The global economy is getting weaker, according to World Bank Chief Economist Indermit Gill, although the US and India are bright spots in an arena where high interest rates are dragging growth lower.
"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 the US and India. The other good news is that in spite of all of these shocks, we have not seen any big economy really get into trouble. But the good news basically ends there," Gill said on October 11.
Gill's comments come days after the World Bank, on October 3 retained its growth forecast for India at 6.3 percent for 2023-24 even amid persistent and intensifying global headwinds. Meanwhile, on October 10, the International Monetary Fund (IMF) raised its own growth forecast for India for the current financial year by 20 basis points to 6.3 percent. Before that, the Reserve Bank of India (RBI) had continued to project a GDP growth rate of 6.5 percent for 2023-24 and 2024-25.
One basis point is a hundredth of a percentage point.
"The trouble now is that because of the high interest rates, growth is slowing down a lot. The big problem is that growth is slowing down to levels that are much lower than what we had seen before the crisis," Gill said on October 11.
Gill, along with World Bank President Ajay Banga, were addressing the media in Marrakesh, Morocco ahead of the start of the annual meeting of the World Bank Group and the IMF.
The World Bank's top economist warned that the possible impact of high interest rates could best be understood by looking at what happened in the 1970s when the US Federal Reserve raised rates.
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"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 long. 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 warned.
Over the last 18 months, the US Fed has rapidly raised its key interest rate by 500 basis points to fight the multi-decade-high inflation caused by the surge in global commodity prices following Russia’s invasion of Ukraine. According to Gill, even though some countries may not have high enough debt right now to be in trouble, they could face issues due to their public debt crowding out private investment, which would slow down growth.
President Ajay Banga added that he expects interest rates to stay "higher for longer", which could complicate matters.
Debt and capital
Resolving the debt issues of low-income and vulnerable middle-income countries has been high on the global agenda following the onset of the coronavirus pandemic, with India pushing it hard during its G20 Presidency. While the G20 first put in place the Debt Service Suspension Initiative to pause the repayment of debt by the poorest countries, it was replaced by the Common Framework to help them restructure it.
However, the Common Framework has worked at a slow pace. When asked if the framework required replacement, World Bank President Banga said that before such a move, its replacement would have to be completely thought out, especially when progress is finally happening.
"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 said.
"I think the issues are - country by country, get the facts on the table, agree on a debt write down, get the creditors to agree and move past it, and then get better regulatory and macro and fiscal frameworks into these countries so we don't fall into the same trap 5, 10, 20 years later."
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