Time to contain geopolitical risks and bolster global economy

This geo political situation will have impact on economic growth and may affect the efforts on macroeconomic stability and lead to financial market vulnerabilities. The war in Ukraine has already shown how longer distance and higher freight rates can affect food prices

It seems like neither Ukraine nor Russia is keen on putting an end to the war that has been continuing for an overly long period. The Covid-19, coupled with high inflation and the subsequent tight monetary policies have led to slow economic growth and higher fiscal deficit. Moreover there have been disruptions to the supply chain, which adversely hit free movement of goods and services putting the world trade in turmoil. As a measure to stem the rot efforts were made to focus on domestic sources for goods and services rather than promote free trade, which in turn has resulted in fragmentation and deglobalisation, when globalization ought to have been the buzzword.

Moreover, the geo political tensions were further aggravated by the conflict between Israel and Hamas, which is impacting the entire Middle East, and free maritime trade, particularly after the Houthi missile attracts on ships in the Red Sea.

In an article "How are geopolitical risks affecting the World Economy ?", Ahmet Kaya states "Geopolitical risks posed by elections, polarisation and conflicts within and between States have inevitable knock-on effects on the economy both globally and for individual countries. This year more than ever, managing these risks and shoring up institutions that promote stability are essential."

At least 64 countries are facing elections and their results are important to measure the extent of changes in trade and investment policies. The November presidential elections in the USA are being keenly watched as its policies and economic moves will have a greater impact on world trade and growth. The relations between USA and China both on political and economic grounds also depend upon the outcome of this election. The upcoming European elections are important to determine the composition of the EU parliament at a time when far right parties are on the rise and the bloc is becoming increasingly polarised. The monetary policy, foreign policy, openness to trade, domestic tax, climate policies, import tariffs , and help or otherwise to ongoing war with military aid are dependent on the outcome of these elections in EU and USA.

According to an article "Experts have identified the elections in the United States (amid increasing polarisation and decline trust in the country's political system)” a possible escalation of the Israeli -Hamas conflict into a wider conflagration in the Middle East and a further deepening of the Russia -Ukraine war are some of the significant geopolitical risks that the world faces in 2024.

Since last November, escalating attacks on ships in the Red Sea have been compounding disruptions in the Black Sea caused by the war in Ukraine and in the Panama Canal due to climate induced droughts.

This has already affected the movement of ships, both numbers and volumes of cargo. By the first half of February, 586 container vessels had been rerouted, while container tonnage crossing the canal fell by 82%.

The alternative route leads to longer distances, higher freight costs and higher emissions adding to climate change risks. Delay in movement of ships will affect supply of food items, oil, gas and other essential commodities.

According to the report, container freight rates on Asia-Pacific to Europe routes have risen sharply since November. A record weekly spike of $ 500 was observed in the last week of December 2923.

This geo political situation will have impact on economic growth and may affect the efforts on macroeconomic stability and lead to financial market vulnerabilities. Countries will have different implications arising out of continued geo political tensions like availability of food grains, oil, gas and essential raw materials and sending finished products to countries dependent on imports. For example, the war in Ukraine has already shown how longer distance and higher freight rates can affect food prices.

It is therefore imperative that evolving situation is monitored closely and assess their impact on transport and trade, especially for developing and low and less developed countries. The key issues to be monitored are shipping schedules, service availability and reliability, security measures for ships and ports, delays in shipments and delivery timelines, freight rates and insurance premiums, shipping connectivity and overall geography of trade.

The central Banks and governments must remember the changing dynamics of geo political situation, tensions and disruption caused by ongoing wars and conflict, the negative impact on global trade and real GDP growth, the economic and financial loss caused by climate change and other shocks to commodities price and their availability. A robust fiscal strength and macro-economic stability and responsive and flexible monetary policy to shocks are the priority areas.

The role of multilateral development institutions, the WTO and such other international institutions is in immediate revamping and quickly respond and resolve world growth and world trade problems with global cooperation.

There has been positive news that most of the countries have passed through the tight monetary policy with more resilience, there are signs that economic growth is improving, inflation is softening and oil prices have been stable without much surge due to developments in the Middle East.

The Union Government and RBI have managed well with timely and consistency in policy supports both on monetary front and fiscal side with resilient management of economy in spite of severe global headwinds.

Currently India is the fastest growing economy and fiscal deficit is under control. Still we have to be alert to the global happenings and take proactive steps to withstand future shocks while continuing to give momentum to all key drivers of economy in order to maintain and enhance our macroeconomic and fiscal strength.

(The author is former Chairman & Managing Director of Indian Overseas Bank)