The International Monetary Fund has warned against “geoeconomic fragmentation” as policymakers and business leaders gather at the World Economic Forum in Davos, Switzerland.

In a blog post ahead of this week’s event, IMF Managing Director Kristalina Georgieva said the global economy faces its “biggest test since the Second World War,” with Russia’s invasion of Ukraine compounding the residual economic effects of Covid-19 crisis, dragging down growth and driving inflation to multi-decade highs.

Spiraling food and energy prices are squeezing households around the world, while central banks are tightening monetary policy to rein in inflation, exerting further pressure on indebted nations, companies and families.

When combined with the spike in volatility in financial markets and persistent threat from climate change, the IMF said the world faces a “potential confluence of calamities.”

“Yet our ability to respond is hampered by another consequence of the war in Ukraine—the sharply increased risk of geoeconomic fragmentation,” Georgieva said.

“Tensions over trade, technology standards, and security have been growing for many years, undermining growth—and trust in the current global economic system.”

She added that uncertainty around trade policies alone cut global GDP by almost 1% in 2019, according to IMF research, and the D.C.-based institution’s monitoring also indicates that around 30 countries have restricted trade in food, energy and other key commodities.

Georgieva warned that further disintegration would have enormous global costs, harming people across the socio-economic spectrum, and said technological fragmentation alone could lead to losses of 5% of GDP for many countries.

Carmine Di Sibio, global chairman and CEO of consultancy giant EY, told CNBC on Monday that the economy has “taken center stage” in discussions among big business leaders at Davos.

“The economy is the top conversation – inflation is a big concern and you do see some leading indicators starting to slow,” he said.

Although corporate deal volumes have slowed, Di Sibio said EY was still seeing signs of “pretty robust activity” and business leaders were still looking at options to transform their businesses, with pricing in the sector coming down of late amid resolute demand.

“The transformation that companies are going through – the transformation in terms of technology, in terms of supply chain and location of supply chain, and de-risking of supply chains – that is still going on and we do a lot around that as well,” Di Sibio said.

Solutions

In order to address the growing fragmentation, the IMF has firstly called for governments to lower trade barriers to alleviate shortages and reduce the prices of food and other commodities, while diversifying exports to improve economic resilience.

“Not only countries but also companies need to diversify imports—to secure supply chains and preserve the tremendous benefits to business of global integration,” Georgieva said.

“While geostrategic considerations will drive some sourcing decisions, this need not lead to disintegration. Business leaders have an important role to play in this regard.”

Secondly, the IMF urged collaborative efforts to deal with debt, as roughly 60% of low-income countries currently have significant debt vulnerabilities and will need restructuring.

“Without decisive cooperation to ease their burdens, both they and their creditors will be worse off, but a return to debt sustainability will draw new investment and spur inclusive growth,” Georgieva said.

“That is why the Group of Twenty’s Common Framework for Debt Treatment must be improved without delay.”

Thirdly, the IMF called for a modernization of cross-border payments, with inefficient payment systems posing a barrier to inclusive economic growth. The institution estimates that the 6.3% average cost of an international remittance payment means around $45 billion annually is diverted toward intermediaries and away from lower-income households.

“Countries could work together to develop a global public digital platform—a new piece of payment infrastructure with clear rules—so that everyone can send money at minimal cost and maximum speed and safety. It could also connect various forms of money, including central bank digital currencies,” Georgieva said.

Finally, the IMF called for an urgent closing of the “gap between ambition and policy” on climate change, arguing for a comprehensive approach to the green transition that combines carbon pricing and renewable energy investment with compensation for those adversely affected by climate change.

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