## Chapter 1: On the Path to Policy Normalization

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### Context and recent shocks
- Three years since the outbreak of the COVID-19 pandemic, fiscal policy is returning to normal as pandemic-related spending measures expire and monetary and fiscal policy tightened in nearly three-quarters of countries in 2022.
- The shift occurred amid a highly volatile environment: a cost-of-living crisis, Russia’s invasion of Ukraine, and instability in the financial sector.
- Multiple shocks have reversed gains in poverty reduction and likely pushed the global goal of eradicating extreme poverty by 2030 farther into the future.
- Food prices in domestic currencies remain high in several countries, owing in part to exchange rate depreciations.
- Long-standing challenges— including the climate agenda and population aging—have become more pressing.

### Public finances and debt dynamics
- Public debt surged to nearly 100 percent of GDP in 2020 because of economic contraction and massive government support.
- With strong nominal GDP growth in 2021–22, global debt posted the steepest decline in 70 years and stood at about 92 percent of GDP at the end of 2022, still about 8 percentage points above the level at the end of 2019.
- Primary deficits are falling rapidly and moving closer to prepandemic levels in many countries, but overall deficits have fallen somewhat less owing to rising interest payments.
- Revenue surprises in 2022 averaged 3.1 percent of GDP for advanced economies and 2.5 percent for emerging market and developing economies, with particularly large revenue windfalls in oil exporters.
- Some countries saved part of the extra revenues; many others increased spending to counter the cost-of-living crisis.
- In some cases, particularly countries with large initial debt stocks in domestic currency, debt ratios fell by more than 10 percentage points in a year as nominal GDP surged.
- Debt dynamics deteriorated in emerging market economies and low-income developing countries with sizable shares of debt in foreign currency as currency depreciation and rising interest rates combined with inflation.

### Near-term fiscal outlook and policy guidance
- In 2023, overall fiscal deficits are expected to increase slightly to 5 percent of GDP on average, as governments face higher interest bills and pressures to increase public spending, including spending on wages and pensions, to catch up with past inflation.
- Risks are firmly to the downside; instability in the financial sector, if it intensifies, could put pressure on public sector balance sheets as governments may be called to help.
- Policy recommendations:
  - Tighten fiscal policy while providing targeted support to the most vulnerable to complement monetary efforts to bring inflation back to target (see Chapter 2).
  - Be ready to adjust policies if risks materialize; if inflation proves stickier than expected, tighter policies for longer will be required.
  - Allow automatic stabilizers to work, especially where inflation is under control and fiscal space is available.
  - In a scenario of systemic financial stress, intervene swiftly to facilitate resolution and minimize costs while mitigating moral hazard; apply governance principles supported by strong insolvency and bankruptcy procedures.

### Medium-term outlook, risks, and capacity constraints
- Over the medium term, fiscal deficits are projected to remain above prepandemic levels in the next few years.
- Under current projections, gradual and moderate fiscal tightening will not be sufficient to prevent public debt ratios from resuming an upward trend as nominal GDP slows, driven by some large advanced and emerging market economies.
- Interest payments as a share of revenues in emerging market economies and low-income developing countries are expected to remain higher over the medium term than before the pandemic.
- In low-income developing countries:
  - Heightened debt vulnerabilities persist, with 39 countries already in or near debt distress.
  - Revenues remain insufficient at 13.5 percentage points of GDP lower than revenues in advanced economies, calling for renewed efforts to raise tax capacity.
- Governments should develop credible risk-based fiscal frameworks to promote consistent macroeconomic policies, reduce debt vulnerabilities over time, and build up room to handle future shocks.

### International cooperation and energy transition
- The international community needs to work together to find joint solutions to multiple challenges.
  - For the most vulnerable economies, it is urgent to strengthen the international financial architecture, especially in debt resolution and enhancement of the Global Financial Safety Net.
  - Many low-income countries need further international efforts, including debt relief, so they can make progress toward the Sustainable Development Goals.
- The recent energy crisis highlights the urgency of accelerating the transition to renewable energy to safeguard energy security and mitigate climate change.
- International cooperation on energy strategy, including carbon taxes and subsidies, would help achieve climate goals and avoid trade tensions.

*Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2023/april/english/ch1execsum.pdf*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2023/april/english/ch1execsum.pdf_