The war in Ukraine and monetary tightening reduce the outlook for global growth by 1%


UNCTAD lowers its projection for global economic growth in 2022 to 2.6% from 3.6%. Developing countries are the most vulnerable to exchange rate volatility, rising interest rates and soaring food and fuel prices.

The United Nations trade and development body has lowered its global economic growth projection for 2022 to 2.6% from 3.6% due to the war in Ukraine and changes in macroeconomic policies made by countries in recent years. last months.

While Russia will experience a deep recession this year, significant slowdowns in growth are expected in parts of Western Europe and Central, South and Southeast Asia.

The ongoing war in Ukraine is expected to reinforce the monetary tightening trend in advanced countries after similar moves that began in late 2021 in several developing countries due to inflationary pressures, with spending cuts also expected in upcoming budgets.

UNCTAD fears that a combination of weakening global demand, insufficient policy coordination at the international level and high debt levels due to the pandemic could generate financial shock waves that could push some developing countries into a downward spiral of insolvency, recession and stunted development.

“The economic effects of the war in Ukraine will deepen the ongoing global economic downturn and weaken the recovery from the COVID-19 pandemic,” said UNCTAD Secretary-General Rebeca Grynspan.

“Many developing countries have struggled to gain economic ground after the COVID-19 recession and are now facing strong headwinds of war. Whether this leads to unrest or not, deep social anxiety is already spreading.

Even without lasting financial market disruptions, developing economies will face severe growth constraints. During the pandemic, their stocks of public and private debt have increased. And problems that disappeared during the pandemic, including high corporate indebtedness and rising household debt in middle-income developing countries, will resurface as politics tightens.

Soaring prices and instability of the exchange rate

The war has put additional upward pressure on international energy and commodity prices, straining household budgets and increasing production costs, while trade disruptions and the effects of sanctions are likely to have a deterrent effect on long-term investments.

Coming just when the pandemic-induced disruptions appeared to be easing, the geopolitical crisis dealt a blow to domestic confidence. “Additional pressure from rising prices is intensifying calls for a policy response in advanced economies, including on the fiscal front, threatening a sharper-than-expected slowdown in growth,” said the UNCTAD report released on March 24.

Soaring food and fuel prices will have an immediate effect on the most vulnerable in developing countries, causing hunger and hardship for households that spend most of their income on food. But the loss of purchasing power and real spending will ultimately be felt by everyone.

“The danger for many developing countries that rely heavily on imported food and fuel runs deeper as rising prices threaten livelihoods, discourage investment and raise the specter of widening trade deficits,” indicates the report.

FAO Food Price Index, January 1961-February 2022

Source: Food and Agriculture Organization of the United Nations (FAO)
​​​​​To note: The FAO annual average for 2022 is based on monthly data for January and February only

The uncertainties generated by the war in the main international markets are of growing concern, adds the report: an environment of unstable capital flows, exchange rate instability and rising borrowing costs, in particular for least developed and middle-income developing countries, with the risk of serious difficulties in paying their external debt.

Rate hikes in advanced economies, coupled with disorderly moves in global financial markets, could, the report warns, prove a devastating combination for developing economies. Volatility in commodity, currency and bond markets, as investors seek safe havens, has already triggered capital flight as well as rising risk premia on financial liabilities in developing economies.

Developing country bond yields have been rising since September 2021. The rise is widespread and is a clear signal of tighter financial conditions. Since the outbreak of the conflict in Ukraine, yields have risen for developing countries by an additional 36 basis points, on average, with countries heavily dependent on food imports recording larger increases.

The report warns that traditional financial indicators such as current account positions and foreign exchange reserves do not paint a complete picture of vulnerability to changing external financial conditions. Measures of financial integration are a better indicator, with many large developing economies vulnerable to sudden reversals in financial flows.

The report highlights that short-term public debt service needs are a growing concern. Developing countries are projected to need $310 billion to meet external public debt service requirements in 2022, equivalent to 9.2% of external public debt outstanding at the end of 2020.

Countries that appear vulnerable to a sudden halt due to a combination of heavy refinancing pressures and a large debt-service-to-exports ratio are Pakistan, Mongolia, Sri Lanka, Egypt and Angola. . Three of them, Pakistan, Egypt and Angola, already have long-term IMF programs in place.

The policies of advanced economies behind the economic slowdown

According to the report, the major advanced economies are on track to reverse the stimuli put in place during the pandemic, by tightening policy rates, canceling central bank asset purchases and closing leave programs, transfers and support for businesses and households. This happens even if inflation has not yet led to sustained wage growth, rendering the threat of wage-price spirals unfounded.

The report warns that these changes will weaken global demand and dampen growth, with investment already stalled in some countries. The threat of a sharper drop in investment and growth cannot be ruled out if interest rates rise much too quickly and the climate challenge no longer makes the headlines. It’s the wrong political trend at the wrong time.

The report notes that developing countries, which have incurred greater costs to cope with the pandemic, face additional constraints on demand and balance of payments obligations due to recent policy change in advanced economies. .

Policy recommendations

UNCTAD recommends the following policy measures to protect the global economy:

  1. Greater, more concessional and less conditional multilateral financial support to developing countries to enable them to withstand financial and economic shocks and increase investment to support economic growth.
  2. Immediate debt relief for Ukraine and resumption of discussions on a multilateral mechanism that promotes the just and orderly restructuring of the sovereign debt of developing countries during times of severe financial stress.
  3. Increased use of special drawing rights to supplement official reserves and provide timely liquidity to avoid severe deflationary adjustments.
  4. More efficient and less ad hoc swap agreements between central banks to support developing country currencies and deal with financial crises.
  5. Sectoral policies, including price controls and subsidies, to counter supply-side pressures and margins on inflation.

UNCTAD rapid assessment of the impact of the war in Ukraine on trade and development confirmed a rapidly deteriorating outlook for the global economy, underpinned by rising food, fuel and fertilizer prices, increased financial volatility , disinvestment in sustainability, complex global supply chain reconfigurations and rising trade costs.


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