Revitalizing Multilateralism in the Face of Compounding Global Crises

Rapid Inflation Further Risks Food and Energy Security

The war in Ukraine dealt a severe blow to the global economy, disrupting the trade of key goods and aggravating existing pandemic- and climate-related stress in global commodity markets. Food, fertilizer, and energy markets are particularly affected, driving up inflation and lowering standards of living across the globe. The United Nations (UN) has established the Global Crisis Response Group on Food, Energy, and Finance (GCRG) to coordinate a multilateral response to the global cost-of-living crisis, yet efforts arising from the GCRG have so far proven limited in scope and impact.

Although Russia and Ukraine contribute a relatively small share to total world trade and global economic output, both countries are key global suppliers of food staples, fossil fuels, and fertilizers. In 2019, Russia and Ukraine supplied roughly a quarter of the world’s wheat, 15 percent of the world’s barley, and 45 percent world’s sunflower oil. Billions across the world rely on these food staples. Additionally, Russia is the world’s leading exporter of natural gas, the world’s second-largest exporter of crude oil, and an important global supplier of chemical fertilizers. 

Rising energy costs contribute to global poverty and could delay a green transition

Rising fossil fuel prices tied to Russia's invasion of Ukraine and the COVID-19 pandemic are driving an energy crisis that threatens to derail climate action and significantly hinder energy access. High fossil fuel prices and the urgent need to meet current energy demands may drive further investments in fossil fuels, placing countries on the path to a high-emission, high-cost energy future that contradicts the roadmap of the Paris Climate Agreement. As renewables continue to prove more affordable and comparatively less susceptible to geopolitical risks, the current energy crisis offers governments an opportunity to redouble efforts to shift investments away from fossil fuels and toward renewable energy sources.

To ease current global energy prices, the International Energy Agency (IEA), an intergovernmental organization with 31 member countries, facilitated the collective release of 182.7 million barrels of emergency oil stocks from members in April 2022. Although the price of crude oil recently dipped below $90 a barrel, energy prices remain well above pre-Ukraine war levels, and the prices of coal and natural gas continue to rise. Europe is particularly vulnerable to high energy prices due to the region’s dependence on Russia for coal and natural gas, which have been subject to trade restrictions and supply stoppages since the start of the war. Prices for natural gas in Europe have increased by nearly 400 percent since January 2022 and are expected to increase further, as energy demand rises in the winter, and the deliveries of natural gas from Russia’s Nord Stream pipeline end. The recent surge in fuel prices is estimated to raise the cost of living in Europe by 7 percent in 2022, and there are growing concerns about an impending energy crisis stemming from inadequate supply. Amid cuts to natural gas supplies from Russia, European governments are expected to spend at least $50 billion on new and expanded fossil fuel infrastructure and supplies, including coal to power formerly closed plants. These temporary European investments in fossil fuels may address the immediate energy crisis but result in lower investments in renewables, higher emissions, and missed milestones in Europe’s planned energy transition away from fossil fuels.

Beyond Europe, volatile energy prices are exacerbating energy poverty globally and undermining recent progress to expand energy access to all. Higher prices for energy are requiring consumers to spend more on energy. With winter quickly approaching in the northern hemisphere, many households face the prospect of being unable to adequately heat homes, while across the southern hemisphere in low- and middle-income countries, high energy prices and inadequate supply are leading to nationwide power outages and reduced energy access at the household level. The World Bank expects COVID-related energy price hikes to leave 670 million without electricity by 2030–10 million more than projected last year. Some developing economies with well-developed electrical grids, such as Bangladesh, are cutting access to power in efforts to manage supply challenges. These outages have led schools, banks, businesses, and government offices to cut working hours, potentially resulting in lost opportunities, reduced wages, and hampered economic output.

Higher fossil fuel costs are simultaneously pushing some countries, such as the United States and Nigeria, to invest in renewables. In 2020 and 2021, renewable energy sources, particularly solar, proved less costly than energy derived from fossil fuels. However, for Nigeria and other developing economies, achieving a cheaper, cleaner energy future will require greater access to sustained climate finance. The UN’s GCRG recently highlighted policies that governments can adopt to support energy access for vulnerable populations in the short-, medium-, and long-term, thereby improving energy efficiency, leveraging renewable energy sources, and expanding access to climate finance to facilitate a net-zero transition.

Despite a recent fall in commodity prices, financial conditions in developing economies are worsening. Higher interest rates adopted by the United States and other advanced economies to contend with rampant inflation are eroding the buying power of developing economies’ currencies. Between January and July of 2022, developing countries’ currencies depreciated by 5.1 percent against the U.S. dollar. As a result, the cost of living in countries that import food and energy has increased substantially. Additionally, the cost of servicing debt denominated in a stronger foreign currency has increased substantially. In 2022, emerging economies are estimated to require $311 billion to service public external debt, a figure that amounts to 13.6 percent of government revenues. These financial conditions are eroding the fiscal and monetary space of low- and middle-income countries, limiting their ability to utilize public revenues or borrow to address current and future crises. 

The international community has pursued a number of initiatives since the start of the pandemic in order to avoid a global debt crisis. Between May 2020 and December 2021, $12.9 billion in payments on debts owed by 73 low-income countries was suspended under the G20’s Debt Service Suspension Initiative (DSSI). The G20, along with the Paris Club of sovereign creditors, also created the Common Framework for Debt Treatments to help DSSI countries restructure their debt and manage insolvency. However, only three countries—Chad, Ethiopia, and Zambia—have submitted requests for debt relief under the Common Framework, though five other countries are in debt distress. Zambia became the first country to restructure debt under the Common framework, but the process was lengthy due to the level of coordination among creditors necessary to reach the agreement. 

In August 2021, the International Monetary Fund approved a record issuance of $650 billion reserve assets known as “special drawing rights” (SDRs) to provide debt relief to developing countries for crisis-era loans. As SDRs are distributed according to country shares of the IMF, a significant portion of SDRs belong to advanced economies. But of the 105 countries that have used their SDRs, 104 were low- and middle-income countries. At least 30 of these countries have used 90 percent or more of their SDRs. Given the ongoing threat of a debt crisis, the IMF has urged wealthy nations to redirect SDR allocations to needy countries rather than release additional SDR allocations. Eleven nations have so far committed to redirecting their resources to less-developed countries. Unless further multilateral action is undertaken to address potential liquidity pressures and increase fiscal space, developing economies’ capacity to meet current debt and humanitarian obligations while financing development and climate resilience may prove an insurmountable challenge.