The Way Forward: Responding to Global Shocks and Managing Uncertainty

Noreyana Fernando:

Hello, everyone. Thank you for joining us here at the World Bank Group headquarters in Washington, DC, for the World Bank Group-IMF Spring Meetings. I'm Noreyana Fernando, your host for today's event.

Responding to Global Shocks and Managing Uncertainty, a conversation between World Bank Group President David Malpass and IMF Managing Director Kristalina Georgieva. As the world deals with overlapping crises and conflicts, these Spring Meetings are focused on the actions that countries can take to respond and build resilient systems for the long-term. To kick off the week's public programming, I hand it over now to President Malpass and Managing Director Kristalina Georgieva.

David Malpass:

Thank you very much. Welcome Kristalina. This will be one of the more enjoyable conversations of the week because we're pretty unscripted. We have crises going on around the world. I know you just put out the World Economic Outlook forecast this morning. I wonder, how do you see things from the macro standpoint? Then we'll also, I know, be talking about Ukraine, about the need for food security worldwide and other topics. But WEO came out.

Kristalina Georgieva:

Well, it came out. To put it very simply, we are facing a major setback for the world economy because the pandemic impact is not yet over, the recovery is not completed. On top of it, we have Russia's invasion of Ukraine, devastating for people in Ukraine, but also impacting countries close and far.

When we look at the numbers, the growth projections for this year, 3.6%, this compares to 6.1% in 2021 when the recovery was picking up momentum. What is very troubling is that this negative impact of the war goes to so many places. We are downgrading 143 countries. This is 86% of global GDP. On top of it, we have inflation speeding up. It is driven now by continuous supply chain interruptions. We need to remember that China has been closing down big cities because of COVID.

But it is driven so much because of energy and food prices, as well as some of the metals going up, fertilizer prices going up. That is our toughest moment to have growth down when we want it to go up and inflation up when we want it to go down.

If you translate this into human terms, what does it mean? People's incomes down, hardships up. In that context, we also recognize that we have two other problems. One is the risk of fragmentation. If we are to move in a world where we have separate cross border payment systems for different blocks of countries, different reserves compositions, less trade, we know that this would be a poorer world.

When we look at this year, next year, we recognize that this is all in a context of extreme uncertainty. The war may get worse. The sanctions can tighten up. COVID may roam again around the world. And we know that we can have shocks that cause failure of crops. So for policy makers, tough times. This is why this week is so important for us to come on the same page.

David Malpass:

That's right.

Kristalina Georgieva:

I know that you look at the same world with much more focus on low-income countries. I would be very interested to get into how you see foot fuel pressures on low-income countries building up.

David Malpass:

They are building. The connection is direct because for poorer countries and for people, for poorer people, they spend more of their income on food and so the price increases really hit them. I think the world really needs to focus on both the economic side of it.

Of course, we hope for peace, for ways that the war can be stopped and that some of these crises can be alleviated. But while they're occurring, I think it's critical that we focus also on more supply. I'm concerned by the forecast that you've cited, and we're looking in the same way that the slowdown from 2021 is substantial. If we can combine efforts of the world to produce more energy, more food, more fertilizer at a time when the world really needs it...

Kristalina Georgieva:

And in more places.

David Malpass:

And in more places. For the poorest countries, there are farmers and they really want to grow crops. Having them have some access to fertilizer is important. We're trying to do... One approach that we're taking is in terms of targeted support. That means farmers that can't afford fertilizer, there can be income support or cash support to help them buy fertilizer with a voucher. That's an effective program because then they're able to grow crops and that helps their family and other people within their community. Some part of this can be community based.

I also think the advanced economies have to really step forward with food aid, but even more importantly, with food production, fertilizer production, and above all, a core element is this energy production problem as the world tries to get away from Russian energy supplies. What do you think? I'm just back from Poland and Romania. I'm concerned because the challenge of the energy crisis is immense. It's upon them because there's been such dependency from Russian natural gas.

Kristalina Georgieva:

It is very painful for those that are either more integrated with Ukraine and Russia or more dependent on Russian and Ukrainian exports. We see that in the neighborhood. Central Asia, the Caucasus, Moldova, are quite severely impacted through multiple channels. Prices of energy, but also remittances are drying up. Those who relied on working in Russia to feed their family's home. We see that for Europe, that is more dependent on Russian energy supply.

Of course, the impact is more significant and that projects in the downgrade for some countries. But then it goes to places much further. Take a country like Lebanon, it is devastated to begin with. It imports most of their wheat and corn from Russia and Ukraine. How are people going to cope? That is where I agree so much with you that we need a recognition that the spillovers are more painful for those that were further behind in the recovery.

We actually saw something very troubling. The timeline for emerging markets developing economies to return to their pre-pandemic projections, the 2019 projections, it has extended more in the future. By 2026, emerging market and developing economies would be still 6% below their 2019 projections. So advanced economies have a moral obligation but also self-interest to generate more opportunities, more growth, and, of course, to support financially the most vulnerable countries.

David Malpass:

One aspect that we're concerned about is the reversal in education. As the COVID hit and the schools were closed, the data shows very clearly the backsliding in education and literacy. We have numbers that we're able to track. The data comes in late. We are afraid we're now above 70% of the children in the low-income countries are not able to read a basic text at 10. The reading literacy has gone downward, and that is very hard to recapture. It affects the whole world. It really is a global resource if children can read. We're working on that.

Kristalina Georgieva:

Do you see difference between boys and girls, David?

David Malpass:

Well, when the shutdown occurred, it affected both boys and girls. As the schools are reopening, there's a tendency for these girls not to come back. We're getting this double whammy, this really severe situation where girls were already sometimes being excluded from higher grades and now they're not invited back. That's, of course, a big problem in Afghanistan, but it's one that affects developing countries.

I wanted to turn and not leave our issue of market access. One of the most important things that the advanced economies could do for the developing countries is provide market access. I hope as we face this food crisis, I would love to see announcements coming out of the advanced economies that they've opened this market or this market to more competition from developing countries.

I was in Senegal two weeks ago, they make peanuts. But their primary customer for peanuts is China, way far around the world, and they have plenty of extra peanuts that could be sold into the United States, into Europe if they had market access. I would like to focus the advanced economies in that direction. What do you think?

Kristalina Georgieva:

I agree, this is a very good team for us to build on the very good cooperation we have started because of the pandemic with the World Trade Organization. And expanding to say, hey, there are ways in which you can boost growth in countries that are so much struggling to cope by opening up markets, by allowing more products to flow in your direction. I completely subscribe to that.

Overall, what we have seen and you know it from your data. The pandemic has created this very dangerous divergence between advanced economies and some emerging markets with stronger fundamentals and the rest of the world. It is a problem economically, it is a problem socially, but it is a problem also from a security standpoint. It is so concerning to see the Horn of Africa, the Sahel, parts of other regions being affected by increase insecurity, gang violence, even worse, local skirmishes and wars. So when we talk about Ukraine, which of course is the most dramatic situation today, we need not to forget that there are other places where insecurity is growing.

David Malpass:

Exactly right. We should talk about Ukraine. We're going to have an important meeting on Thursday where we'll talk with Ukraine's prime minister and the finance minister will be in. Some of the countries that are supporting Ukraine will be there. We hope to both be providing assistance as they try to survive the battles. I mean, assistance for example to hospital workers and the World Bank has been very quick in some of the immediate response. Then we'll also be looking at what could a rebuilding phase look like. How could it be done most effectively? You know a lot about this. You were born in Bulgaria. You know how hard it is to move forward into a new economy. Any thoughts on the reconstruction in Ukraine?

Kristalina Georgieva:

We had a very good call with President Zelenskyy this weekend. We talked about two things, how to make sure that the economy functions as much as possible while the war is still going on. Two, how to create a clear pathway for reconstructing the country. On the economy functioning, I want to praise the economic team of Ukraine On the macro side, they have done an exemplary job. They sustain payments of social services, of salaries. They aim to recover normal functioning of the economy whenever there is a chance. I have family in Ukraine in Kharkiv, they tell me something that I shared with the President, they are now having work done to plant trees and flowers, and clean the areas where bombings are not taking place. Why? To bring that sense of normalcy to people. Amazingly, they're seeing flourishable products like milk, cheese, reappearing. So it is important for everybody that is listening to us to recognize that there is war but there is also part of the country where people go to work, farmers continue to provide absolutely critical food supply for the country. We have a duty to support Ukraine during the next couple of months. We are discussing what that would mean in terms of financing. As you know, we have provided $1.4 billion dollars in emergency financing to make sure there is this buffer for Ukraine, but more would be necessary and it would be a great investment over the next couple of months to keep the economy functioning and prevent inflation shooting up, prevent money printing just to pay the salaries, prevent the risk of people getting desperate because the war continues and there is no sign of an end. But then comes your question. Actually, I'm so glad we are talking because the World Bank is the institution to lead reconstruction. From us, from the IMF, we will do everything we can for balance of payment support, for effective budgetary provisions, and then of course, quality of spending. For you it would be to reimagine the future together with the Ukrainian leaders and to say here is a country that yes, it has been so dramatically destroyed, but it can rebuild for the future, not rebuilt entirely what was there in the past. Then integrate into the European economy with an eye that people get their skills, they get their businesses to be part of this broader economic community. My country went through this by joining the European Union and it has been remarkably successful.

David Malpass:

I was just in Poland and they went through a process starting really in the 1970s and into the 80s of trying to plan their future even while they were under communism. So that becomes important, what is the plan and how is it based on some market structures? They were able to have a stabilization of the currency. I know bulgaria, that was an important element of the success there. That will be one of the challenges for Ukraine. I think also the debt burden has to be worked through and reduced substantially. That'll be an element. Then the supply systems, if we can call it that. It's the how it has land titling allow the agriculture sector to really prosper. We think infrastructure is going to be a big part of the equation because people forget how important logistics are for farmers. They have to move their crops to market. Right now the black sea is closed in and that's created an obstacle for the whole world. Kristalina, I'll turn to another topic and it's relevant to this. One of the challenges we're facing, well, two of the challenges I'll raise, interest rates are going up at a time when debt levels are already high. I'm really troubled by the inequality that is being disclosed and, actually, worsening in the world. What we see is the advanced economies able to borrow huge amounts of money. That takes it out of world capital markets, and it's contributing to demand, but not so much to supply. It's feeding the inflation concern or the inflation reality that we're facing, Then central banks themselves are, I think, contributing to that as their tool is higher interest rates. Well, that doesn't work for people that are newly trying to borrow, and it works for people that have borrowed and locked in their fixed rate for a long period of time. But new entrants are going to have a great deal of difficulty in this environment. I think it's important that central banks use more of their tools, not just the interest rate tool. At the same time, the advanced economies lighten up on the borrowing that they're doing into the global capital markets. I'm asking the advanced economies to think about more supply, allowing more market access, but then also adjusting their policies somewhat so that there's not such a contribution to this inequality.

Kristalina Georgieva:

Right. Well, the message we have communicated with the World Economic Outlook is that, unfortunately, for many countries, inflation has turned into a clear and present danger, and therefore, action has to be taken. Otherwise, we know that when we have price instability, it is bad for growth. But how you approach it without, one, throwing too much cold water on your own recovery, and, two, not damaging the prospects for recovery in the emerging markets developing countries that are still behind is going to be the very difficult question to answer. Like you, I hope that there would be great care given to how to move forward in a way that is clearly communicated and minimizes the risk of outflows from emerging markets. So far, we haven't had a major draw of capital from emerging markets to advanced economies, but we haven't yet seen the interest rates climbing up. Like you, I'm very worried that this could be a problem for everybody. So, what do we say? We say, well, look at every possible way in emerging markets to pursue structural reforms that make you more attractive. What did the pandemic tell us? It said those of you who had strong fundamentals, you dealt with the crisis better. The same way people that were affected by the virus with strong immune systems which stood it better. So very simple for everyone. Don't shy away from reforming labor markets, making sure that if you use any subsidies that they are very well targeted, that your private sector can flourish domestically so you can get more growth and be more attractive to capital from elsewhere.

David Malpass:

We've worked together and hard to try to have more transparency in the debt, especially of the developing countries. But I think it applies to everyone, even in the advanced economies, they take on debt, and it's a little unclear what it's for. For the developing countries, we really need to, I think, find ways that less of the debt is collateralized. A concern that we've had is that there are non-disclosure clauses in the debt contracts that are being signed even by poor countries, and that creates this conflict of incentives in the countries. I'm hoping as we move through these crises, we can find some principles of debt that include more transparency, less of it being collateralized so that there can be more investment. The way you're describing.

