Transcript of October 2021 Fiscal Monitor Press Briefing

October 13, 2021


Vitor Gaspar, Director, Fiscal Affairs Department

Paolo Mauro, Deputy Director, Fiscal Affairs Department

Paulo Medas, Division Chief, Fiscal Affairs Department

Ting Yan, Communications Officer, Communications Department

Ms. Yan ‑ Good morning, everyone. Welcome to the Fiscal Monitor Press Briefing. I am Ting Yan from the Communications Department. I hope you and your families are doing well and are staying safe. Let me first introduce our three speakers today. We have Vitor Gaspar, Director of the Fiscal Affairs Department; and Paolo Mauro, Deputy Director of the Fiscal Affairs Department; and also, Paulo Medas, Division Chief in the Fiscal Affairs Department.

Vitor will first give some opening remarks to highlight the key messages of the Fiscal Monitor Report, and then we will be happy to take your questions via WebEx or IMF Press Center. With that, Vitor, the floor is yours.

Mr. Gaspar ‑ Thanks so much, Ting. Welcome. Thanks for your interest on fiscal policy developments and prospects all around the world based on Fiscal Monitor. More than a year and a half after the start of COVID‑19, decisive global action is necessary to tackle the great vaccine divide, the great finance divide, and climate change. Here I focus on the great finance divide. Because of COVID‑19 and the policies put in place to respond to it, debt levels increased fast and reached high levels. High and rising levels of public and private debt are associated with risks to financial stability and public finances.

I want to start with global debt. Given that we now have preliminary estimates from the global debt database for 2020. In this slide, you see percentages of GDP, but I will be quoting dollar figures. The debt of governments, households, and non‑financial corporations added up to $226 trillion in 2020. That is 27 trillion above 2019. This increase is by far the largest on record. Advanced economies and China contributed more than 90 percent to the accumulation of worldwide debt in 2020. The remaining emerging markets and low‑income developing countries contributed only around 7 percent. Constraints on financing are particularly severe for poor countries. This great finance divide will be a guiding thread for my presentation.

In 2020, fiscal policy proved its worth. The increasing public debt in 2020 was fully justified by the need to respond to COVID‑19 and its economic, social, and financial consequences. But increases are expected to be one‑off, as documented in Chapter 1 of the Fiscal Monitor.

Debt is expected to decline this year and next by about 1 percentage point of GDP per year. After that, it is projected to stabilize at about 97 percent of GDP. These dynamics are driven by a strong contribution from nominal GDP growth accompanied by a much more gradual reduction in the primary deficit.

Differences across cross‑country groups appear again when looking at fiscal policy and economic developments. Differences are clear, not only across country groups, but also within country groups. It follows that policy advice must be tailored to the evolution of the epidemic, to economic developments and prospects, but also country characteristics.

Advanced economies are projected to recover to the pre‑COVID growth path. Fiscal support will persist but spending revenues and the primary balance will gradually approach the pre‑COVID path.

China and the U.S. stand out with early and strong recoveries. In contrast, low‑income developing countries that you see on the right are projected to suffer persistently in growth relative to the pre‑COVID prospects. Lower growth and shortfalls in revenues are major concerns for the eradication of extreme poverty and more generally from the viewpoint of sustainable and inclusive development.

Financing gaps to achieve the Sustainable Development Goals by 2030 were already considerable before COVID. The pandemic made prospects even worse. Data in our analysis suggest that the ability to issue debt at favorable terms was pressures in the year of the pandemic.

What determines the degree of access to financial markets? Many factors play a role. But the major theme of the Annual Meetings is that credibility of monetary and fiscal frameworks is important for all countries. Chapter 2 of the Fiscal Monitor shows that countries with highly credible fiscal frameworks benefit from better bond market access.

Countries with high credibility face lower interest rates on sovereign bonds. The bottom line, fiscal responsibility pays off. While recognizing that the international community provided critical support to alleviate fiscal vulnerabilities in low‑income countries, more is needed.

The recent general allocation of Special Drawing Rights (SDRs) contributes to international liquidity. This $650 billion is the largest SDR allocation agreed upon ever. Its beneficial effects can be exponentiated through voluntary channeling from higher income economies to low‑income developing countries. Options for voluntary channeling include financing from the Poverty Reduction and Growth Trust or through a new Resilience and Sustainability Trust (RST). By voluntary channeling of SDRs in such a way, donor countries would be contributing to sustainable development and international convergence.

