Dozens of countries are about to default, warn WB and IMF

The rapid rise in interest rates and the strength of the dollar have dozens of countries on the brink of default; In this context, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), announced that within the framework of the Spring Meetings that are taking place this week in Washington, a meeting will be held between all creditors, public and private, the countries with debt problems and international organizations to find a solution.

Georgieva and David Malpass, president of the World Bank Group, emphasized that the accelerated increase in interest rates is not only generating greater pressure to pay debt interest in low- and middle-income countries, but is also adding an outflow of capital that far from paying the convergence –that the economies with the lowest income catch up with the developed– is widening inequalities.

The managing director of the IMF highlighted that the world economy is sustained in a context of high uncertainty: along with a significant inflation problemwhich has forced central banks to increase interest rates to combat it, this rapid transition in monetary policy has exposed vulnerabilities in the financial sector.

According to Georgieva and Malpass, these vulnerabilities in the financial sector have been better resolved by central banks and regulatory authorities than in 2008. However, the crisis after crisis that has been occurring has pushed the long-term agenda for the immediate , which is to guarantee price and financial stability.

David Malpass, who leaves his position as head of the World Bank in June, stressed that although the central banks have made the cost of money more expensive through the interest rate, with the aim of reducing demand and with it inflation, a A longer-term measure is to expand the supply, while highlighting the increase in the prices of food and fertilizers. In this regard, Georgieva stressed that this shock to the world economy can be eliminated only with Russia’s decision to stop the war in Ukraine.

Fiscal consolidation has not reduced debt

In a report to be presented on the sidelines of the Spring Meetings, the IMF noted that fiscal consolidation has not typically lowered debt ratios in the past because the appropriate conditions or corresponding policies to accompany her; countries with a higher debt burden may now require a substantial and rapid debt reductionalerted.

After public debt soared to a new record during the pandemic and exceeded global gross domestic product (GDP), government borrowing remains high, while rising interest rates and the strength of the US dollar contribute to higher prices interest, which weighs on growth and fuels financial stability risksexpanded the organism.

In an analytical chapter of his most recent report World economy perspectivesthe IMF reported that according to data analyzed from two decades, a proper fiscal contraction of approximately 0.4 percentage points of GDP reduces the debt ratio by 0.7 percentage points in the first year and up to 2.1 after five years.

This effect is conditional on the moment in which the fiscal adjustment is made and the type of economy that recently made it, for example, in high-income countries. spending cuts are more likely to lower debt ratios than increase revenue. He added that the chances of success also improve when fiscal consolidation is reinforced by structural reforms.