UNCTAD lowers 2022 global economic growth projection to 2.6% from 3.6%

In an update to its Trade and Development report published on March 24, UNCTAD said the ongoing war in Ukraine is likely to reinforce the monetary tightening trend in advanced countries following similar moves that began in late 2021 in several developing countries due to inflationary pressures, with expenditure cuts also anticipated in upcoming budgets.

UNCTAD is worried that a combination of weakening global demand, insufficient policy coordination at the international level and elevated debt levels from the pandemic, will generate financial shockwaves that can push some developing countries into a downward spiral of insolvency, recession and arrested development, the UN body said in a release.

“Many developing countries have struggled to gain economic traction coming out of the COVID-19 recession and are now facing strong headwinds from the war. Whether this leads to unrest or not, a profound social anxiety is already spreading,” UNCTAD secretary general Rebeca Grynspan said.

Even without lasting financial market disruptions, developing economies will face severe constraints on growth. During the pandemic, their public and private debt stocks have increased. And issues that receded from view during the pandemic, including high corporate leverage and rising household debt in middle-income developing countries, will resurface as policy tightens.

The war has put further upward pressure on international prices of energy and primary commodities, stretching household budgets and adding to production costs, while disruptions to trade and the effects of sanctions are likely to have a chilling effect on long-term investment, said UNCTAD.

Coming just as pandemic-induced disruptions seemed to subside, the geopolitical crisis has dealt a blow to confidence domestically. “The added pressure of price increases is intensifying calls for a policy response in advanced economies, including on the fiscal front, threatening a  sharper than expected slowdown in growth,” the UNCTAD report said.

Soaring food and fuel prices will have an immediate effect on the most vulnerable in developing countries, resulting in hunger and hardship for households who spend the highest share of their income on food. But the loss of purchasing power and real spending will ultimately be felt by everyone.

“The danger for many of the developing countries that are heavily reliant on food and fuel imports is more profound as higher prices threaten livelihoods, discourage investment and raise the specter of widening trade deficits,” the report added.

UNCTAD has recommended greater, more concessional and less conditional, multilateral financial support for developing countries; immediate debt relief for Ukraine along with renewed discussions on a multilateral mechanism that promotes the fair and orderly restructuring of developing country sovereign debt during periods of severe financial stress; more use of special drawing rights to supplement official reserves and to provide liquidity on a timely basis to avoid severe deflationary adjustments.

It has also recommended more effective and less ad hoc swap arrangements between central banks to support developing country currencies and address financial crises, and sector-specific policies including price controls and subsidies, to tackle the supply-side and mark-up pressures on inflation.

Fibre2Fashion News Desk (DS)