IMF, World Bank make desperate call for cooperation, but is anybody listening?

As weak growth and high debt forces the Global South to cut critical spending from education to climate mitigation, the Marrakech Principles are yet another rallying call for global cooperation in a divided world that seems likely to go unheeded

David Dodwell

Published: 7:30pm, 15 Oct 2023

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Overshadowed by the Gaza conflict, over the past week of outpourings from the International Monetary Fund’s annual meetings in Marrakech, the irresistible pressure has been towards doom and caution.

Severe shocks were “becoming the new normal for a world that is weakened by weak growth and economic fragmentation”, said IMF managing director Kristalina Georgieva. “Successive shocks since 2020 have pushed global output down by US$3.6 trillion as of this year.” This, according to the IMF, was producing “the weakest medium-term growth outlook in three decades”, with most forecasts “skewed to the downside”.

The good news for those of us in Asia is that regional growth is forecast to remain comparatively strong, at 4.6 per cent this year, the result of which is that Asian economies are expected to account for around two-thirds of global growth.

The bad news is that China has weakened as a growth driver, and if “a downside scenario where ‘de-risking’ and ‘reshoring’ strategies take hold”, then the output of those Asian economies most closely linked to China could fall by 10 per cent in the next five years.

So “strengthening multilateral and regional cooperation and mitigating the effects of geoeconomic fragmentation are increasingly vital for Asia’s economic outlook”, said the IMF in a blog released on Friday.

Such is its concern about the dangers of fragmentation that the IMF’s World Economic Outlook cites the word no less than 172 times. As the Financial Times’ Gillian Tett noted: “IMF economists (like global investors) fear that rising strife will undermine growth, not least by shattering global supply chains.”

Perhaps the greatest angst is over what the world’s investment community seems, mysteriously, to be unconcerned about: debt and debt service.

The IMF warned of “the diminished ability of individual and business borrowers to service their debt”, with a growing proportion of small and medium-sized enterprises holding “barely enough cash to pay their interest expenses”.

Money spent on servicing debt is taking up more than 40 per cent of revenues in some highly indebted countries, with corporate debt problems likely to worsen next year as more than US$5.5 trillion is due for repayment.

World debt, including from governments, companies and households, reached US$307 trillion in June, according to the Institute of International Finance. This was an increase of US$10 trillion in just the first six months of the year, meaning that global debt accounted for 336 per cent of the world’s gross domestic product.

“Our concern is that countries will have to allocate more and more to interest expenses,” said the report’s lead author Emre Tiftik.

According to an Unctad report, at the end of last year, 59 countries had public debts amounting to at least 60 per cent of their GDP, with 64 countries spending more on repaying debt interest than on either health or education.

The severity of this diversion of government funds from critical spending on education, health and welfare was made clear by a Debt Service Watch report last week. Citing “the worst ever debt crisis since global records began”, it calculated that government debt costs across the Global South was averaging 38 per cent of budget revenue and 30 per cent of spending – in Africa, these were higher at 54 per cent and 40 per cent respectively.

As debt crisis widens, relief must be restructured to unlock growth

In particular, 35 countries spent more than half of their revenues servicing debt, with a further 19 spending more than a third. Worst affected were Egypt, where debt servicing stood at 196 per cent of its revenue, and Sri Lanka, at 120 per cent. But China (82 per cent), Turkiye (70 per cent) and Argentina (73 per cent) were not far behind.

Beyond the threat of debt costs crowding out education, health and welfare budgets is the diversion of spending from other critically important areas – in particular the slowing down of global warming and the mitigation of the impact of climate change.

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“Debt burdens are preventing meaningful efforts to implement [climate] mitigation and adaptation measures,” said advocacy group Debt Justice in a paper focused on debt and climate finance. It is calling for an automatic debt service suspension mechanism for countries in severe difficulties, and unconditional debt cancellation where necessary, along with multilateral debt workout processes.

“The scarring effects of successive crises are increasingly apparent,” said the IMF, “just as many countries are struggling to overcome high inflation, high debt and significant financing shortfalls to provide basic services, support infrastructure and climate action, and address rising poverty, inequality and fragility.”

In the face of these intensifying challenges, the IMF and World Bank last week unveiled the Marrakech Principles for Global Cooperation.

These focus on reinvigorating inclusive and sustainable growth, building resilience, supporting reforms focused on the climate challenge, pandemic preparedness, the technology revolution, skills development and rebuilding multilateral institutions and international cooperation.

As Russia’s war on Ukraine drags on and the prospect of war looms over Israel, as the harm from global warming steadily intensifies, as the urgent need to build health systems that can better protect us from the next pandemic remains untended, and as leading economies use supposed threats to national security to justify turning inward and building damaging protectionist walls, such commendable commitments seem depressingly like so much spitting in the wind.

So far, such rallying cries for urgent cooperation have gone unheeded. What hope that the Marrakech Principles will make a difference?

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades