The IMF warns in regards to the financial penalties of the battle: “There will be no clean and orderly return to the previous situation” | Economy | EUROtoday

Pessimistic, pragmatic and, above all, involved in regards to the penalties of the battle within the Middle East. “Even our most optimistic scenario contemplates a downward revision of global growth. Why? Due to significant damage to infrastructure [energética]supply interruptions, loss of confidence and other negative effects.” This is how emphatic Kristalina Georgieva, managing director of the International Monetary Fund (IMF), was during the opening speech of the institution’s spring assembly, which will be held next week.

“We have no idea precisely what the longer term holds when it comes to transits via the Strait of Hormuz. What we do know is that progress will likely be slower, even when the brand new peace proves lasting,” he warned.

The Bulgarian has given one of the most pessimistic speeches that can be remembered since the pandemic. The United States and Israel’s war against Iran has caused a major disruption to global supply chains, and has illuminated an energy crisis whose evolution depends on the success of the two-week ceasefire reached last Tuesday. Even so, the damage to the global economy will be long-lasting. There will be scars that will take years to heal. “Not even in the best of cases will there be a clean and orderly return to the previous situation,” the managing director stressed.

Inflation risk

“The strength of the world economy is being tested once again by the war in the Middle East, now on hold,” Georgieva began. At the same time, he explained that the conflict in Iran has caused a “large-scale, global and asymmetrical impact” due to oil supply cuts. After the bombings on Tehran, the Ayatollah regime closed the Strait of Hormuz, a strategic passage through which a fifth of the world’s oil transits, in addition to a good part of the natural gas consumed by the planet. “As always, a shock supply drives up prices,” he recalled.

The Bulgarian economist has called on countries not to address the energy crisis caused by the interruption of oil transit through the Strait of Hormuz unilaterally. “It could be like pouring gasoline on a fireplace. And they’re going to want it for his or her vehicles,” he warned from the organization’s headquarters in Washington. That is why he advises “wait and see” before making decisions that “make things worse.” It has encouraged central banks to act, with rate hikes, in the event that inflation expectations begin to rise, something that “fortunately” is not happening yet. “This is something of great importance,” he remarked.

The example of Ras Laffan

Georgieva has tried to answer the question about the magnitude of the economic impact of the war. “The reply depends upon whether or not the ceasefire holds and results in lasting peace, and on the magnitude of the injury the battle leaves in its wake.” He assures that in the report of World Economic Outlook that the IMF will present next Tuesday, three scenarios will be contemplated depending on how long it takes to normalize the situation and achieve lasting peace. But he warns that even in the best-case scenario, recovery will not be immediate.

And he has given as an example what happened after the attacks on the Ras Laffan industrial complex in Qatar. This is the largest natural gas plant in the world, where 93% of all natural gas in the Persian Gulf is processed. The facilities have been closed virtually since the start of hostilities, and on March 19 they came under attack by Iranian forces. Recovery of its capacity will take between three and five years. Which means that prices will remain higher than before the war for a long period of time.

Regarding the measures that some nations have authorized to attempt to alleviate the escalation in gasoline costs, he assured that “fiscal support must continue to be focused and temporary.” He has highlighted that after the pandemic many nations lack adequate fiscal area to deal with crises. For this motive, he has referred to as for warning when approving new fiscal measures. “A deficit-financed stimulus would increase the burden on monetary policy and amplify such changes. It would be like driving with one foot on the accelerator and the other on the brake: a bad idea,” he mentioned. “Countries must deploy their limited fiscal resources responsibly, and most must act decisively to rebuild their fiscal space after this shock,” he added.

The AI ​​bubble

Georgieva has highlighted the elemental position that monetary regulators should play within the face of accelerating dangers. “It is essential that they remain alert, be agile and respond promptly to a changing situation,” he claimed. The managing director of the IMF has recalled how monumental assets are being diverted to the event of synthetic intelligence. “While this has boosted growth, there are also risks of reversal. If investors began to worry, for example, that energy insecurity will slow the growth of artificial intelligence (AI), given its enormous energy needs, we could find ourselves in a difficult situation.”

It has additionally put a highlight on essentially the most susceptible oil-importing nations, these in sub-Saharan Africa and small island nations, which should pay extra to buy the crude oil they should energy their power amenities. Georgieva has predicted that the IMF should come to the rescue of some nations which are going to have a tough time on account of the battle within the Persian Gulf. And she has proven herself keen to assist with no matter is required. “Given the collateral effects of the war in the Middle East, we expect short-term demand for IMF balance of payments support to increase to between $20 billion and $50 billion, with the lower figure prevailing if the ceasefire is maintained,” he mentioned. “You can count on us to help you and find a way forward through the fog of uncertainty,” he concluded.