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Updates from IMF: Forecast for Post-COVID Economy and Debt Levels

The International Monetary Fund (IMF) released two updates in the month of June – first was the World Economic Outlook, titled A Crisis Like No Other, An Uncertain Recovery and another was the Financial Stability Report.

These reports and updates are some of the most watched reports by economists, policymakers and businesses. The earlier Economic Outlook in April, 2020 had predicted a growth in India by 1.9% and a sharp rise back to 7.4% in 2021. It seems that IMF again missed their economic forecast and this time by leaps as it revises their predictions yet again.

One is reminded of the Economic crisis of 2018 when IMF financial surveillance could not predict any significant risks to the global economy in their Economic Outlook reports. IMFs own working paper based on GDP forecasts of over 63 countries for the year 1992 to 2014 finds that the ability to predict turning points are limited and they miss the magnitude of recession by a wide margin until the year is almost over.

Likewise, a Bloomberg analysis of more than 3200 same-year country forecasts, published each spring since 1999 found its forecasts underestimated GDP growth by 56% of cases and overestimated it in 44%. Noted Indian economist and former member of the Economic Advisory Council to the Prime Minister (EAC-PM), Mr Rathin Roy had earlier commented on IMF projections as usually 80% wrong.

What is important to note is that IMF not only forecasts but also provides billions in bailout loans in exchange for implementation of strict austerity measures and other neo-liberal policies imposed in the country that are opposed by workers, civil society and citizens.

WORLD ECONOMIC OUTLOOK

IMF in the World Economic Outlook forecast has reversed their earlier observations and is now projecting a deeper recession in 2020 and a slow recovery in 2021, different from predicted few months back. Global output is projected to decline by 4.9 % in 2020. It also has estimated that the total output loss to the economy in 2020 and 2021 will be over $12 trillion.

India’s forecast has been cut by a sharp 6.4% to -4.5% for 2020. In the last forecast, IMF had predicted Indian economy will grow by 1.9% but it was revised to -4.5% in the update. This according to Gita Gopinath, chief economist IMF, is due to longer duration of the lockdown than it was assumed and rise in Covid cases in India.

Synchronized deep downturn

The update projects a synchronized deep downturn in 2020 for both advanced economies (-8%) and emerging markets and developing economies (-3% to -5%, if excluding China), and over 95% of countries are projected to have negative per capita income growth in 2020. The report mentions among other things the severe hit to labour market. It quotes ILO on the global decline in work hours which in the first quarter of 2020 was equivalent to 130 million full time jobs and predicts loss of 300 million full time jobs in the next quarter.

It estimates India’s liquidity support announced in different packages as of 4.5% of GDP in the form of loans and guarantees for businesses and farmers, and equity injections into financial institutions and the electricity sector.

Mounting Debts and deficits

Public debt is projected to reach the highest level in recorded history this year, in relation to GDP, in both advanced and emerging markets as well as developing economies. This is predicted due to steep contraction in output, fall in revenues and high fiscal support costs. The global public debt is expected to reach an all-time high, exceeding 101%of GDP in 2020–21—a surge of 19 percentage points from a year ago. India’s Gross Debt is projected to increase to 84 % in 2020 compared to 72.2% in 2019.

Read World Economic Outlook Update, June 2020

GLOBAL FINANCIAL STABILITY REPORT UPDATE

IMF also came up with an update for its Global Stability Report. The report captures an overall easing of financial conditions as there is a surge in risk appetite in financial markets and equity markets rallying back. This according to the report is due to the swift and bold actions by central banks and have boosted market sentiments. However this has created a disconnect between the real economy and financial markets. The Economic Outlook has predicted a further reduction in global output, loss of working days, reduction in revenue etc.

The pandemic has exposed the financial vulnerabilities including corporate and household debt which could become unmanageable given the continued economic lockdown during the pandemic.

Historically, globally debt has reached $55 trillion in 2018, described as the largest, broadest and fastest of all the debt so far. Aggregate corporate debt and household debt has increased in many economies and some of which will face an extremely sharp decline. This has led to broader impact on the solvency of companies and household.

