Washington, October 14
The International Monetary Fund said on Wednesday that the governments around the world have responded to the COVID-19 pandemic with discretionary fiscal measures amounting to USD 11.7 trillion and now they will have to rebuild the fiscal buffers over the medium-term to long-term period.
Swift and decisive fiscal action was crucial to save lives, support vulnerable people and firms, and mitigate the economic contraction, said Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department.
But the sharp increase in primary deficits together with the deep fall in economic activity caused the global public debt to jump up to close to 100 per cent of GDP, in 2020.
“Going forward, over the medium-term, public debt is projected to stabilise, at a high level—close to 100 per cent of GDP—up to 2025,” Gasper told PTI in an interview.
“In our view, the priority is to bring COVID-19 under control. As for fiscal policy, it is important to avoid premature withdrawal of fiscal support. It is necessary to sustain the recovery and to avoid permanent scarring to economies and societies,” he said.
Still, the composition of fiscal support should change over time, he said, adding that support for firms and workers should be gradually shifted towards facilitating resource reallocation and economic transformation, including investment in people and capital.
“Countries will need to rebuild fiscal buffers over the medium term to long term. It is important to think ahead about long term challenges. It is also important to reinforce the respect for principles of transparency and good governance,” Gasper said.
The COVID-19 pandemic, which has killed over 1 million people across the world so far, has triggered a substantial increase in public finance risks. A medium to long term fiscal framework can help countries in dealing with the relevant trade-offs over time, Gasper explained.
“For example, for countries with fiscal space and deeper scarring, a slow reduction in the fiscal deficit could be appropriate. That would be particularly the case if the increase in debt were used efficiently to finance productive public investment. Under such conditions the favourable impact on growth could even foster public finance resilience,” he said.
But, in contrast, for countries already facing binding financing constraints, rising financing costs and roll-over challenges, fiscal consolidation is necessary for a stable and sustainable recovery. In addition, some developing countries will need further official financial support and debt relief, he said.
According to Gasper, governments around the world have responded to COVID-19 quickly and decisively. He said governments in total took discretionary fiscal measures of about USD 11.7 trillion.
“Budget support has amounted to more than nine per cent of GDP in Advanced Economies (AEs) and to about four per cent of GDP in Emerging and Developing Economies (EMDEs). Financial support including equity injections, loans, and credit guarantees, amounted to another 11 per cent of GDP in AEs and two per cent of GDP in EMDEs,” he said.
The size and composition of the policy support has varied across countries reflecting differences in underlying fundamentals, health capacity and preparedness, available fiscal and borrowing space, as well as differences in the timing of infections, he said.
Describing COVID-19 as a health emergency, Gasper said supporting health systems has been the first priority. Beyond essential health measures, countries adopted lifelines to protect households, workers and businesses.
“Financial support measures, such as equity injections and direct or guaranteed loans have been necessary to prevent bankruptcies and mass layoffs…Countries have also used temporary tax deferrals and cuts which have helped maintain businesses’ cash-flow,” he said.
Responding to a question, Gasper said that fiscal policy going forward will depend on the evolution of COVID 19 and its financial and economic implications. Given the amount of uncertainty it is necessary to think in terms of contingent scenarios, he said.
“The Fiscal Monitor emphasises the importance of not removing fiscal support too soon or too fast. The consequences of doing too little are worse than doing too much. But countries will also need to plan for a gradual adjustment to bring deficits down and stabilise debt,” Gasper said.
Going forward, flexible use of a set of fiscal measures is necessary to navigate tentative reopenings and to facilitate structural transformation to a new post-pandemic economy, he asserted.
“Specifically, as lockdowns ease and become more selective, governments should ensure that lifelines are not withdrawn too rapidly. Improvements in the ability of social protection systems to reach, target, and deliver benefits to the most vulnerable people should be preserved,” he said.
When health risks diminish and a durable recovery is foreseeable, support should shift from protecting employee-firm relationships to helping workers find new jobs, helping viable but still-vulnerable firms reopen, and supporting the structural transformation, he said.
“Given the unprecedented nature of the shock, the immediate priority in India is a comprehensive policy response to fight the virus, prevent long-term damage to productive capacity, and provide social insurance to the most vulnerable. Although medium-term fiscal consolidation will be necessary, fiscal support can and should be deployed as needed to support the poor and kickstart the recovery,” he said. PTI