IMF's Kristalina Georgieva: Covid-19 uncertainty is massive
Kristalina Georgieva, managing director of the IMF, speaks to the FT's David Pilling about the economic uncertainty caused by the coronavirus crisis, how Africa is in danger after a period of growth and how the fund is supporting countries through this crisis.
Edited by Petros Gioumpasis, Filmed by Rod Fitzgerald. Still images by Getty and Reuters.
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Managing Director, thank you so much for joining us today. We're going to speak principally about Africa. And I know that the Fund has done a detailed study on the economic impact on Africa of the Covid-19 crisis. Can you tell us how deeply damaged are these economies going to be?
This is the heaviest hit on Africa at least since the 70s. We are predicting minus 3.2 per cent. But for countries that are particularly exposed of the economic shock, the devastation is more severe. Tourism-affected countries, minus 9.7 per cent. Oil dependent economies, minus 4.9 per cent. Commodity dependent, in addition outside of oil, minus 4.2 per cent. So when we look at the devastation that this crisis is causing everywhere, we have to recognise that it is particularly hard on Africa, especially given that Africa has been the continent on the move. It has gained momentum for growth and poverty reduction. And this momentum is now so dramatically interrupted.
Now, if the world does nothing, what are the dangers for Africa? Some for example, talk about the dangers of big defaults. People are talking about Zambia, Angola. Then there's of course, the lack of money to actually fight the Covid-19 crisis itself, which is in the fairly early stages yet. We don't know quite what's going to happen. And can you tell us what you think the dangers are and which countries are particularly vulnerable?
What we already see is that countries that have been building strong fundamentals and diversifying their economies are in a better position. Countries that are more dependent on one or two sectors, and where levels of debt have gone up before the pandemic are in a much tougher place. When we look at the highest risks for Africa, I would place four on your radar screen. The first and more troubling is the fact that the infections in Africa are growing. We now have some quarter of a million people affected. And we see a number of countries, South Africa, Nigeria, big countries, Angola, being among the most affected. This is a tragedy, but it is especially harsh when medical capacity is limited.
Second, we see risk of losing the gains in poverty reduction. I have said that we are seeing a shrinkage of 3.2 per cent. But on real income per capita, because of population growth, it is higher. It is 5.4 per cent. What this means is that we are unfortunately recognising this reversal of poverty reduction already. The World Bank predicts 26 million people more in extreme poverty. And if the crisis is more protracted, that can go up to 40 million.
Three, countries that are under the burden of debt already, and we had some 16 countries in sub-Saharan Africa either in debt distress or close to debt distress, they're in a particularly tough place. You mentioned that Zambia, Angola is facing similarly significant difficulties, but so do a number of other countries. And this is where the debt service suspension initiative is so important to help countries that are under this burden of debt.
And last but not least, the fourth thing to watch is how would economies that are most severely affected because they are tourism or commodity export dependent, how would they manage this next year, two years, given that the rest of the world is going to go through what we're describing now in our report as a partial and uneven recovery in 2021.
Now, and given the nature of this economic challenge, and given that this is really purely an exogenous shock that has nothing to do with bad policies in Africa specifically, some are saying that the world is not doing enough for Africa. The IMF has been singled out as actually doing something. But other institutions and other countries are really being criticised by some African leaders. They say that hundreds of billions, even trillions are being made available for the north, and yet a few billion for Africa. And they really need more. Are you, at the IMF, being too timid, given the need?
Well, the IMF is leaning forward to support Africa in a very significant way. Let me give you the numbers. On average, we disburse about $1bn in Africa. This year, so far, we have disbursed $10bn, ten times more, and we are on the way to add another $6bn in support for Africa. And we have no intention to stop there. We are going to continue to seek ways in which we can increase support for Africa.
