– Opening remarks by World Bank Group President David Malpass during the launch of the January 2022 Global Economic Prospects Report
By David Malpass
COVID and the shutdowns are still taking a huge toll especially on people in the poor countries. In the new GEP the World Bank is lowering our global growth forecast to 4.1 percent for 2022. That’s down two-tenths of a percent from the June GEP and growth was 5.6 percent in 2021. Let me thank Ayhan Kose (Director of the World Bank’s Prospects Group) who’s on with me today also Carmen Reinhart (World Senior Vice President and Chief Economist) and Indermit Gill (Vice President for Equitable Growth, Finance and Institutions). My view is that we have the best development economics team in the business. And so I’m glad to have this GEP come out early in 2022.
The forecast assumes COVID has its biggest impact on Q1. If the variants persist, there’s a downside risk to the forecast that could reduce global growth further anywhere from 2/10 to 7/10 of a percentage point. Developing countries are facing severe long-term problems related to lower vaccination rates, global macro policies and the debt burden. There’s a growing canyon between their growth rates and those in advanced economies. This inequality is even more dramatic in per capita and median income terms, with people in the developing world left behind and poverty rates rising. We’re seeing troubling reversals in poverty, nutrition, and health.
The reversal in education from school closures will have a permanent impact; the share of ten year-olds who cannot read a basic story has risen from 53 to 70 percent in low and middle-income countries. Many schools remain close, and the data is clear that this causes learning to go down particularly for primary age children. I am very worried about the permanent scar on development.
Elevated inflation is another key problem a relatively new one. It’s hard to stop. Supply chains may continue to be disrupted. The US, for example, is suffering what’s being called the Great Resignation. It’s hard to get workers back into the labor force and the supply chain once they’ve exited. Both inflation and interest rates hit the poor the hardest. A third of developing countries have already had a hike interest rates and the private sectors in developing countries are shrinking. They are key to growth, but they’re under pressure.
This new GEP report discusses the drag on development from policy uncertainty. Government spending and monetary policies are in uncharted territory. With macroeconomic imbalances at unprecedented levels. Government spending is very high across the developed world. Many countries don’t have workable limits on that, so there’s uncertainty in the outlook about the course of spending and of government borrowing.
The concern is that the huge borrowing by advanced countries reduces the amount of money available for others. This was expressed at the Rome G-20 Leaders Conference at the end of October. It’s hard for governments to find useful investments at this point in the cycle, so the spending ends up being a drag on growth. There’s a crowding out that hits small businesses. This is one factor in the supply chain problems.
Another factor is that the central bank balance sheet has absorbed unprecedented amounts of long-term assets financed by bank reserves. This allocates capital away from small businesses and from the supply chain. This shortage of working capital makes it harder to bring down the inflation rate, interest rate hikes and tighter credit conditions add to this problem of working capital. We need robust small business loans to solve the supply problems.
You’ve ended up with inflation. To fight it, central banks are considering two tools: interest rate hikes and reducing their total assets. I’m worried that these won’t solve either the inflation or the inequality problems. It matters a lot how the central bank balance sheets shrink. They can reduce their short-term assets, which wouldn’t do much – it would just shuffle Treasury bills to another balance sheet somewhere else or they can reduce the long-term assets. I think that latter process would help with the supply chain problem and with inequality.
The major central banks are borrowing huge amounts of bank reserves to maintain their bond and mortgage portfolios. They have many, many trillions of dollars of bank debt. For now, when bonds mature, they buy more bonds. This crowds out small businesses and developing countries. Paul Volcker, in his memoir, noted that asset prices are a close cousin to goods prices, meaning it will be hard to stop inflation as long as there’s permanent support for asset prices. The current inflation risk is that the price of goods and services will have to go up to meet the price of assets, meaning lots of inflation and uncertainty as we go through that process.
Another key monetary issue that I’ll raise is whether the central banks use their regulatory policies to allocate capital and credit toward small businesses or away from them, as has been happening. This regulatory power has more impact on small businesses than the reserve requirements, since bank reserves are in massive excess. We’ve gone way beyond monetarism. It’s really post-monetarism, where regulatory policy governs credit flows more than the money supply does.
I’ll mention three other key areas and then turn to questions. First is vaccines. Omicron shows the threat. We have to speed up the vaccination process and therapeutics. I chair a task force on this with the WHO, WTO, and IMF. The World Bank has vaccination financing for 67 countries in place, and we’re working hard to expand the supply of vaccines and therapeutics and the deployment. Improving health care and preparedness are key World Bank development priorities, including in the just-completed IDA20 replenishment that reached US$93 billion.
Second point is on climate. Our action plan is focused on helping the world identify and fund high-impact projects that actually reduce greenhouse gas emissions and support adaptation. The World Bank plays a central role in protecting and improving global public goods. We do this by working with governments to meet their climate and development goals.
The challenge is for countries to undertake clearly defined, complex long-term projects and bring in huge amounts of both short-term and long-term funding from the global community. To emphasize, this is a complex problem, it’s very expensive. It’s one that the World Bank is at the center of and the forefront of in putting together the various aspects of the greenhouse gas reductions and also adaptation.
And the third issue I want to mention is debt transparency and sustainability. Many countries are now facing record levels of external and domestic debt as interest rate hikes begin. Around 60 percent of low-income countries are already at high risk or already in debt distress, and many emerging markets are struggling as well. These conditions, current conditions, present developing countries with immense challenges brought from exchange rates, inflation, debt sustainability, and economic growth. In 2022 alone, IDA countries will have to prepare around $35 billion in debt service to their official bilateral and private-sector creditors, with over 40% of that due to China.
Risks of disorderly defaults are growing. The tightening of monetary policy in advanced economies will have ripple effects. And the G20 Common Framework needs to be enhanced and its implementation accelerated. I presented approaches on this, including a debt service standstill for countries entering the Common Framework. We need clear rules for assessing and enforcing comparable treatment among all creditors. It’s crucial that China participates fully in international debt relief efforts, as well as private sector and commercial creditors participating.
The new GEP report has a special focus chapter providing recommendations on how to increase the effectiveness of the Common Framework and avoid the shortcomings that were faced by earlier debt relief initiatives. It’s an innovative chapter and I encourage your attention to it, and I’ll draw a couple of lessons for you from it.
One is the deep debt relief is much needed for the poor countries. If we wait too long, it will be too late and won’t be successful. Second, debt transparency is crucial in all of this. We need to have a debt reconciliation process. Also, much stronger public disclosure practices – that includes the elimination of the confidentiality and non-disclosure clauses that have been put into these instruments and also disclosure of collateralization and security agreements. And then third, we have to work toward rebalancing the creditor and debtor powers in sovereign debt restructuring. There’s the possibility of including, for example, an aggregated collective action clause in all new official sector and private sector debt and debt equivalent instruments.
Okay, to sum up, we’ve got a very challenging environment for developing countries. The interest rate hikes, the likely interest rate hikes make that more challenging, and it comes at a time when debt and the other needs for fiscal resources for these countries, including climate, are immense. With that, I’ll turn to you and see if there are questions.
Thanks again, everybody, for joining.