Task Force 5: Purpose & Performance: Reassessing the Global Financial Order 1. The Challenge Well before the onset of the COVID-19 pandemic crisis, levels of debt (both public and private) were building up across the world. This was partly the consequence of the recovery effort from the Global Financial Crisis (2008-09) which had involved the massive provision of fiscal and monetary stimuli. Yet, in response to the low inflation during this period, interest rates were low and the debt appeared manageable. Beginning in 2020, however, the pandemic represented a dual public health and economic crisis, with each feeding on the other. Measures to control the pandemic (e.g. lockdowns) would exacerbate the economic crisis and permitting economic activity would lead to rapid spread of the novel coronavirus. [1] Policymakers the world over responded, at least in part, by providing massive fiscal and monetary stimuli. Much of the fiscal stimulus was debt-financed since the sharp downturn in economic activity reduced tax revenue. Depressed economic activity meant that interest rates could remain abnormally low. With the pandemic coming to an end, the built-up monetary and fiscal stimuli led to excessive liquidity in the economy and thus, high and sustained inflation. Sluggish supply conditions, largely the result of disruptions of global supply chains, meant that output could respond only with considerable lag to the rise in prices. Inflation targeting has meant that interest rates rose and are still rising sharply and the debt crisis is getting exacerbated. Recent World Bank data [2] shows that external debt alone of low- and middle-income countries totalled US$ 9 trillion at the end of 2021. Rising interest rates increase the risk to global growth and induce debt distress. About 60 percent of the poorest countries are at high risk of debt distress or already in distress. [3] These countries therefore need urgent debt relief if they are to tide over the immense challenges thrown at them by the COVID-19 pandemic. A second crucial demand on the global economy comes from the need to address climate change. It has become clear that avoiding or mitigating climate change is difficult now and adaptation is the only realistic option available for humanity. Such adaptation requires huge amounts of funds in the next few years to build the financial and technological capacity to combat perilous consequences of extreme weather events and other natural disasters as well as implications for soil productivity, among other impacts of climate change. Increased annual funding requirement aimed at helping vulnerable nations adapt to the climate emergency is estimated to be between US$160 billion and US$340 billion by the end of the decade, and up to US$565 billion by 2050. [4] The urgency of concerted and coordinated climate action is increasing over time and any further delays will only exacerbate the human and environmental cost of delayed and insufficient action.
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