But let me be very clear, many of the countries need not more loans, they need more grants, and they need certainly more concessional resources on a larger scale. At the Fund, we have tripled our capacity to provide concessional financing. And we intend to increase this capacity even further. And I think it would be fair to say that if everybody does their part, we can support Africa much more significantly. We had a meeting designated to work with Africa exactly on this issue of the financial gap during our virtual spring meetings. At that time, we concluded that the financial gap for Africa was about $110bn, and $44 of this $110bn was still missing.
So we see our duty to step up, and we would like to see others, especially those who can provide Africa with grant financing or space not to be serving debt, as long as the economy is in this standstill so Africa can go to the other side, and then rethink how they're going to grow and provide a chance for the enormous opportunities of Africa to materialise.
Managing Director, where do you stand on SDR's, on special drawing rights? And there's been a lot of talk about this, and one is that some of the existing special drawing rights that belong to rich countries be reallocated. And I'm told that this would not be enough given that African countries only have a six per cent quota of those. The other would be to issue new SDR's, perhaps a trillion dollars worth of SDR's. And do you favour that? Do the Americans favour that, or are they pushing back against that hope?
So when in March we had the G20 heads of states call, at that time, among the actions we needed to take to respond to this crisis, I actually listed a possibility for a new SDR allocation. At that time, that was a very pressing issue because shortage of liquidity across emerging markets in developing countries could have turned into insolvency. We are in a different place today because the tremendous provisions of liquidity by major central banks, especially by the Fed, the European Central Bank, and others, and the enormity of fiscal measures taken by especially advanced economies, made it possible for emerging markets with good fundamentals to raise money at a fairly low cost. We have seen a dramatic increase in bond issuance by emerging markets.
This issue of access to liquidity for countries with strong fundamentals right now is not so pressing. However, for countries with weak fundamentals, for weak economies, for poor countries, it continues to be a very pressing issue. So where we are, we have not been able to gather sufficient support for a new SDR issuance at this point. I wouldn't say this is off the table, but we need 85 per cent voting. We don't have it at this moment of time. And there are some reasons that are being stressed as to why this is not coming.
But for poor countries, we are working on moving existing SDR's from countries that have it, don't need it, to countries that don't have it, but need it. And this discussion with the membership is progressing.
Some people have said that there is a difference between the IMF and the World Bank here, that the IMF is keener to push ahead, to break the glass as one finance minister put it, i.e. to be more innovative and aggressive. The World Bank is more cautious, and more conservative. And some people are very angry at this because they say, you know, this is not a time to be cautious. You have said, spend now, but keep the receipts. But if you don't have the money, you can't spend. Is the World Bank being a brake on what should be happening?
The World Bank is mobilising some $160bn for this year and next to provide to countries, supporting them in this extraordinary environment. Where the Fund is perhaps more unusually leaning forward that we have been seeing in the past, is in exactly that recognition that we are talking about, an exogenous shock. And the advice we are giving everyone, countries rich and poor, is put the floor under your economy so you can move to the other side, restore growth, and deal with the consequences from this crisis, higher debt, higher deficits possibly, higher unemployment, possibly higher poverty.
But unless you can go through this period of time, then there can be very significant scarring that would have long lasting terrible consequences. So we are acting on our own advice by tremendously increasing provision of emergency financing. We have done in a short period of three months 72 programmes. Never in the history of the Fund we have done so much. 29 of those are for Africa, for African countries, with more to come.
And then we are stressing that it is critical to have strong accountability to the citizens, because if we act on scale but lose the receipts, then we would see a backlash from the public, especially when we know that there would be more difficulty, especially for poor people.
Where do you stand on the issue of private debt, because some are saying that you, the Fund, are helping out countries with debt moratorium, but they will merely use that money to pay off banks that have lent on the commercial markets to Africa. And yet, if there is a moratorium on private debts, on euro bonds, et cetera, the danger is that African countries will be downgraded by the ratings agencies. First of all, where do you stand, and do you think that the ratings agencies are being obstreperous? Do they need to be more helpful in saying, look this is an emergency. If you have a standstill, we won't count this against you.
