The Perfect Economic Storm: the downfall of a class of Central Bank Governors and Finance Ministers

Several of the seventy plus countries in which I’ve worked on economic reform, are going through significant cabinet reshuffles. On the chopping block have been several Minister’s of Finance, and Governor’s of Central Banks. If you happen to hold any of these two posts in a middle income country (MIC), or a less developed country (LDC), especially in Africa, Eastern Europe, and the Middle East, this is not the best of times. 

Central Bank governors from the countries of the British Commonwealth convene at the 2022 summit (Commonwealth Secretariat)

So why is this happening? And, why now? Why have Governor’s of Central Banks and Minister’s of Finance become the public officials receiving the most scrutiny? Why have they become the officials receiving the most ire from the public at large? 

This has several simple explanations. First of all, inflation is rampant across a large number of MICs and LDCs. Currencies of several developing nations are in a free fall, and job losses are mounting. Economic downturns are the norm, so why not blame Minister’s of Finance and Central Bank Governors for this mismanagement? 

Actually, there are multiple reasons not to. Global economic prospects are after all bleak at best. While the world's economy bounced back from the COVID pandemic with the strongest post-recession expansion in 80 years, this wasn’t the case for many MICs and LDCs. The bounce back gains to many of these countries have been slow this year, as new CORONA virus variants appear, and rapidly rising prices for items such as food and energy weigh heavily on consumers. Globally, inflation is at its highest rate since 2008, and supply chains already challenged, ensure cost escalation is the norm across countries that are part of the global market place. Supply chain bottlenecks aren’t helping curb inflation, and the unwinding of stimulus programs means less stimulus for households. 

Many countries as they attempt to curb inflation have raised interest rates, income taxes, property taxes and reduced tax exemptions, all of which will contribute to economic slowdowns. They have also depreciated their currencies in one form or another, or have seen their currencies go into free fall mostly due to global market trends. Using facilities like Eurobonds, which looked like a great way to raise money a few years ago, now contribute to a debt stock that is even harder to manage. 

If the current growth in the public debt stock continues, then several MICs and LDCs will likely find themselves in debt distress, which might lead to seeking an International Monetary Fund bailout. The IMF is already working on several bailout packages which may solve a short term problem for many of these countries, but add to long term pain. 

Let me explain. When the IMF comes knocking, to some degree for these imperilled countries they are the lenders of last resort. The IMF will, of course, try to right the ship in many of these countries by requiring austerity of some form. This will translate into lower subsidies, higher gas prices, higher cost of utilities, more taxation, larger currency depreciation, and a lower government sector wage bill which will undoubtedly force layoffs of different kinds, etc. What this will translate into is more money coming out of people’s pockets, and in turn further economic slowdowns and higher unemployment in the short run. When you’re sick, to get better the medicine you need to take can be just as bad as the illness itself, at least in the short run. 

And, since demand for labor is a derived demand, derived from the demand for goods and services, when taxes rise, utility prices rise, gas prices rise, consumption inevitably goes down, and then does demand for labor causing higher unemployment. This won’t make the incoming Minister’s of Finance and new Central Bank Governors popular either. 

What is interesting to me is the current political discourse, the blame game for the various Minister’s of Finance and Central Bank Governors that are being dismissed. They are being blamed for the economic downturns facing their countries which can easily be explained in great part to exogenous shocks. Many of the outgoing Central Bank Governors and Minister’s of Finance that have lost their jobs in recent weeks are all dear friends and colleagues of mine. And, their demise given the uptick in inflation, the economic slowdowns, and the rising levels of unemployment isn’t surprising. Scapegoats are after all a political necessity. 

Having said this, though, the belief that their replacements will somehow fare better is of course misguided as well. The incoming Central Bank Governors and Ministers of Finance are after all coming into the perfect storm. They are expected not only to turn the tide, but to successfully negotiate standby agreements with the IMF as well. Good luck with that one. 

As one of my esteemed departing Governors told me he feels relieved to be out of his job. And, why wouldn’t he? When I called to wish him well, he said, “the last few months have been hell. But, I kept trying and nothing was working. And, no matter how bad things were getting I kept thinking I have to keep trying, even if it kills me.” He told me the happiest day of his life in recent memory was the call he got telling him he didn’t have to come to work tomorrow. That he was still alive. 

For the now more daring incoming Minister’s of Finance and Central Bank Governor’s, maybe they too will quickly wish for the day they get a similar call. These will be dark times for select MICs and LDCs. Darker than I’ve ever seen them before.