Kristalina Georgieva:

It has been really great to work with you on this debt issue from the very beginning of the pandemic. You were the strongest voice for the debt service suspension initiative. I am humbled and proud to be part of this. Now, we see the problem for many countries getting worse and the tools to deal with this problem disappearing. We don't have the debt service suspension initiative anymore. The Common Framework has not yet delivered on its promise. Yes, it has potential, but we need, as you and I have been speaking loud and clear, we need predictable process, credit committees in place, and preferably incentives for countries to step forward by that service suspension at the time they ask for it. I heard you speaking also about expanding it. I was talking about that before, and I realized that just getting what we have to work is not yet quite there. That problem is knocking on the door louder and louder. If we don't want to see countries going into that distress and from there into not servicing that, as Sri Lanka just did, let's get serious about the Common Framework.

David Malpass:

Sure. One thing we've done at the Bank at the prospect of interest rates going up, the worry is, wait a minute, the countries have a lot of floating rate debt. To my earlier comment, sometimes we don't know what the contract is, but as you see the contracts, a lot of it is floating rate debt. We have the ability within the Bank to allow the countries to convert that to fixed rate debt. We've had substantial success over the last year in countries locking in their longer-term debt that they do have. That's going to help a little bit. Also, we are providing net positive flows to a lot of the developing countries so that in a way helps their situation. That allows us to focus more on the private sector, which has issued a lot of debt that is not well positioned for the current environment. I think there needs to be relief on that front. Some of the official creditors have large amounts outstanding that need to really be considered. As interest rates go up, it's just adding to the urgency of this process.

Kristalina Georgieva:

Very much agree. We have today some 40 programs. We are already getting indications for quite a number of countries that they may need augmentation of these programs because of the hit that comes from Russia's invasion of Ukraine. As they do so, we actually, like you, we prioritize that management strategies because it would be really sad to have us lend to countries just so they can stay current in the debt service obligations. I am very hopeful that this week will energize more attention because the problem is here.

David Malpass:

Do you have takeaways from the week? We just started it but, what do you think?

Kristalina Georgieva:

Well, I think the... three takeaways from how we are stepping into the week, One, the soberness with which ministers and central bank's governors engage and their determination to concentrate on really big ticket items. Inflation, what do you do about it? How do you prevent harming your economy, economy of others by taking maybe oversized action, prevent being too slow on the uptake and then inflation gets out of control? The question of the war in Ukraine and its implications, the spillovers. Luckily, some of our leading voices, like Secretary Yellen, are talking about spillovers to poor countries. You know that the two of us were engaged on that particular topic of food security and also fragmentation. How would the world look like...

David Malpass:

If it broke apart?

Kristalina Georgieva:

If it breaks apart? How can we prevent this from happening? One of my favorite favorite lines is from the US secretary of treasury at the time of establishing the Bretton Woods, and he said, "prosperity like peace is indivisible". So my message for the week, our action has to be indivisible as well.

David Malpass:

Well, I guess out of time, but we've talked about the need for more supply in countries both advanced and developing, finding ways to have more supply, and I think more tools to deal with inflation, and then working together, recognizing that prosperity is beneficial all the way around the circle, that it should be a positive sum set of solutions that people come up with. Thanks very much. How do we do this?

Kristalina Georgieva:

Thank you.

David Malpass:

Thank you, Kristalina Georgieva, IMF managing director.

Kristalina Georgieva:

And we work together, David, and that is a very good thing.

David Malpass:

Your office is closer than my office right across the street.

Kristalina Georgieva:

That is very true.

David Malpass:

Nice to see you.

Kristalina Georgieva:

Our teams are so united on what you just said, what needs to be done.

David Malpass:

Solutions. That's great.

Kristalina Georgieva:

Solutions. Thank you.

David Malpass:

Thank you.

Noreyana Fernando:

Thank you very much President David Malpass and Managing Director Kristalina Georgieva. Your discussion has provided us with insightful context and shedding light on the major issues that you and global leaders will be focused on in this coming week. You can catch all of our public events on World Bank Live and IMF Live channels. We do hope you'll be able to join us for these important conversations.

00:00 Welcome! Responding to Global Shocks and Managing Uncertainty
01:31 World Economic Outlook forecast: Macroeconomic perspective
05:18 Supply chains: Food, fertilizers, and energy production
09:40 The reversal in education and literacy
11:01 Market access for developing countries
13:29 Reconstruction in Ukraine: Assistance and response
17:50 Challenges ahead for Ukraine
19:09 Interest rates, debt levels, inequality
22:47 Transparency in the debt
27:16 Expectations for the WBG-IMF Spring Meetings 2022
28:51 Closing remarks