Just to give you a number that was a pretty shocking number, when we decided to calculate how much would the world lose in this two years because of this pandemic and economic shock, the number is staggering. It is $12tn less. OK. We should all have the interest to accelerate the return to growth and then make it possible for everybody to have better opportunities. Now of course, when we talk to private sector, we recognise that they also have their own constituency to report to. And yet, I would really plead that it is in everybody's interest, we are in this together. If there is anyone that hasn't quite yet gotten it, please wake up,
And when it comes to rating agencies, I mean, some years ago the Fund would say, debt levels are going high, this is going to be a problem, debt is not sustainable, the countries are in debt distress. But we would not see the same concern translate into ratings. Now, we are in a situation when countries are being hit by exogenous shock. Well, it is fair to look at this situation and assess it as it is, highly unusual. It is a crisis like no other. So I would really hope that we would all be mindful that this is unprecedented, and we have to be able to think through this crisis with an objective that we have a stronger, more resilient economy when you come on the other side.
Is China doing enough? China signed onto the debt moratorium for Africa until the end of the year. But again, there's concern that's been expressed in Washington that China will revert to norm, it will negotiate bilaterally country by country, pick them off, and that in a sense, it may also free ride if the big institutions, if the big Western economies have a debt standstill pushing money towards Africa, that China may continue to collect. What's your experience, what's your feeling about China's doing?
Well, let me first recognise that the debt service suspension initiative is a huge achievement. Never before, we had the Paris Club, and the non Paris Club Official Creditors coming together. They did it, and they did it very quickly. And I want to give my personal appreciation for everybody, for the Gulf countries, for China, of course for the Paris Club countries.
And if we are successful in this debt service suspension initiative, one might envisage that there could be an official creditors forum that brings all the key creditors together on common principles, and in coordinated action. And that would be very good for the future of finance. China has taken this commitment to heart. And from what we see, is they're recognising that it may be necessary to do even more. President Xi Jinping, in the summit with Africa spoke about possibly prolonging this moratorium, and very important, he spoke about calling on all Chinese institutions to participate.
From the Fund's side, we are working at the senior technical level with China on the broader principles, but also country by country where we see that the country headed in terms of debt sustainability, what may be necessary, and what China's role should be. So it is critical China has evolved to be a very big lender to African countries. They have multiple institutions that are participating, not necessarily it is at this point entirely clear how decisions are being made in the country. But if we are to be successful, we have to come up to multilateral approach to debt sustainability. And I certainly would like to see China playing its role in it.
Just finally, I'd like to turn to a non-African question, really a global question. We're seeing many economies come out of lockdown now, and yet if you look at the global numbers, I'm talking about the Covid-19 numbers, they're still going up. There's no real - we have no real reason to believe that this is ending. People are talking about a second wave, but it's not really clear that the first wave has ended yet. If we get let's say, a spike or an upsurge in Covid-19 cases, have you done any kind of back of the envelope calculations as to how damaging, how low could the global economy go, if we really don't get this pandemic under control?
Well, when we published our projections, we did have upside and downside scenarios. And the downside is indeed, if measures to contain the pandemic are less effective, and if we are to have either continuation of the infections with a high speed or a second wave. And what we recognise is that it would be a much tougher place for the world to be. Let me stress two points. One, where we are today is we understand somewhat better how the virus behaves, and what can be done to reopen responsibly while the pandemic is still with us. In April, we were still hoping that we would reopen after the pandemic is gone. Now, we know this is not the case. And we know the measures that can be put in place. So it really is upon countries to take these measures to heart, and act indeed responsibly.
And secondly, we are at a time when uncertainty continues to be massive. Yes, I personally believe in our scientists. I think they will come through. There will be vaccines. There will be treatment. But when, how effectively, how fast, we don't know. And when we have such a high degree of uncertainty, then it becomes hugely important for policymakers to be agile, to be following developments and correcting, adjusting policies accordingly. And then we would be able to protect more lives, and at the same time protect our economies from deep scarring. We are in a place where we are finally recognising relief in a more risk-prone world. We have to change our mindset accordingly.
Managing Director, thank you very much.