Marrakesh, Morocco, October 11: In a recent address to the media in Marrakesh, Morocco, World Bank Chief Economist Indermit Gill expressed growing concerns about the state of the global economy. Despite the overall outlook remaining weak, the major economies India and the United States will continue to show a resilient performance.
Gill identified high interest rates as a significant factor dragging down economic growth on a global scale.
“The World Bank is getting stronger, and the world economy is getting weaker… The good news is that there are a few bright spots like India and the US. The other good news is that in spite of all of these shocks, we have not seen any big economy really get into big trouble. But the good news basically ends there,” Gill stated on October 11.
Gill’s comments come on the heels of the World Bank’s decision on October 3 to retain its growth forecast for India at 6.3 percent for the fiscal year 2023-24, despite persistent global headwinds.
Similarly, the International Monetary Fund (IMF) raised its growth forecast for India for the current fiscal year by 20 basis points to 6.3 percent on October 10. This aligns with the Reserve Bank of India’s (RBI) projection of a 6.5 percent GDP growth rate for the fiscal years 2023-24 and 2024-25.
Gill highlighted that rising interest rates have resulted in a substantial slowdown in economic growth, reaching levels considerably lower than pre-crisis levels.
Gill, in conjunction with World Bank President Ajay Banga, addressed the media on the cusp of the annual meeting of the World Bank Group and the IMF in Marrakesh, Morocco. Gill warned that the consequences of high interest rates can be better understood by examining what transpired in the 1970s when the US Federal Reserve raised rates.
“There are two or three things to think about that. The first one is it took a long time, it didn’t take one or two years. So we should expect this tightening cycle to also take longer. The second one is at that time, it left about 24 economies bankrupt.”
“And we should expect some countries to get into trouble now,” he cautioned.
Over the past 18 months, the US Federal Reserve has significantly raised its key interest rate by 500 basis points to combat inflation triggered by the surge in global commodity prices following Russia’s invasion of Ukraine.
Gill emphasized that even countries with relatively lower debt levels might face challenges due to public debt crowding out private investment, which, in turn, hampers economic growth.
President Ajay Banga added that he anticipates interest rates to remain “higher for longer,” which could further complicate the economic landscape.
Debt and Capital Challenges
Addressing the persistent challenges of resolving debt issues in low-income and vulnerable middle-income countries, particularly in the wake of the COVID-19 pandemic, has been a global priority. India, during its G20 Presidency, has championed efforts to address this issue.
The Debt Service Suspension Initiative, initially introduced by the G20 to halt debt repayments by the poorest countries, was succeeded by the Common Framework aimed at facilitating debt restructuring.
However, the Common Framework’s progress has been relatively slow. When questioned about the potential need for its replacement, World Bank President Banga emphasized the importance of careful consideration before making such a decision, especially when there are signs of progress.
“I wish there was a magic wand that said ‘abracadabra,’ we will just wipe the debt out of the system – I don’t think that’s likely to happen. I think this is hard work. And it needs to be done the right way,” he commented.
Banga stressed the necessity of dealing with debt issues on a country-by-country basis, presenting all relevant facts, reaching agreements on debt write-downs, garnering creditor support, and implementing improved regulatory and fiscal frameworks to prevent the recurrence of these problems in the future.
