The IMF Executive Board approved the establishment of the RST, effective from May 1, with the goal of mobilising at least 45 billion USD for the fund. IMF Managing Director Kristalina Georgieva said the RST will allow richer countries to move emergency reserve funds for vulnerable countries to address long-term challenges that threaten to destabilise their economies.
This is said to be a historic decision embodying the spirit of multilateralism, through which countries can work together to benefit all. Spokesman for the UN Secretary-General Stephane Dujarric said that the Secretary-General has welcomed the adoption of the new RST by the IMF as a tool that helps create long-term prospects and helps developing and low-income countries in responding to issues such as climate change and the COVID-19 pandemic, while also strengthening resilience to future shocks.
According to the head of the United Nations, a long-term perspective is necessary if we are to address not only the current crises but retain hope of rescuing the Sustainable Development Goals (SDGs).
The impacts of the Russia-Ukraine conflict and the complicated developments of the COVID-19 pandemic have led the World Bank (WB) to lower its forecast for global economic growth this year from 4.1% to 3.2%. Before the spring meeting of the IMF and the WB, WB President David Malpass said that the regions expected to suffer the most growth slowdown are Europe and Central Asia.
In addition, growth forecasts for developed and developing economies were also cut due to higher food and energy prices. Massive debt and inflation are two major problems facing global growth. In this regard, the WB leader is particularly concerned about the sudden increase in prices of energy, fertilizer and food in developing countries. Poor countries are burdened with large amounts of debt, with 60% of low-income countries in debt distress or at high risk of it.
In response to rising economic tensions, the WB said it would propose to set up an emergency aid fund worth 170 billion USD to support the poorest countries that are being impacted from overlapping global crises. The fund will last for 15 months until the end of June 2023, with the WB aiming to mobilise about 50 billion USD within the next three months. The emergency fund will continue the mission that has been deployed during the COVID-19 pandemic and help countries cope with the rising inflation and severe financial stress caused by increasing debt.
The accumulated debt situation of businesses and individuals around the world is warned that it may hinder the economic recovery of countries. In its World Economic Outlook report, the IMF emphasised that the debt burden could reduce growth in developed countries by 0.9% and in emerging markets by 1.3% over the next three years.
Financially constrained households and vulnerable businesses, which have increased in number during the pandemic, are expected to see greater cuts in spending. To avoid exacerbating these problems, the IMF recommends that governments adjust the pace to terminate relief and spending programmes. When the recovery is going well and the balance sheet is in good shape, fiscal support programmes can be cut faster, thus facilitating the work of central banks.
For sectors that are struggling, governments can provide aid to prevent bankruptcy, or provide incentives to restructure, rather than dissolving businesses. This recommendation comes as governments in many countries have taken special measures to support the economy, including adopting measures to allow debt repayment reschedules or provide large-scale loans. However, these programmes have resulted in higher debt levels in some areas.
The burden of debt makes many countries that are already suffering from pandemics and conflicts even more vulnerable. The support tool offered by major financial institutions is hoped to be a “pain reliever” in helping to revive vulnerable economies.