The guardians of the world economy are encountering this week at the International Monetary Fund (IMF) to discuss a daunting array of challenges: slowing global growth, vulnerabilities in the banking sector, and growing calls for multilateral amends.
In addition to the IMF’s annual spring meeting with the World Bank in Washington, DC, on April 12-13, the Group of Twenty, or G20, and Finance Ministers and Central Bank Governors (FMCBGs) will meet.
While problems in the global economy will be at the forefront, tensions surrounding the war in Ukraine could complicate the development of a concerted plan of action.
“To boost confidence in the global financial system, G20 officials should discuss providing temporary guarantees for bank deposit,” said Edward Glossop, deputy director for macroeconomics at Ernst & Young, mentioned to Al Jazeera.
“It seems inevitable that the Fed will seek to extend daily swap lines [currency trading between major central banks, usually weekly] until the end of April to allow enough money to flow into a global market,” – added Glossop.
In January, the World Bank reduced its 2023 growth estimate for the global economy to just 1.7% from 3% in 2023. Meanwhile, IMF chief Kristalina Georgieva last week predicted the world would face years of anemic growth.
Washington lenders warn that raising interest rates to curb inflation is causing financial turmoil in the global banking system.
In the last 13 months, the US Federal Reserve increased its interest rate by 4.5%, and other major central banks followed suit.
Higher interest rate, which depreciates the value of fixed-income assets and increases the likelihood of floating rate instruments defaulting, was partly to blame for Silicon Valley Bank’s and Signature Bank’s failures. The market turmoil quickly spread across Europe, leading to the takeover of ailing Credit Suisse by multinational investment bank UBS in March.
The solution to the recent tightening cycle
Elsewhere, the Federal Reserve’s recent deflation cycle has promoted international vendors to reallocate their funds into US financial assets and away from riskier assets in developing countries, shaking their economies.
This cycle led, in particular, to higher refinancing costs and a general currency depreciation against the dollar. In addition to higher import bills, declining currency values make it more expensive to repay existing foreign debts.