IMF has warned that a long downturn is happening. But is anyone listening?

The IMF has not minced any words when it comes to fiscal policy. It has always advocated tight control over the political inclination to spend now and let someone else worry about the future

Higher prices. Lower incomes. We are nearly back to the 1930s.

The finance ministers and heads of central banks of the G20 are meeting in Bali right now. They can be forgiven for feeling depressed because they are. Even the International Monetary Fund (IMF) thinks so.

First came the pandemic. It created the need for income support. So, the central banks, under instructions from their political leadership, loosened monetary policy to an unprecedented extent.

Then, a few months ago, Russia invaded Ukraine and created a vast supply problem for everything.

Taken together, the effect is quite devastating, as the IMF said in its latest diagnosis yesterday. It is available here

“It is going to be a tough 2022 — and possibly an even tougher 2023, with increased risk of recession,” says the IMF in a series of classic understatements.

Recession? It’s going to be a full-blown depression of the 1930s variety.

The report says, “75 central banks — or about three-quarters of the central banks we track — have raised interest rates since July 2021. And, on average, they have done so 3.8 times. For emerging and developing economies, where policy rates were lifted sooner, the average total rate increase has been three percentage points — almost double the 1.7 percentage points for advanced economies.”

Well, yes, good. But what happens to income-supporting fiscal policies, then? They go out of the window because the IMF says, “Countries facing elevated debt levels will also need to tighten their fiscal policy. This will help reduce the burden of increasingly expensive borrowing and — at the same time — complement monetary efforts to tame inflation.”

Higher prices. Lower incomes. That’s what the world faces for the foreseeable future. We are nearly back to the 1930s.

The IMF has not minced any words when it comes to fiscal policy, which for long has been its bugbear. It has always advocated tight control over the political inclination to spend now and let someone else worry about the future. But then economists don’t have to worry about re-election.

So, the report says, “New measures must be budget-neutral — funded through new revenues or expenditure reductions elsewhere, without incurring new debt and to avoid working against monetary policy. This new era of record indebtedness and higher interest rates makes all this doubly important.”

The IMF has always taken a long position on international cooperation. Usually, its exhortations have fallen on deaf ears, but this time these have strong moral content.

“As an immediate step, countries must reverse recently imposed restrictions on food exports. Why? Because such restrictions are both harmful and ineffective in stabilising domestic prices.”

But morality doesn’t cut much ice with domestic political compulsions. So this appeal isn’t going to find much traction.

Finally, let’s see how India has done in respect of all these prescriptions. And hold your collective breaths, folks. It’s done spectacularly. Indeed, it’s almost as if the IMF has copied from the Indian playbook.

It started tightening monetary policy well before most countries did. And it’s managed to be extremely careful with fiscal policy. No one at the Bali conference is going to be able to complain.

But what the IMF could and should complain about is India’s ban on food grain exports. And it should complain not because many African and middle eastern countries are going short on food but because the ban deprives Indian farmers of much-needed extra income.

But forget India for a bit. It’s China that’s going to take everyone down. Here it is enough to say that its massive industrial capacity will be under-utilised by around half.

But more about that next week.