The report has warned that rising debt levels and potential credit losses resulting from insolvencies could test resilience of the banking sector. Banks have to provision more for expected loses as they assess the ability of the borrowers to repay their loans. The Non-Banking Financial Companies (NBFCs) which now have a greater role in the financial system are vulnerable to pro cyclical corrections and the behavior of NBFC during a deep downturn is untested.

Read Global Financial Stability Report Update

In India, the increase in the stress of the banks is a pre-existing condition according to the Financial Stability Report of RBI published in December 2019. The Gross Non Performing Assent ratio of banks was estimated to increase from 9.3% in Sept 2019 to 9.9% in September 2020. The report also said state-run banks’ GNPA ratios may increase to 13.2% by September 2020 from 12.7% in September 2019. However as per the RBI Governor, the economic impact of the corona virus pandemic may lead to higher non-performing assets and capital erosion of banks.

Rating agency CRISIL in its report on Covid-19 impact has said that gross non-performing assets (NPAs) of lending institutions are set to rise 150-200 basis-points (bps) this fiscal due to higher slippage and lower recovery. This according to Fitch Ratings can be anywhere between 200 and 600 basis points (bps). Considering the Covid-19 impact, CRISIL has projected GNPAs in the range of 11-11.5% for the financial year 2021.

According to RBI itself, there is a need for re-capitalisation plan of public sector banks as the minimum capital requirements of banks will not be enough to absorb the loses.

Disaster Funding and COVID-19 response of MDB’s in India

Over the years increasingly institutions like World Bank and other MDBs have started using post-disaster situations and climate change as an opportunity to bring in policy reforms. Post disaster rehabilitation and recovery programmes provide institutions an easy entry with little resistance to the massive policy reforms that come along. Also, the language of resilience and sustainability is built into the narrative, which find very little resistance. Institutions like the WB are taking multiple roles of assessment, planning, financing project through development policy loans and monitoring specially in cases of disasters. It is a classic case centralization of powers. World Banks language of resilience, sustainability and post disaster recovery needs to be decoded. With increase in natural disasters in this decade and with climate change realities, disaster capitalism has also become a reality.

In an article on “The Rise of Disaster Capitalism” in the Nation Naomi Klein points out, “governments will usually do whatever it takes to get aid dollars–even if it means racking up huge debts and agreeing to sweeping policy reforms. But shattered countries are attractive to the World Bank for another reason: They take orders well. After a cataclysmic event, governments will usually do whatever it takes to get aid dollars–even if it means racking up huge debts and agreeing to sweeping policy reforms. And with the local population struggling to find shelter and food, political organizing against privatization can seem like an unimaginable luxury.1

In the recent years India has witnessed an increase in climate disasters and the World Bank has used every opportunity to bring in the post recovery and rehabilitation projects, which come along with policy reforms. Post 2013 till now, India has witnessed some major disasters. The responsiveness of the Bank to these disasters has been of an opportunity for implementing economic and governance reforms under the garb of disaster preparedness, rebuilding and building resilient infrastructure. The Uttarakhand floods, Cyclone Phailin, Cyclone Hudhud, flooding in Srinagar and the larger valley region, the Kerala floods and being some of the disasters for which, the World Bank has supported the GoI in conducting rapid post-disaster damage and needs assessments in the first four listed disasters. The assessments provided clear guidance on the post-disaster recovery path that needed to be taken. Subsequently, emergency projects were prepared and are currently under implementation. These projects focus on recovery and reconstruction as well as strengthening long-term resilience and emergency response capacity at the State level in the affected States2.

In 2018 and 2019 Kerala saw floods and landslides paralyze almost the entire state. The disasters had a huge negative impact on the biodiversity of Kerala and the already fragile environment. In 2018, a prolonged southwest monsoon over the state of Kerala resulted in one of the worst floods in 100 years, causing estimated losses of US$ 4.25 billion.  This post disaster situation has been used as lucrative opportunity by institutions like the World Bank into financing programmes focused on disaster management with rehabilitation, post disaster recovery, building resilience as hook words. The Bank has found an easy entry point for development policy loans and other financing, which are coupled with policy reforms as well.