The expiration of the DSSI at the end of the year makes a fully functioning G‑20 Common Framework urgently needed. The great vaccine divide, the great finance divide, and climate change affect everyone, but especially the poorest and most vulnerable. Sustainable inclusive development is key everywhere. It should be green and digital. National and global policy action must work hand in hand. Time is of the essence. It is urgent to invest for the longer time to ensure a durable and inclusive structural transformation. Financing is one of the essential keys. The diagnosis is clear. Action is urgent.

Ms. Yan ‑ Thank you so much, Vitor. Now we can take your questions. Please submit your questions on the IMF Press Center or you can ask your questions on the WebEx. Our first question comes from PTI.

Question ‑ Thank you for doing this so early in the morning. We really appreciate it. I have a quick question. Vitor, in your opening remarks, you called for urgency of action. What are the dangers of inaction? And, secondly, the Indian government has announced a series of economic reforms. What is your assessment of the fiscal situation in the country right now? Thank you.

Mr. Gaspar ‑ Thanks for your questions. I will address the first question and Paolo will address the second. I sounded the alarm on three major issues that require urgent global action. I call it the great vaccine divide, following the Chief Economist of the IMF, Gita Gopinath, the great finance divide, and climate change.

Global recovery is very uncertain and held back by the availability of vaccines. The IMF, together with other international organizations, has put out a plan with a price tag of $50 billion would ensure fast progress in vaccination around the world with the headline objective of ensuring 40 percent of the population vaccinated in every country before the end of this year. We quantify that failure to contain the epidemic through such effective action could cost in excess of $5 trillion over five years.

I also stressed pretty much in this presentation what I call the great finance divide. COVID‑19 has hit particularly hard the people who are most vulnerable, which includes the poor and those who have constrained access to finance. In that context, making resources available to low‑income developing countries is extremely important to attain the Sustainable Development Goals. But climate change is also an urgent priority. Climate change is also associated with strong dynamics and uncertainty and early action pays off.

We, again, emphasize the vulnerability of the poorest countries and [inaudible] effective action by advanced economies to ensure transfers of technology and financing of developing countries in line with previous commitments is very important. It is also very important to launch the Resilience and Sustainability Trust that will allow financing instruments to be tailored to the transition needs of low‑income developing countries.

Mr. Mauro ‑ Turning to the Indian reforms recently, and this also leads to some of the things that Vitor just mentioned. I think the starting point is that the situation is improving when it comes to the epidemic. It is very different from a few months ago. Fortunately, the number of cases is declining. The vaccination is becoming more widespread.

On the economic front, therefore, even though the situation is improving, the priority remains to address the health emergency. It remains to provide ample support, particularly to the poorer segments of the population through social protection, employment benefits, and so on.

As we move towards the recovery, it is also important to focus on public investment, particularly on green investment, so that the recovery can be inclusive and green. This said, India's debt is at the ratio of about 90 percent, and it is important to give a signal that there is a medium‑term fiscal framework in place that ensures investors that the debt ratio will decline in the medium term.

In terms of more recent reforms, one that I would like to highlight is the National Asset Reconstruction Company, the so‑called bad bank. This is potentially very promising because it is important to tackle non‑performing loans. This has been a long‑standing drag on credit, and potentially this is very promising. It is very important that both the governance and the independence of such so‑called bad bank be in place so that the costs to public finances can be kept under control and one can go back to promoting inclusive growth.

Ms. Yan ‑ Thank you, Vitor, and thank you, Paolo. We also received a question from Heather Scott from AFP. Her question is: "How big is the risk that a slow recovery and rising debt in emerging and low‑income countries could lead to a more profound crisis or a need for debt restructuring? Is there a risk that vulnerable countries will have to sharply decrease spending in order to prevent a debt crisis?”

Mr. Medas ‑ Maybe I can answer this question. Let me deal a bit on what Vitor already mentioned. The realities, many advanced economies were able to use large fiscal firepower in response to the pandemic. This was not the case in many other countries. Developing economies face very tight and tighter financing constraints. So even though they were hit very hard from the crisis, they have not been able to do as much fiscal support as advanced economies.

In reality, what we see is that almost half of low‑income developing countries are already at debt distress or at risk of it. We also see, as Vitor already mentioned, that there will be long‑term scarring in emerging markets and low‑income countries partly because of this lower policy support. We will see is the output and tax revenues will be lower than the pre‑pandemic trends. This will make it harder to manage debt over the medium term. So, we do see that action is needed on several fronts.

On the domestic front, countries need to do more to mobilize tax resources and to spend better and more efficiently. This will help not only manage debt but also achieve the Sustainable Development Goals. But not only domestic action is needed. We also emphasize that international support is going to be needed. One, to help get everyone vaccinated in the world; and two, to help the lowest income countries that are highly indebted better manage their financing constraints.

