Global financial hotspots

Global financial markets have raised concerns about the risk of a new crisis after several large US and European banks fell into trouble in recent days. However, the International Monetary Fund (IMF) has just warned that the risks related to financial stability not only come from the banking sector, but also lie in the debt burden of many countries.

Speaking at the China Development Forum in Beijing over the weekend, IMF Managing Director Kristalina Georgieva warned of increasing risk factors related to global financial stability. According to Georgieva, at a time of higher debt levels, the rapid transition from a prolonged period of low-interest rates to much higher rates – necessary to fight inflation – inevitably generates pressures and vulnerabilities.

The IMF’s Managing General forecasts that the “world economic picture” will continue to be gloomy in 2023 and global growth will fall below 3% due to the impact of the conflict in Ukraine, tight monetary policies, and the consequences of the COVID-19 pandemic. Georgieva assessed that instability remains at a particularly high level and the global economic outlook remains weak in the medium term.

The above comments by the head of the IMF come as the collapses of Silicon Valley Bank (SVB) in the US and Credit Suisse in Switzerland have shaken the global financial system. However, along with banking instability, financial crisis and public debt burden are also creating other worrying hotspots in the global economy.

The IMF warned that Lebanon is “in a very dangerous situation” a year after it made reform pledges, having failed to fulfil them. The IMF also called on the government to stop borrowing money from the central bank and that the Lebanese authorities need to speed up the implementation of conditions set out to receive the 3 billion USD bailout package.

Another country facing serious financial difficulties is Ukraine. The IMF has just reached an expert-level agreement with Ukraine on a four-year financial support package worth about 15.6 billion USD.

Meanwhile, public debt and economic crisis continues to be the “chronic disease” of Sri Lanka. The country is experiencing its worst financial crisis since gaining independence in 1948, with severe foreign currency shortages, hyperinflation, and an economic recession.

Due to international debt default, this island nation of 22 million people is also suffering from high taxes on imports and exports, with shortages of food, medicine, fuels, and other necessities, as well as power outages every day. Sri Lanka’s economy shrank by 7.8% last year.

The IMF approved the country’s request for a 2.9 billion USD bailout with about 333 million USD to be disbursed immediately. However, the IMF Managing Director said that the country needs to continue pursuing tax reform and expansion of social security for the poor, as well as to step up the fight against corruption – ¬which is one of the causes of the crisis.

Another “hotspot” of the financial crisis is Tunisia. The country’s economy has been in trouble for many months and is one of the reasons for a new wave of migrants into Europe. Italy urged the IMF to disburse a 1.9 billion USD loan to Tunisia. Negotiations with the IMF on Tunisia’s bailout package have stalled for months as the United States and several other countries are demanded sweeping reforms from President Kais Saied before disbursing the funds.

Facing the difficulties of a series of countries, the IMF, the World Bank (WB) and India – the country that holds the rotating presidency of G20 – will hold the next roundtable on public debt on April 3 to accelerate debt reduction for countries in need and speed up the debt restructuring process.

The IMF said that after this meeting, there will be a higher-level meeting on the sidelines of the Spring Meeting of the IMF and the World Bank in Washington DC. The roundtable has been scheduled as debt settlement agreements for Zambia, Ghana, and Ethiopia continue to stall.

In the context that the world economy in 2023 has just begun to recover, the IMF’s early warning of risks to dispel the dark clouds of crisis from the global financial system is very important. In order to promptly prevent banking crises and debt crises, not only do international financial institutions such as the IMF or WB need to closely monitor the public debt situation of countries, but Governments and central banks are also required to pay attention to the financial health of their economies.

In today’s deeply integrated world, a crisis from one country, even a commercial bank, can create a “domino effect” and trigger economic crises on a regional scale.

NDO