IMF warns of severe economic impact worldwide of Russia’s war on Ukraine

The economic consequences of the war in Ukraine are already very serious, the International Monetary Fund (IMF) said on March 5 after a board meeting chaired by executive director Kristalina Georgieva was briefed on the situation.

Energy and commodity prices—including wheat and other grains—have surged, adding to inflationary pressures from supply chain disruptions and the rebound from the Covid 19 pandemic, the IMF said.

“Price shocks will have an impact worldwide, especially on poor households for whom food and fuel are a higher proportion of expenses,” the IMF said.

“Should the conflict escalate, the economic damage would be all the more devastating,” it said.

The sanctions on Russia will also have a substantial impact on the global economy and financial markets, with significant spillovers to other countries, the statement said.

The IMF said that in many countries, the crisis is creating an adverse shock to both inflation and activity, amid already elevated price pressures.

Monetary authorities will need to carefully monitor the pass-through of rising international prices to domestic inflation, to calibrate appropriate responses, the statement said.

“Fiscal policy will need to support the most vulnerable households, to help offset rising living costs.

“This crisis will create complex policy trade-offs, further complicating the policy landscape as the world economy recovers from the pandemic crisis.”

In Ukraine, in addition to the human toll, the economic damage is already substantial, the IMF said.

Sea ports and airports are closed and have been damaged, and many roads and bridges have been damaged or destroyed.

While it is very difficult to assess financing needs precisely at this stage, it is already clear that Ukraine will face significant recovery and reconstruction costs, the IMF said.

Ukraine has already requested emergency financing of $1.4 billion under the IMF’s Rapid Financing Instrument.

“Staff anticipates bringing this request to the Executive Board for consideration as early as next week.”

The sanctions announced against Russia’s central bank would severely restrict its access to international reserves to support its currency and financial system, the statement said.

“International sanctions on Russia’s banking system and the exclusion of a number of banks from SWIFT have significantly disrupted Russia’s ability to receive payments for exports, pay for imports and engage in cross-border financial transactions.

“While it is too early to foresee the full impact of these sanctions, we have already seen a sharp mark-down in asset prices as well as the ruble exchange rate.”

Countries that have very close economic links with Ukraine and Russia are at particular risk of scarcity and supply disruptions and are most affected by the increasing inflows of refugees, the IMF said.

It said that Moldova had requested an augmentation and rephasing of its existing IMF-supported programme to help meet the costs of the current crisis, and IMF staff were actively discussing options with the Moldovan authorities.

Staff would continue to monitor the spillover effects on other countries in the region, in particular those with existing IMF-supported programmes and those with elevated vulnerabilities or exposures to the crisis, the statement said.

The ongoing war and associated sanctions will also have a severe impact on the global economy, the IMF said.

“The Fund will advise our member countries on how to calibrate their macroeconomic policies to manage the range of spillovers, including via trade disruptions, food and other commodity prices, and financial markets.”

The statement said that the IMF would continue to assess the evolving situation, and provide timely policy advice, financial support, and technical assistance to its member countries as needed, in close collaboration with its international partners.

(Illustration: Jhon Casso)

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