Global policymakers face complex economic challenges

Amid slow recovery from COVID-19-induced crisis, inflation, and record fiscal debt levels, policymakers outlined their immediate and long-term actions to stabilize the global economy.

This flows from the impact of a new COVID variant, which shows that governments will continue to face economic challenges in 2022, as the World Economic Forum (WEF), rounded off its virtual event, the Davos Agenda.

In a session on the global economic outlook, Managing Director, the International Monetary Fund (IMF), Kristalina Georgieva, emphasized that the response to the pandemic crisis has been anything but orthodox.

“In a highly coordinated fashion, the world central banks and fiscal authorities have prevented the world falling into another great depression,” she said.

“Policy flexibility is critical in 2022 – persistent inflation, record fiscal debt levels and COVID-19 combine to present a complex obstacle course for policymakers,” she added.

In particular, she expressed concern that vaccination rates represent a dangerous divergence between countries; more than 86 countries did not meet end-of-year vaccination targets.

Georgieva expects the economic recovery will continue in 2022, but cautioned that: “It is losing momentum amid persistent inflation and record debt levels which now exceed $26 trillion.”

She noted that “More than 60% of developing countries are heading towards debt distress,” more than twice as many as a few years ago.

COVID-19 responses

On her part, President of the European Central Bank, Christine Lagarde, said during the COVID-19 crisis, monetary and fiscal policies joined hands to respond exceptionally to the pandemic.

“In Europe, so far, we are not seeing inflationary pressure spiral out of control. We see wages and energy prices stabilizing from the middle of the year as bottlenecks reduce and wage inflation normalizes.”

She asserted that: “In Europe, we are unlikely to see the kind of inflation increases that the US is experiencing; demand and employment participation are only just returning to the pre-pandemic levels.

“Europe is stronger and more united than it was before the pandemic and we will act if we need to.”

Similarly, Governor of Bank of Japan, Kuroda Haruhiko, said Japan has been relatively successful in minimizing the death rate from COVID-19, although the economic recovery is still lagging.

“Public sector debt in Japan is now well over 200% of GDP,” he said, “but the government projects a primary surplus from 2025, hence thereafter public debt should decline.”

He was optimistic about progress so far. “The Bank of Japan’s accommodative monetary policy has been working well and the Japanese economy is now emerging from the spectre of 15 years of deflation.”

 He added that “In Japan, we expect an inflation rate of about 1% in 2022 and the Bank of Japan will continue our stimulative monetary policy.”

Policy flexibility is critical in 2022 – persistent inflation, record fiscal debt levels and COVID-19 combine to present a complex obstacle course for policymakers.

Countries’ interventions

Also commenting, Minister of Finance of Indonesia, Sri Mulyani Indrawati, revealed that the country should see a strong recovery in 2022. “To build on this, we are expecting more than 1% of additional GDP growth from a series of recent reforms.”

She said that Indonesia is the largest economy in the ASEAN region but “it is vulnerable to a dependence on commodities – the emphasis now is on value-added activities.”

She added: “We are improving Indonesia’s investment environment with a comprehensive reform package on tax, regulation and incentives.”

For the Minister of Economy of Brazil, Paulo Guedes, his country’s economy is bouncing back strongly and economic output is already above the pre-pandemic level.

He said: “Do not underestimate Brazil’s resilience. The country’s debt to GDP ratio has stabilized at around 80%, well less than widespread fears that debt/GDP could exceed 100%.”

He pointed out that more than three million new jobs were created in 2021, and the government has assisted 68 million Brazilians with direct income transfers.

He was however less upbeat about inflation. “Central Bankers are asleep at the wheel – inflation will be a persistent problem for the western world. Inflationary pressures will not be transitory.”

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