Global Governance Requires Re-Organisation

Press Release

US government has begun a shutdown from the beginning of this month after the two houses of Congress failed to agree a new budget. The Republican-led House of Representatives insisted on delaying President Barack Obama’s healthcare reform as a condition for passing a bill. With Congress deadlocked, a lack of funds has halted or sharply curtailed a wide variety of government services. The financial markets witness marginal swings on the hopes that the issue will be resolved. As the US Government continues with its shutdown the concerns of US debt ceiling also emerge as we approach mid of October. Against this backdrop the Annual World Bank Group IMF Autumn Meeting will be held at Washington this month. The last minute standoff over debt ceiling led to a downgrade of the U.S. credit rating “AA+” from “AAA” by Standard & Poors in 2011.

Fiscal deficit continues to be a challenge for US and other Advance economies and Fiscal discipline is required from Advanced Economies. Since 1940 to 2010, gross federal debt of US increased from $43 billion to more than $13.5 trillion and till date has touched $16.5 trillion. On account of US ageing population and its medical programs the government’s annual deficits will continue far into the future, pushing the debt ever higher, unless major tax increases are enacted. High levels of public debt slow economic growth. The U.S. Office of Management and Budget has forecasted that in the year 2017, interest payments on the public debt will exceed the cost of Medicare.At the end of the first quarter of 2013, the government debt to GDP ratio in the euro area stood at 92.2%. The highest ratios of government debt to GDP at the end of the first quarter of 2013 mainly came from Portugal, Italy, Greece, and Ireland. At the current IMF Meeting they intend to discuss on “strengthening fiscal transparency and Government accounting”.

Earlier this year US Federal Reserve had indicated it would begin the tapering of its easing measures which created panic in the financial markets and drop in emerging market currencies. Intitally it was expected that US Federal Reserve will begin its tapering in September 2013. However the US Federal Reserve in its recent meeting has indicated that it looks for more economic data from US economy before planning any tapering. In recent years the Asian Capital markets have seen huge inflows since the sub-prime crisis and outflows are witnessed in the current year on account of possible tapering by the Fed and further create pressure on their currencies. The Bank of England and Bank of Japan also continue to follow Quantitative easing. At the current IMF Meeting they are also planning to discuss on “Unconventional Monetary policies and their Cross-country Spillovers” to understand the implications of withdrawal of Quantitative Easing by Central Banks of Advanced Economies.I expect that the uncertainties of US shutdown and debt ceiling can impact US economic growth resulting in postponement of Quantitative easing by US Federal Reserve.

Some of the emerging economies have continued to facing challenging conditions such as slowing growth, rising inflation. Except China other emerging market currencies had depreciated against the dollar in 2013. The slowdown in economic growth, China credit Squeeze in June 2013 and the possibility of US fed withdrawing its stimulus had resulted in correction in the capital markets. However capital markets bounced back on hopes of Government measures and possible delay in withdrawal of US Fed stimulus. At this IMF meeting they intend to discuss on “Emerging markets – Restoring Momentum” The IMF Quota and Governance reform involves doubling IMF quotas, shift in quotas to dynamic emerging markets and reform of the composition of the executive board which is yet to be implemented. The Global Governance requires re-organisation through passage of this reform. The delay gives more impetus to the creation of alternative sources by BRICS, such as a proposed $100 billion fund that is aimed at steadying currency markets.

With slowdown in emerging economies the Frontier economies are receiving increased attention. Some frontier economies are on path to become emerging markets. Some of the GCC countries come under Frontier economy classification .GCC countries such as UAE and Qatar will be upgraded to emerging market status next year from Frontier market by MSCI. At this IMF meeting they intend to discuss on “The frontier Economies: The Next Generation of Emerging Markets.” The World economic outlook may be revised downwards by IMF on concerns on slowdown in emerging economies and fiscal issues in US. The concerns on exit from Unconventional monetary policies and US political gridlock are the major challenges faced by the Global economy.