IMF chief warns of global economic unrest as central banks raise rates to combat inflation

• Central banks must balance inflation and economic recovery: Georgieva

• Countries may see increased unrest after two difficult years of economic turmoil from the pandemic

International Monetary Fund’s chief on Wednesday said the world would face greater uncertainty and potential turbulence in 2022, with the momentum of economic recovery slowing, central banks raising interest rates to combat inflation, and supply-chain bottlenecks.

The rate hikes could worsen the already deepening, “dangerous divergence” between advanced and developing economies, IMF Managing Director Kristalina Georgieva said at a virtual event hosted by the Center for Global Development, a Washington-based think tank.

She also mentioned that the organization is preparing for a potential increase in demand for its lending this year as central banks tighten monetary policy after many developing nations increase their debt.

Although Georgieva noted that inflation is not a universal phenomenon, it is a problem in several countries, especially the U.S., whose consumer prices surged to 7% in December, the highest annual increase in nearly four decades.

U.S. inflation vs. global debt

The U.S. Federal Reserve, last month, signaled it would end its bond purchases in March 2022 and will gradually increase the interest rates by the end of the following year.

Georgieva said central banks face a “delicate balancing act” between combating inflation and maintaining economic recovery.p

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As the U.S. dollar is the world’s reserve currency, most nations use it to trade and take loans. When U.S. interest rates increase, the value of the dollar appreciates, which causes the exchange rate between developing countries and the U.S. to widen, and also raises the cost of borrowing.

Consequently, it increases the dollar-denominated debt owed by developing nations, which will eventually siphon away investments from those markets.

In December, IMF said he global debt surged to $226 trillion in 2020, the biggest ever one-year jump since World War II, mainly due to the COVID-19 pandemic and a deep recession.

Relief fund for emerging nations

“Yes, the recovery is likely to continue, but against stronger winds,” she said, citing inflation and growing debt levels.

Georgieva said that disaffection with two years of economic turmoil from the pandemic could lead to greater unrest in some countries.

“We have to be prepared that there may be more turbulence,” she said, adding that social unrest that was seen in 2019 is expected to re-emerge this year, which could pose challenges for policymakers.

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Last year, IMF allocated $650 billion in emergency reserves, called special drawing rights, for its 190 members countries to deal with pandemic fallout.

The board of the international organization will discuss the proposal for a Resilience and Sustainability Trust on Friday to provide low-interest long-term funding, which the countries can borrow to fight the pandemic and climate crisis, Georgieva said.

Picture Credit: DW