TheWorld Bank in October 2018 extended a support of up to $500 million to the Government of Kerala’s comprehensive flood recovery efforts and to build greater resilience to future shocks3. In June 2019 the World Bank board approved The First Resilient Kerala Program Development Policy Operation as a Development Policy Financing of 150 million USD4.The proposed operation supports Government of Kerala (GoK’s) resilient recovery from August 2018 floods. The proposed programmatic operation, the first in a series of two Development Policy Loans (DPLs), will support policy and institutional reforms recovery, mainstreaming long-term resilience to disaster risks and climate change into sectors of key importance.

The most problematic aspect of the reforms is that they are expected to mainstream disaster risk reduction and climate resilience into critical infrastructure development and service delivery. The priority sectors include water supply, sanitation, solid waste management, transport, and agriculture. The World Bank’s long-standing agenda of privatization is actualized through these reforms.

This case is very similar to what happened in Indonesia post the 2004 Tsunami disaster, where post disaster funding pushed privatization. With project loans worth $ 1.1 billion and the policy reform support loan, the Bank pushed for privatization and other new regulations that would support economic liberalisation. From this loan, came Indonesia’s new law on oil, gas and electricity that allows for the privatization of respective state-enterprises5.

In the post covid time the MDB’s have already invested close to 5.5 billion USD in India as support for dealing with the crisis. The world bank’s 1 billion USD supported COVID-19 (Coronavirus) Emergency Response and Health Systems Preparedness Project does not only look into immediate support for the public health systems, there is also considerable focus on integrating systems with push for private entities like health insurance companies to integrate with government schemes. We have already in India seen the fallouts of such systems.

India’s also negotiated a Development Policy loan for ‘Accelerating India’s COVID-19 Social Protection Response Program’ with World Bank . Development Policy loans have strings attached in terms of a neo-liberal agenda. These are loans given by the World Bank on the condition of policy changes, which are promised by a country and in line with the Country Partnership Framework for the country. Many of the reforms, which were announced in the financial package, are directly from the reform book of International Finance Institutions who have been demanding a rollback of labor regulations, environmental regulations, power sector reforms and relaxation of the land acquisition laws.

Asian Development Bank has funded USD 1.5billion COVID-19 Active Response and Expenditure Support Program(CARES) project which will support the government mitigate the severe health, social, and economic impact caused by the coronavirus disease 2019 (COVID-19) pandemic. ADB with its operation in health sector has altered and influenced health sector policies in India for sometime now. This emergency operation is built upon previous and ongoing health sector operations and policy dialogues. Since, the first health sector operation in India in 2013 through the support to the National Urban Health Mission (NUHM), ADB’s health sector engagement has been increasing. Following the launch of Ayushman Bharat in 2018 and implementation of NUHM under the National Health Mission, ADB is now developing a program to support delivery of comprehensive primary health care in urban areas (2020 pipeline). 

Asia Infrastructure Investment Bank has invested 1.25 billion in COVID response. They have funded two projects both co- financed one with ADB and other with the World Bank. As usual AIIB is riding the back of lead financiers, exhibiting its commitment to COVID without accountability on their end. 
New development Bank has provided a loan of USD 1billion for Emergency Assistance Program in Combating COVID-19 for support in public health and social safety sector.

The total lending of USD5.5 billion is not huge for a 3 trillion economy and whose annual budget is over Rs. 25 lakh crore. But the influence to change the economy and the mosaic of this country, through these investments, is huge and disproportionate to their lending. 


The World Bank and other MDBs are increasingly taking up all the roles of assessment, planning, financing projects and financing through development policy loans . The World Banks language of resilience, sustainability and post disaster recovery needs to be demystified. With increase in natural disasters in this decade and with climate change realities, disaster capitalism has also become a reality. With economies globally in shambles and in need for additional support, this vulnerable situation should not allow MDBs like the World Bank to push their agenda of disaster capitalism with ease.

