The UN Trade and Development Conference (UNCTAD) in its latest Trade and Development Report Update released Wednesday expects global growth in 2023 to drop to 2.1%, compared to the 2.2% projected in September 2022, assuming the financial fallout from higher interest rates is contained to the bank runs and bailouts of the first quarter.
It warned that developing countries are facing years of difficulty as the global economy slows down amid heightened financial turbulence. Annual growth across large parts of the global economy will fall below the performance registered before the pandemic and well below the decade of strong growth before the global financial crisis.
The report said that India grew 6.6 per cent in 2022, ceding the pole position among G20 countries in 2022 to oil-rich Saudi Arabia, which grew at 8.6 per cent. Meanwhile, as current government spending has been weakening, but export orders remain on the rise, India’s GDP growth is projected to decelerate to 6.0 per cent in 2023.
For India, it said the positive effect of high public and private investment and consumption as well as rising exports was partly offset by higher energy import bills, which deepened the current account deficit and ate up reserves.
“The Reserve Bank of India started tightening its policy stance during the spring of 2022 to limit damage caused by foreign capital outflows, a weakening currency and inflation risks. Higher financing cost slightly dented buoyant economic activity, and over-leveraging in the corporate sector may become a factor of financial instability,” the report said.
In view of financing its growth ambitions, the Indian Government has committed to massive infrastructure investment. In 2020 and 2021 and in the energy sector alone, funds amounting to USD 160 billion had been committed to fossil and non-fossil projects alike, the report noted. South Asia registered a growth of 5.7 per cent in 2022 but the stark rise in already high poverty rates has not abated yet. UNCTAD expects the region to expand at a still fast pace of 5.1 per cent in 2023, “driven by the growth of its largest economy, India.”
Strong dependence on extra-regional fossil imports will keep the region vulnerable to inflationary pressures, which may trigger further monetary tightening while public spending may be curtailed by budgetary pressures, it added.
The report further said that highly indebted South Asian countries, such as Sri Lanka or Bangladesh, will keep facing pressures from external creditors to cut public spending and cancel social, productive and climate adaptation investments.
The report projected that the US, which grew at 2.1 per cent in 2022, will see growth slow down to 0.9 per cent in 2023. China, which grew at 3 per cent last year will see its growth accelerate to 4.8 per cent in 2023.
UNCTAD said that many developing countries face a deepening development crisis as soaring debt levels and higher servicing costs squeeze productive investment in both the public and private sectors. A shortfall of international liquidity has already turned unforeseen shocks into a vicious financial cycle in some countries.
UNCTAD found that 81 developing countries (excluding China) lost USD 241 billion in international reserves in 2022, an average decline of 7%, with over 20 countries experiencing a drop of over 10% and in many cases exhausting their recent addition of Special Drawing Rights (SDRs).
Meanwhile, borrowing costs, measured through sovereign bond yields, increased from 5.3% to 8.5% for 68 emerging markets. Overall, external creditors’ pressure on developing countries to reduce fiscal deficits is expected to increase.
Both the banking crisis and the cost-of-living crisis have shed light on the opacity and increased concentration of market power in key industries and UNCTAD calls for the closing of the loopholes in financial reform launched in the wake of the 2007-09 crisis, for the widening of the scope of systemic oversight and for closer regulation of shadow banking institutions.
“To adequately address developing countries’ needs, the financial multilateral agenda requires strengthening, with an urgent focus on the reform of the debt architecture. UNCTAD calls for the establishment of a multilateral debt workout mechanism, a registry of validated data on debt transactions from both lenders and borrowers, and improved debt sustainability analyses that incorporate development and climate finance needs,” it said.
The combined impact of higher interest rates and elevated energy and food prices in the context of receding fiscal support is expected to further weaken household spending, including on housing. Business investment, buffeted by financial turbulence, is also expected to slow down further or contract, it said.
Annual growth across large parts of the global economy will fall below the performance registered before the pandemic and well below the decade of strong growth before the global financial crisis – with a potentially devastating effect on the economies of developing countries. This will further deepen the cost-of-living crisis that their citizens are currently facing and magnify inequalities worldwide.
The International Monetary Fund (IMF) on Tuesday lowered India’s economic growth projection for the current fiscal to 5.9 per cent from 6.1 per cent earlier.
