IMF to Cut World Growth Forecast, Sees Recession Risks Spreading

The International Monetary Fund is poised to cut its global growth forecast for 2022 as a result of the war in Ukraine, and sees recession risks in a growing number of countries, Managing Director Kristalina Georgieva said.

The world economy is still set to expand in 2022, though by less than the 4.4% previously anticipated, Georgieva said in an interview with Foreign Policy magazine broadcast Tuesday. The IMF is set to update its projections in April when the fund holds its annual spring meetings.

“Some economies that have been fast to recover from Covid are in a stronger position” to cope with the reverberations from Russia‘s invasion of Ukraine, Georgieva said. The U.S. in particular has “fairly strong fundamentals,” she said. “But those that were not yet coming out of the Covid crisis, that were falling further behind, they’re going to be hit even harder,” with the “possible risk of recessions.”

Tighter financial conditions, as the Federal Reserve and other developed-world central banks raise interest rates, will be a “big shock” for many countries, according to Georgieva. About 60% of low-income countries are in debt distress or close to it, double the number that the IMF was worried about back in 2015, she said.

Georgievas top deputy, Gita Gopinath, said in the same event that the IMF sees “increasing fragmentation” in global payments systems as one consequence of the war.

Dollars Role

The U.S. dollar isn‘t about to suffer an “imminent demise” as the dominant currency in the global financial system, but “we could see pockets where we might see shifts happening,” Gopinath said. “We are likely to see some countries reconsidering how much they hold of certain currencies in their reserves,” while it’s clear that the way energy is traded has changed “forever.”

Depending on how long the war lasts, there could be larger effects, Gopinath said, though she described the potential impact of a Russian debt default as limited and “not a systemic risk to the global economy.”

The fund is also monitoring how the war affects use of cryptocurrencies, and expects an acceleration in the development of central-bank digital currencies, Gopinath said. Both she and Georgieva said more work is needed to strengthen regulations in this area.

Georgieva said the IMF has “three-quarters of our $1 trillion of lending capacity available” to help countries cope with the risks. She also said that the fund will do its “part” for Ukraine when the war ends and reconstruction begins. The countrys economy may shrink by a third compared with before the war, she said.

The IMF chief said she has family members in Kharkiv, a city in eastern Ukraine thats been a target of Russian forces. Georgieva said that she had been in touch with her family and that they are safe for now, though their building has lost water supply and they are hearing bombing every day.