Record high "real interest rates" may continue for a number of years, worsening an already "troublesome" world economic situation, especially for the poor nations piling up debt, the International Monetary Fund said in its annual report published over the weekend.
"Real interest rates" represent interest rates in actual money terms, minus an allowance for inflation. For most of the 1970s, the real interest rate was abnormally low, and sometimes actually negative, because inflation levels were so high.
But that situation allowed the poor countries to manage their debt with considerable ease, the IMF pointed out. Thus, for example, a group of less developed countries with moderate per capita incomes were paying interest rates averaging about 5.5 percent in the 1974-1979 period, while their export prices were increasing about 15 percent a year.
IMF's report explains that as inflation rates began to recede last year, interest rates have skyrocketed, largely as a result of American monetary policy. Thus, interest rates, rather than being negative, are positive by a substantial measure in most countries in the world. In turn, that means the less developed countries now face a big increase in their "real debt service burden," unless interest rates in general come down.
The IMF report held out little hope for such a possibility: "In view of the imperative need for the industrial countries to control inflation, there seems to be a strong prospect that real interest rates will remain well above the abnormally low or negative levels of the 1970s.
"The likelihood that external borrowing will remain more costly in real terms than it has been for many years underscores the need for prudent adjustment measures in many of the borrowing countries."
In its earlier World Economic Outlook published on July 19, the IMF also made the point that a large part of financing for less developed countries had been at subsidized rates which are becoming increasingly difficult for the poor countries to obtain under present economic conditions.
In more general terms, the report reiterated recent observations that the world outlook is "difficult and disappointing in important respects" even though there has been some progress -- notably on oil prices -- in combating inflationary pressures.
It remained relatively gloomy about the prospects for economic growth in the industrial nations of North America and Europe, which still reflect the consequences of the massive increase in oil prices during 1979 and 1980. The report predicted that the average rate of real expansion in the industrial world will be no more than one to 2 percent within the next year.
Many of the policy issues outlined in the IMF's annual report will be discussed at the joint annual meeting of the IMF and World Bank which will take place in Washington late this month.
On one specific issue that is certain to come up -- whether to create greater monetary reserves for the IMF member nations -- the annual report said only that the question is "still under discussion."
One still unresolved question to be decided at the annual meeting concerns the possibility of a new allocation of special drawing rights, the monetary unit supplied by the IMF to its members. Each SDR is worth approximately $1.23, and so far 21.4 billion have been issued.
The annual report guardedly indicated that the IMF staff favors a further creation of SDRs at the beginning of next year, a conclusion not yet reached by many countries, including the United States.
The report said that the world would likely need more monetary reserves, and if in part this were to be satisfied by more SDRs, it would relieve some of the burden on international credit markets and also reduce "existing pressures in foreign exchange markets."
Although the general focus of the report was to emphasize the negative aspects of the world economic situation at midyear, the report also carefully enumerated certain "signs of progress," including the reduction of some inflationary pressures and the willingness of many governments to follow an austerity policy even though there were obvious negative impacts on growth and employment.
Another hopeful sign cited in the report is that the old close link between economic growth and oil consumption appears to have been broken. Energy consumption in the industrial world, for example, was about the same in 1980 as it was in 1973 despite a 19 percent growth in the real gross national product in the industrial countries over the same period.