IMF Survey : Coping With a New Reality

April 13, 2016

  • Public debt ratios have worsened almost everywhere and public finances have become more vulnerable
  • Countries need to adapt, but “no one-size-fits-all”
  • Fiscal policy should be growth-friendly with a focus on measures that boost both short- and medium-term growth

In a context of fragile and uneven global economic recovery, a comprehensive policy response is needed to reduce vulnerabilities and improve growth prospects, the IMF said today in the latest Fiscal Monitor.

Saudi Arabia’s largest oil refinery in Ras-Tanura: owing to the drop in commodity prices, revenues are declining in many countries, hitting oil producers in particular (photo: Jacques Langevin/Sygma/Corbis)

Saudi Arabia’s largest oil refinery in Ras-Tanura: owing to the drop in commodity prices, revenues are declining in many countries, hitting oil producers in particular (photo: Jacques Langevin/Sygma/Corbis)

April 2016 Fiscal Monitor

The April 2016 Fiscal Monitor examines how countries can respond to the sharp deterioration of fiscal positions in the past year.

Public debt ratios have been revised upward in most countries. The revisions have been the largest in emerging market and middle-income economies, where fiscal deficit ratios in 2015–16 are now expected to exceed the levels observed at the beginning of the global financial crisis.

The main forces driving bigger budget deficits and the rise in debt ratios are ongoing adjustments in the global economy. These lasting transformations include continued weakness in global economic activity, the decline in commodity prices, the slowdown in trade, and tighter financial conditions in emerging and developing economies.

“All countries need to adapt to these new realities, but no one-size fits-all,” said Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department. The appropriate policy response varies across countries and depends on the nature of the fiscal challenge they face. The report outlines three main challenges.

Advanced economies: Steering clear of the deflationary trap

Advanced economies are facing the triple threat of low growth, low inflation, and high public debt. This combination of factors could create downward spirals where economic activity and prices decline—leading to increases in the ratio of debt to GDP—and further, self-defeating attempts to reduce debt. To avert falling into such a deflationary trap, countries should do more to bolster domestic demand and fiscal policy has an important role to play. This is especially the case in countries where interest rates are already close to zero and hence monetary policy cannot be expected to provide a big boost to activity.

The focus should be on fiscal measures that boost both short- and medium-term growth (such as infrastructure investment) and policy actions that support the implementation of structural reforms. In countries where fiscal consolidation cannot be postponed, its pace and composition should be calibrated to reduce the short-term drag on economic activity. Should a significant decline in global growth materialize, a swift and bold multilateral policy response would be needed involving both demand and supply policies in the larger economies. The policy package in such a case should be coordinated across countries to generate positive spillover effects.

Commodity exporters: Addressing persistent revenue shortfalls

Between 2014 and 2016, about two-thirds of all countries in the world experienced a decline in their revenue-to-GDP ratios. The decline was very large in commodity exporters, and in particular oil producers, where revenue shortfalls averaged 7 percent of GDP. As commodity prices are likely to remain low for some time, producers have no choice but to reduce public spending and align it with lower revenues. Nonetheless, this unavoidable adjustment can be made less painful by finding new sources of revenue and cutting poorly targeted and wasteful spending, including by reforming fuel subsidies.

Low-income countries: Achieving development goals

Almost half of the low-income countries have a tax ratio below 15 percent of GDP. Low revenue mobilization is an important impediment to economic development not only because it limits the ability to fund pro-growth spending (health, education, infrastructure) but also because a low tax ratio is often associated with a lack of institutional capacity. Thus, adequate revenue mobilization is a fundamental component of a growth and development strategy in low-income countries. Combined with improvements in expenditure efficiency, better revenue mobilization can help achieve the Sustainable Development Goals.

Prepare for the medium-term

Beyond the country-specific immediate policy responses, all countries must pursue two main objectives over the medium term. First, in a risky environment, a key objective of fiscal policy is to make public finances more resilient. In particular, countries need to improve the way they disclose and manage fiscal risks (such as loan guarantees provided by the government). A comprehensive and timely reporting on the state of public finances can help make policymakers accountable and generate support for prudent fiscal policies. Countries should also take concrete measures to mitigate the risks they have identified. Today very few countries have developed risk management strategies with the dual objective of reducing the probability that risks may occur and building up buffers to help absorb risks that have materialized.

Second, raising growth is necessary everywhere. In advanced economies, a sustained increase in growth of 1 percentage point could bring debt ratios to their pre-crisis levels within a decade. In emerging and developing countries, strong growth is also warranted to raise living standards and finance development strategies. The analysis in Chapter 2 of the Fiscal Monitor shows that some fiscal measures, such as well targeted tax credits for research and development are very powerful tools for fostering innovation, productivity, and growth.

In sum, countries face big challenges in restoring vigorous growth, and healthy and resilient public finances. But policymakers, individually and in concert, still have adequate policy tools to address these challenges and adapt to the new realities, concludes the report.



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