G20 finance heads face reform calls from Global South

Zurich, Switzerland – The sentinels of the global economy are meeting this week at the International Monetary Fund (IMF) to discuss a complex set of issues – slowing global growth, banking sector vulnerabilities and growing calls for multilateral reforms.

Alongside the IMF’s annual spring meetings with the World Bank in Washington, DC, the Group of Twenty or G20 Finance Ministers and Central Bank Governors (FMCBG) meetings will take place April 12-13.

While the challenges facing the global economy will be in the spotlight, the tensions surrounding the war in Ukraine could make it difficult to come up with a coherent course of action.

“To bolster confidence in the global financial system, G20 officials are likely to discuss providing temporary support for bank deposits,” Edward Glossop, deputy director of macroeconomics at Ernst & Young, told Al Jazeera.

“It seems inevitable that the Fed [United States Federal Reserve] will seek to expand daily swap lines [currency exchanges between major central banks, usually transacted on a weekly basis] until the end of April to ensure there is sufficient cash flow in global markets,” Glossop added.

In January, the World Bank lowered its 2023 global growth forecast from 3 percent to 1.7 percent. Meanwhile, IMF chief Kristalina Georgieva predicted last week that the world would face years of sluggish growth.

Washington lenders have warned that higher interest rates to curb inflation are causing financial turmoil in the global banking system.

Over the past 13 months, the US Federal Reserve has raised its benchmark rate by 4.5 percentage points, and other major central banks have followed suit.

Higher interest rates, which drive down the value of fixed-rate assets and increase the likelihood of default on floating-rate instruments, are partly blamed for the collapse of Silicon Valley Bank and Signature Bank. Market turmoil quickly spread to Europe, leading multinational investment bank UBS to take over long-troubled Credit Suisse in March.

“The era of cheap money came to an end as central banks began raising interest rates in an attempt to bring down consumer prices. Global risk appetite has since fallen,” Glossop said.

Elsewhere, the recent cycle of tightening by the Federal Reserve has prompted international investors to move funds into US financial assets and turn away from riskier investments in developing countries, which has crippled their economies.

In particular, this led to higher refinancing costs and widespread depreciation of the currency against the US dollar. In addition to higher import bills, the fall in the value of the currency makes paying off existing foreign debt more expensive.

This prompted calls for the G20, whose member states account for 85 percent of the world’s gross domestic product (GDP) and two-thirds of the world’s population, to work towards debt relief for developing countries.

“In an effort to contain domestic inflation, the Fed and its colleagues will continue to hurt developing countries if they keep raising interest rates,” former Argentine finance minister Martin Guzmán told Al Jazeera.

Last December, the World Bank estimated that low-income countries would have to service $62 billion in external debt this year, up 35 percent year on year.

“Part of this increase was due to currency dynamics, but the extent clearly differed between lenders,” Guzman said.

Approximately 66 percent of low-income countries’ official debt is held by China, the world’s largest sovereign creditor. At the latest FMCBG meeting, Reuters reported that India had submitted a proposal calling on bilateral lenders, including China, to take on losses on outstanding loans.

Meanwhile, China has challenged multilateral lenders such as the IMF and the World Bank for not agreeing to discounts on their loans.

“Beijing claims that debt relief efforts [among all creditors] must be collaborative and inclusive,” Guzman said. “So this week’s FMCBG will be a good opportunity to discuss the overall structure.”

The overall structure of the G20 is an attempt to coordinate sovereign debt write-offs among its members and to demand equal restructuring terms from private creditors. So far, only four countries have signed up. No one has completed debt negotiations yet.

Guzmán went on to note that “improved guidelines such as debt suspension during negotiations and extending the common framework to middle-income countries [as opposed to just low-income nations] help validate the initiative.

In addition to multilateral debt relief, observers are also calling for domestic reform at international financial institutions (IFIs) and multilateral development banks (MDBs).

According to Avinash Perso, Climate Envoy of Barbados Prime Minister Mia Mottley, “Now offers an ideal opportunity to restore confidence in multilateralism, especially in IFIs and MDBs.”

“To begin with, the fund’s quota limits are too low for emergency lending,” Perso told Al Jazeera, referring to IMF programs such as the Resilience and Sustainability Trust, where countries’ funding is limited to 150 percent of their capital commitments in the fund.

“This limits lending for fiscal emergencies and climate change. Instead, the fund should aim to play the same role that the Fed has played in recent weeks, namely a temporary lender with multiple lending conditions.”

Persaud also rejected the World Bank’s “cautious” approach to risk tolerance.

“The bank can raise additional billions of dollars for developing countries by adjusting its loan-to-equity ratio by just 1 percent,” he said.

His remarks were reflected in the July G20 report, which said that by slightly changing their lending ratios, the MDBs could unlock hundreds of billions of dollars of new lending opportunities.

Still, Perso sees this year’s leadership change at the World Bank as “positive.”

In February, Ajay Banga was named head of the organization after his predecessor, David Malpass, stepped down from the position amid accusations of climate change denial, which Malpass denied.

“Stakeholders are starting to change their minds on developing country debt and the environment,” Perso said. “The appointment of Bungui shows that. He will have a brief moment to shake things up early in his tenure. Let’s hope the G20 supports it.”