The International Monetary Fund lowered its global GDP growth forecast and recommended that governments impose capital controls on cryptocurrencies

The International Monetary Fund (IMF) said in its latest World Economic Outlook report that the global economic outlook has been severely hit by the Russian-Ukrainian war, and the organization has lowered its global growth forecast for 2022 and 2023, saying that the economic blow caused by Russia's unprovoked invasion of Ukraine will "spread in all directions." In addition, as the war continues to raise concerns about evading sanctions, governments should ensure that they have the right to impose capital controls on traditional assets and cryptocurrencies.

Global economic outlook bleak

The Washington-based agency now expects the global economy to grow by 3.6% in GDP in 2022 and 2023. This is a decrease of 0.8 and 0.2 percentage points respectively compared with the forecasts released in January.

The World Bank also lowered its global growth forecast, now estimating growth in 2022 to be 3.2%, down from a previous estimate of 4.1%.

"The effects of a war would be widespread, increasing price pressures and compounding significant policy challenges," IMF economic adviser Pierre-Olivier Gourinchas said in the report.

Bitpush previously reported that the United States, Canada, the United Kingdom and the European Union have imposed multiple rounds of sanctions on Russian banks, oligarchs and energy. The IMF said the penalties will have "serious consequences for the Russian economy," estimating that the country's GDP will fall by 8.5% this year and 2.3% by 2023.

“Even if the war ends soon, the loss of life, destruction of physical capital and flight of citizens will severely hamper economic activity for many years to come,” the group said.

Inflation concerns

Russia’s decision to invade Ukraine has exacerbated the supply shock to the global economy while also creating new challenges.

"Russia is a major supplier of oil, gas and metals and, along with Ukraine, of wheat and corn. Reduced supplies of these commodities have led to sharp price increases," the IMF said in the report.

That is expected to hurt low-income households around the world and cause inflation to rise for longer than previously expected. The IMF estimates inflation will reach 7.7% in the United States and 5.3% in the eurozone this year.

The organization said: "The risk that inflation expectations deviate from the central bank's inflation target is rising, prompting policymakers to adopt more aggressive tightening policy."

The Federal Reserve expects six more rate hikes in 2022, while the European Central Bank confirmed last week that it will end its asset purchase program in the third quarter.

Emerging Market Risks and Capital Controls

Capital controls are restrictions imposed by a government on the inflow and outflow of capital across its borders. Specific measures include government restrictions on cross-border capital transactions, cross-border payments and transfers, foreign exchange controls, taxation of cross-border capital flows, etc.

The International Monetary Fund said on Tuesday that governments should ensure they have the power to impose capital controls on traditional assets and cryptocurrencies as the war in Ukraine continues to raise concerns about sanctions evasion.

This means that citizens of crisis-hit countries such as Greece and Argentina may face limited access to Bitcoin, such as restrictions on withdrawing cash from ATMs or obtaining foreign currency.

Even though cryptocurrencies such as Bitcoin are not recognized as foreign currencies, the IMF wrote in its financial stability report: "Laws and regulations governing foreign exchange and capital flow management measures should be reviewed and revised, if necessary, to cover crypto-assets."

It added that “the war in Ukraine has brought to the forefront some of the challenges regulators face in implementing sanctions and capital flow management measures” and that crypto-based tax evasion will become “more prevalent.”

While the IMF acknowledged that large ruble transfers on cryptocurrency exchanges were “impractical,” it warned that some seeking to evade sanctions might turn to less scrupulous providers or use other privacy technologies, such as mixers.

The group argues that crypto mining also offers an opportunity for emerging market countries to effectively exchange energy for bitcoin, raising concerns that countries’ ability to stem capital outflows during financial turmoil could be undermined.

But IMF officials acknowledged that virtual assets may not be used to circumvent financial restrictions on Russia.

“The evidence so far suggests that not a lot has happened in terms of sanctions undermining through crypto assets,” said Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department, citing data on Tether’s stablecoin trading prices and volumes. “That’s certainly something we’re watching very closely.”

To guard against risks in emerging crypto markets, the IMF recommended that policymakers develop global standards for crypto assets and noted the need to strengthen regulation of fintech companies and decentralized financial platforms to reduce their risks.

The international body recommended that policymakers develop coordinated regulations for crypto assets to manage capital flows, establish international cooperation, address data gaps, and regulators should also set up a Financial Action Task Force to enforce standards to prevent illicit capital flows.