The interest rate rises and austerity the world’s richest nations are using to fight sky-high inflation risk a painful global recession that would hurt developing countries most, the UN has warned.
In its annual trade and development report, the UN Conference on Trade and Development (Unctad) said a drive by major central banks to ramp up rates in response to soaring prices represented an “imprudent gamble” that could dangerously backfire.
The UN agency said an urgent “course correction” was required to prevent a cascading series of crises of debt, health, and climate emergency for poorer countries struggling to cope with the economic hit from the Covid pandemic and Russia’s war in Ukraine.
The intervention comes as global central banks sharply increase interest rates to combat inflation at the highest levels for four decades. The US Federal Reserve is weighing a further sharp rise in rates from next month, alongside similar moves by the Bank of England and the European Central Bank.
However, Unctad said political leaders and central bankers in advanced economies were making the mistake of harking back to hawkish policies used in the 1970s and 80s to squeeze inflation out of the system, which it said were inappropriate for the world’s current juncture.
Challenging the assumption that a sharp monetary shock administered by central bankers was required, it said much of the current inflationary burst was being driven by soaring prices for energy, food, and friction in global trade rather than excess demand for goods and services.
The report said measures including strategic price controls, windfall taxes, anti-trust measures and tighter regulations on commodity speculation were needed to combat inflationary pressures at source without pushing poorer countries over the precipice.
The UN body said interest rate increases from the Fed were expected to cut an estimated $3.6tn (£3.2tn) of future income for developing countries, excluding China, and signal even more trouble ahead.
The report notes that countries that were showing signs of debt distress before Covid are taking some of the biggest hits (Zambia, Suriname, Sri Lanka) with climate shocks further threatening economic stability (Pakistan).
“The real problem facing policymakers is not an inflation crisis caused by too much money chasing too few goods but a distributional crisis with too many firms paying too high dividends, too many people struggling from pay cheque to pay cheque and too many governments surviving from bond payment to bond payment,” said Richard Kozul-Wright, the head of the team in charge of the report.
Higher interest rates from the Fed have helped fuel a sharp rise in the value of the dollar against other currencies, putting pressure on poorer nations on the price of goods imported from overseas, as well as the cost of servicing their debts.
“There’s still time to step back from the edge of recession,” said Rebeca Grynspan, the secretary-general of Unctad. “We have the tools to calm inflation and support all vulnerable groups. This is a matter of policy choices and political will. But the current course of action is hurting the most vulnerable, especially in developing countries, and risks tipping the world into a global recession.”
