anaemic and progress in curbing inflation slow.
The almighty US consumer and robust labour markets have propped up 2023 US growth. But the fourth quarter will weaken amid higher interest rates, rising oil prices, labour strife, the restarting of student loan repayments and America’s disgraceful political dysfunction. That dysfunction risks further undermining global trust in the US and will be a hot discussion topic behind the scenes. Even with a soft landing, a weak first half in 2024 may be on the cards.
Europe is stagnant, dragged down by the impact of the energy shock, European Central Bank rate hikes and Germany’s large structural headwinds. Meanwhile, the Federal Reserve and ECB’s ‘higher for longer’ approach to interest rates will increase the chance of financial instability.
China’s faltering post-pandemic recovery has steadied amid modest stabilisation measures. But long-term structural headwinds – demographics, over-indebtedness, excess reliance on inefficient investment, financial sector weaknesses – are mounting. Housing woes and hostility to the private sector compound the headwinds.
Slow progress in tackling low-income country debt
According to IMF and World Bank estimates, 60% of LICs face debt distress. The G20 common framework, which aimed to bring China to the table to provide significant debt relief, continues to flounder. China’s agreement on official debt with Zambia represented a step forward for the common framework and the IMF’s work to bring China to the table. Private creditors, though, haven’t reached a deal with Zambia. Whether China’s Zambian agreement represented a precedent or one-off has yet to be seen.
Meanwhile, China has yet to come to terms with Sri Lanka, and Suriname’s IMF programme only advances by running arrears to China. Neither country is eligible for the common framework, though the problems they face are similar to eligible countries. Questions abound. Are IMF targets providing sufficiently ambitious debt relief for countries facing unsustainable debt? How should domestic debt be treated in restructurings? Should the IMF be more proactive in using its lending into official arrears policy? Why would unsustainable countries sign up for the common framework if it would antagonise China?
The global community fully agrees – climate change is the world’s epic challenge. Yet, the recent global stock take casts severe doubt on the ability to limit global warming to 1.5 degrees Celsius over pre-industrial levels – the world is on track for 2.5 degrees by 2100. The best contribution to tackling climate change would be a stiff carbon price. No such thing is on the cards.
Reform is on the agenda
There will be much discussion about multilateral development bank reform to tackle climate change. The Independent Experts Group commissioned by the G20 Indian presidency argued that $500bn in added annual official external finance would be needed by 2030 and MDBs should provide $260bn of that annually. A revamped MDB capital adequacy framework and balance sheet optimisation are under discussion, as are proposals for guarantee measures to boost lending.
This is a fine start, but insufficient to tackle the dire challenges at hand. It is right to argue MDBs should improve climate lending practices to show further resources can be effectively used. But if the international community wishes to go big and match rhetoric with reality, large general capital increases will be needed. But they could raise ticklish shareholding issues. Given the US need for Congressional support, fiscal dysfunction and Republican resistance, the jury is out on US approval for guarantee proposals, let alone eventual support for raising capital.
IMF reforms are on the docket. First, Managing Director Kristalina Georgieva rightly wishes to mobilise significant grant resources to permit stepped up LIC lending to continue at zero interest. Some national contributions have rolled in. The IMF’s balance sheet can be mobilised to provide supplemental – though insufficient – resources as a good step forward. Modest IMF gold sales could ultimately address the total need, but that’s unlikely soon.
Second, the IMF has long agreed to conclude a quota review by year-end. The US proposed an ‘equiproportional’ quota increase – one that would not change voting shares. China makes up only 6% of the IMF but some 18% of the world economy. China and other truly underweight countries (India, Vietnam, Indonesia) may demand some realignment. The US fairly argues China should start providing large debt relief and shed its opacity on foreign exchange practices. But even if China changed course, given US-China politics, the US couldn’t support raising China’s share. China may argue that this is another example of US efforts to hold it down. Will China have more incentive to try and find refuge in alternative architecture?
Third, after Argentina’s presidential elections, the Fund will have to take a stand on whether to cut off funding to its most intractable client unless it really starts to perform.
There will be much lofty rhetoric in Marrakech. The reality will be sombre.
Mark Sobel is US Chair of OMFIF.
OMFIF is hosting several events in Marrakech during the meetings, including the launch of the Absa Africa Financial Markets Index 2023. Find more information here.