1 https://www.thenation.com/article/archive/rise-disaster-capitalism/

2 file:///Users/anuradhamunshi/Downloads/world-bank-india-disaster-risk-management-program-2016.pdf

3 https://www.worldbank.org/en/news/press-release/2018/10/16/world-bank-commits-support-to-rebuild-a-more-resilient-kerala

4http://documents.worldbank.org/curated/en/428421551979689773/pdf/Concept-Program-Information-Document-PID-Resilient-Kerala-Program-P169907.pdf

5 https://www.brettonwoodsproject.org/2005/01/art-108058/

Corona Uncovering the Cracks in Capitalism

The COVID-19 corona epidemic that has taken over 16,99,019 lives all around the world has undoubtedly been a disaster with no parallels in modern history. Political and social analysts describe this pandemic as the reason for the most sustained period of worldwide public suffering since World War II and it indeed remains a fact that the global outreach of the virus has brought forth societal and economic shutdowns. The virus has not just wrecked the physical well-being of people globally but has also set in motion a precarious chain reaction that is all set to upset the veneer of stability in one country after another. If anything, this pandemic has laid bare the contradictions of the capitalist system like never before; for this time, unlike the 2008 global financial crisis, it would be difficult for the capitalist and neo-liberal models to rescue themselves without conceding ground to the biological implausibility of capitalist globalization.

While the national bourgeoisie is busy shifting the blame for the economic crisis on to the virus and many countries are significantly looking forward to accelerate protectionist tendencies, what the virus has in reality exposed is the deep-seated contradictions within the neo-liberal framework accumulated through decades. Hence, the crisis that we see today is a crisis of capitalism as a whole, as much as it is one triggered by corona. While it must be acknowledged that capitalism always delayed impending crises through different means such as massive credit expansions and racking up debt, thereby stonewalling growth, the bogey of capitalist advancement had to confront its current pandemic-sponsored rupture without any prior warnings. Thus, the virus seems to be only an unforeseen episode that turned spotlight on the deep fault-lines in non-democratization of economic power and freedom. While forfeiting the opportunities for building a truly international public healthcare infrastructure at the altar of the large pharmaceutical companies, little did the developed world envisage a time when thousands would be left dead with no antidote in sight for the worst ever viral attack.

It is in this context that many left wing intellectuals like the American historian and sociologist, Mike Davis, sees these times as a possible opportunity for “a second New Deal; the moment to reclaim social ownership and democratization of economy” (Zitelman, Forbes, 30March, 2020). However, the exhilaration over the assumed retreat of hyper-globalization, while presenting a chance to reset both global and personal landscapes, could also be a scenario where states get to reinforce nationalism. This is precisely because of how state is essentially a coercive institution which nurtures itself through class divisions in society. Consequently, as citizens world over would turn to their respective governments to protect them from the pandemic, the emergency powers at the disposal of these states currently, to combat the viral outbreak, in all likelihood would become the new status-quo. The “democratic aura” of the West has clearly been damaged by the lack of swiftness in their responses to tackling the crisis in comparison to say China, South Korea or Singapore. Hence, COVID-19 would by default become the most potent soft-power tool to turn the world into a less open, less free and more surveillance space.

It is indeed true that this crisis presents the best opportunity for fascist forces to engineer a parallel pandemic of despotism that would embolden deep-rooted resentments and frustrations in societies along religious, national and social prejudices. A societal set-up where the mob becomes the moral prosecutors and pro-bono law enforcers would definitely help in satisfying the morbidity of masses who finds the pandemic an excuse for a dangerous catharsis. The attack against Muslims in India, the linking of the pandemic to migrant population in Hungary, the furtherance of acrimony towards the Latinos and Hispanics and strengthening of border controls in USA are all testimonies to how every despot loves a good pandemic. Nevertheless, approaching the corona crisis as a crisis of industrial capitalism is also inspiring several anti-globalization activists and economists to understand the corona crisis as an avenue for radical wealth redistribution and as a way forward for catalyzing a transformative leap.

The casualities of natural events like Ebola, Zika, MERS, SARS, Influenza or now Corona are not just external shocks which are “given factors external to the economic system” (Nayeri, Our Place in the World, 27 March,2020). They are rather archetypes of how capitalist accumulation serves as the root cause of eco-social crises and how all such existential threats amplifies the overall crisis by undermining the most vulnerable groups and regions first off. The financial and economic crises kindled by corona are unearthing the structural weaknesses inherent in all the major world economic models including the USA. And this, being a far worse situation than 2008, also necessitates a coming together of various brands of political ideologies to devise fiscal policies that would help “slow, if not stop, the unfolding recession” (Goodman, The New York Times, 13 March, 2020). Societies are bound to change and look different post every major crisis and therefore, while all economic and political life was relentlessly committed to an upward redistribution of wealth for the past many decades, the anti-capitalist advocates believe that the solution to a pandemic of this scale lies in seizing the opportunity for a redistribution of financial resources as per social needs. They believe that the virus has in fact demonstrated the need for states to reorganize themselves beyond the framework of private accumulation of wealth (Damon and North, ICFI, 10 March, 2020).

