IMF chief urges debt-laden nations to act now to avoid problems

The International Monetary Fund’s chief urged nations with high levels of dollar-denominated debt to try to extend maturities now to lessen pressure as the U.S. Federal Reserve raises interest rates.

Managing Director Kristalina Georgieva said that her worry is greatest for low-income countries because 60% are in debt distress or in danger of reaching that point. She predicted a more difficult year ahead for policymakers based on the differences between nations and the nuance of the solutions required, and that 2022 will be like “navigating an obstacle course.”

“Our message to countries with high levels of dollar-denominated debt is ‘act now,’” Georgieva said on Friday during a virtual panel at the World Economic Forum, alongside European Central Bank President Christine Lagarde and Bank of Japan Gov. Haruhiko Kuroda. “If you can extend maturities, please do it. If you have currency mismatches, now is the moment to address them.”

“We have to be careful how we also support those that without international support are going to be in deep, deep trouble,” she added.

COVID-19 has dealt a major blow to the world’s poorest countries, causing a recession that could push more than 100 million people into extreme poverty and resulted in record-high debt levels, according to the World Bank. The challenges are mounting with the omicron variant, which is driving a new wave of infections.

Meanwhile, the Federal Reserve is poised to raise interest rates for the first time in more than three years, with U.S. inflation rising the fastest in almost four decades, spurred by consumer demand and supply-chain disruptions.

The panel underscored the differing challenges that countries face two years into the pandemic. Kuroda said that Japan must continue with extremely loose monetary policy because, unlike in other major economies, inflation remains too slow. Lagarde said that the ECB has reason to be acting less aggressively than the Fed because it expects inflation in Europe to slow as supply-chain bottlenecks are resolved.

Paulo Guedes, the economy minister in Brazil, where the annual inflation rate has climbed to 10%, said that he believes price growth will be a “real problem very soon for the Western world.”

“My fear is that the beast is out of the box,” he said. “I don’t think inflation will be transitory at all.”

Georgieva warned that while the IMF expects the global economic recovery to continue in 2022, it’s losing momentum. The rebound faces headwinds from Covid-19 infections, inflation that’s proving more persistent than anticipated, and a record $226 trillion in debt, she said.

The IMF is set to release an update of its World Economic Outlook on Jan. 25.

China’s policy

The IMF chief spoke about the challenges facing China, the world’s second-largest economy. The nation’s “Covid zero” policy, which has resulted in mass lockdowns and interruptions to production, supply chains and travel, may be much harder to maintain without a dramatic impact on the country’s economy, given that omicron is more transmissible, Georgieva said.

“The zero COVID policy for quite some time did contain infections in China,” Georgieva said. Now, with omicron, “the restrictions that need to be imposed are more of a burden on the economy.”

“It is at this time that it’s important to reassess what is the best way to deal with the pandemic,” she said.

She also said that China may have withdrawn policy support for its economy too soon.

Georgieva said last month that she expects the IMF to pare back its global economic-growth forecast. The Washington-based IMF in October predicted that the global economy would expand 4.9% this year. For 2021, it had trimmed its outlook to 5.9%.