The need to shift away from a market-oriented economic model  towards a  state-controlled supervision of the pandemic is best reflected in the words of the French Economist Thomas Piketty, when he talks of how “drastic state-led interventions in the economy during the corona crisis could show governments how much they can regulate the economy” (Zitelman, Forbes, 30 March, 2020). Many governments world over are being forced to take measures, unthinkable till a month back, in order to help people sail through the crisis. Paris Marx in his essay on Think (24 March, 2020) gives several such examples ranging from the nationalization of all private hospitals and health care providers in Spain to writing off mortgages in Italy to suspension of taxes, rents and utility bills for several companies in France including possible nationalization of bankrupt companies to halting evictions in USA, with states like California planning to provide shelters to at least 108,000 of its homeless. Many political analysts and economists are thus hopeful that the blind spots of capitalism and bad governance would necessitate a radical shift in political and economic practices. Consequently, they see the possibilities for a universal health care system, free medical coverage for low and middle income groups so that they do not have to dive into medical bankruptcies due to the prevailing private insurance mechanisms and an economic stimulus package that would encourage the state institutions to pump more money into the stock markets and ease off the burden of interest rates and loan debts on students and other vulnerable communities.

The renewed hope for a fundamental reorganization of society in these times comes from the understanding that this crisis has hit the capitalist model differently from the 1970’s or 2000’s as, while the virus followed the route map of global capitalism and transmitted itself world over through business, tourism and trade, its cardinal cause is also external to the economy. No scientist or economist can deny the fact that it is the fundamentals of the global capitalist model that helped the pandemic widen its target group- be it the heavy reliance of most on labour market or the grandeur of international connectivity. And these are not features specific or exclusive to any one economic policy paradigm; rather they are the essential characteristics of capitalism as such, making the corona crisis a global watershed moment. It is for this very reason that many left-wing intellectuals like William Davies vehemently talks about “how a crisis of this magnitude can never be truly resolved until many of the fundamentals of our social and economic life have been remade” (Zitelman, Forbes, 30 March, 2020).

While the neo-liberals are yet again managing to oversimplify the crisis by putting the responsibility of institutional failures to tackle the crisis on the state which they say had inadvertenly overindebted itself, the anti-capitalists too should exercise caution while clamouring for an all-powerful state in the pretext of mitigating the crisis of capitalism. Solidarity cannot be a synonym for ruthless state intervention. Nevertheless, the inoperability of many of the contemporary capitalist consumerist models under the present conditions necessitates a cultural, scientific and dogmatic alteration in the ways in which social formations are typically conceived by populations across space and time. The masses of the most advanced capitalist countries are entering this new phase of crisis not really after a period of growth and prosperity but rather after more than a decade of economic austerity and slowdown and this makes class struggle inevitable.

It is beyond doubt that the society at present is going through a phase that best represents the deficiency of a system of rule and social order based on capitalist advancement. The inadequacies of the market model have turned most of the market forces into temporary “socialists” who are waiting for the states to bail them out by passing on the unpaid bills to the working classes. The request from multi-billionaire Richard Branson for a state-supported bail-out of his Virgin Atlantic airlines with a net worth of 4 billion pounds while simultaneously asking his employees to go on unpaid leave bears testimony to how the bourgeoisie are relying on public money to rescue themselves from the chaos. However, it is the responsibility of the state systems to form the front line of defense when it comes to public health and safety and this can only be possible by discarding the austerity measures solely intended to design tax cuts and subsidies to redeem the corporates and the rich. As the endless accumulation of capital is clearly falling apart from within, all over the world, and the recklessness of consumerism is intensifying environmental degradation, a social democratic vision that couples public health measures with employment/ livelihood protection of the weakest seems to be the best way out.