Of course, action has already been taken, but more needs to be done. For example, 47 countries already took advantage of the Debt Service Suspension Initiative. This has helped them allocate resources to fight the pandemic but did not prevent that other priority spends had to be cut already. The IMF has also allocated $117 billion to 85 countries to help provide financial support or debt service relief. We also are working with other countries to make sure, like, for example, the initiative debt relief of the G‑20 are more effective and help more countries. And, of course, as Vitor already mentioned, the $650 billion allocation in SDRs can also make a big difference, especially if advanced economies can rechannel their allocation increase to low‑income countries to help manage their pressure. Thank you.

Ms. Yan ‑ Thank you, Paulo. Let us go back to the WebEx. We have a question from Maoling from Xinhua News Agency. Maoling, please go ahead.

Question ‑ Thank you very much for doing this. I have two questions. Firstly, could you share some insights on the recently reached deal on the minimum corporate tax under the framework of OECD. We expect the deal to help resolve the digital tax tensions. Secondly, on China, China's deficit is expected to reduce, and debt is still increasing. How should the Chinese government continue to boost recovery and stabilize debt levels with its fiscal policy? Thank you.

Mr. Gaspar ‑ Thank you so much, Maoling. I will take your both questions. On the international deal on corporate taxation, I would very much insist that it is a historic moment. The system that we now have was basically conceptually agreed by the League of Nations about 100 years ago. Just think about the economy 100 years ago and how much it has changed. So, the fact that we were able now to reach an agreement to reform international corporate taxation is a major breakthrough.

In terms of 2021, it is one of the highlights of the year in terms of global cooperation. In terms of the meaning of the deal itself, the deal does basically two things. In what is called Pillar 2, it agrees on a minimum for the corporate income tax rate all around the world and that breaks the race to the bottom.

In Pillar 1, it attributes taxing rights to market countries, and by doing so, it moves partially towards a destination principle of international taxation that has been shown to be robust to international integration. That basically means that we have a cooperative way forward in the field of tax, and that is a major development.

On China, China has been able to contain COVID‑19 relatively early. China is a country that is benefiting from a strong recovery. China was one of the few countries in the world where economic activity did not contract in 2020. That basically means that fiscal policy in China is able to adjust very gradually over time, and that seems to be broadly appropriate to the Chinese conditions.

Two points, taking a longer time frame. First of all, a rebalancing of the Chinese growth model, a transition to a more sustainable development path will require a transfer of spending from investment consumption. And here, fiscal policy has a role to play, including by increasing, by strengthening the social protection system.

Probably it makes sense to highlight the potential of increased medical and unemployment benefits, but China is also using technology to improve social protection, and the use of digital wallets has been used to reach segments of the population that are hard to reach otherwise.

From a long‑run perspective, China, as many other countries in the world, is facing a demographic transition, and so it is very important in that context that it benefits from a long‑run approach to Public Finance Management so that those challenges associated with long‑run growth and demographic position can be tackled appropriately.

Ms. Yan ‑ Thank you. Next, we have a question on the WebEx from Egypt. Please go ahead.

Question ‑ Good morning, all. Thank you for taking my questions. I have two questions. The first is on the debt issue. Elevated debt levels are a key consequence of the COVID‑19 crisis. What are the IMF's expectations for the debt‑to‑GDP ratio in developing countries and emerging markets, especially in the MENA region over the medium and long terms? My second question is on the rising energy prices. This rise will affect many families and small businesses that are already struggling amid the ongoing pandemic crisis. Are you concerned that large energy prices will hurt the economy and what can governments do, including should we give subsidies to deal with this issue? Thank you so much.

Mr. Mauro ‑ Let me say a few words about the debt and MENA, the Middle East and North Africa region, and then perhaps Paulo can elaborate on the issue of energy prices. So specifically, the numerical aspect of your question when it comes to MENA, we are on average at the end of 2020 at a debt ratio of 52 percent. We project that by 2025, the ratio will have slightly declined to 48 percent. This is not unusual for emerging markets as a whole. For most emerging markets, indeed, we project there is going to be a stabilization and a gradual decline, a very small decline in the debt ratio going forward, starting, of course, as you said, from higher debt at the moment compared to pre‑pandemic.

One big exception to that would be China where we project a continued increase in the debt ratio. But I do want to emphasize the very wide diversity among emerging markets. Just take a starting point in the region. Egypt right now has a debt ratio of about 90 percent. And also thinking about developments in the oil markets, some countries are net exporters, others are not, and that is going to make a big difference.

What I would highlight is in terms of the policy prescription, it very much depends on country circumstances. There are countries where the epidemic is still raging, others where things are getting a little bit better. The pace of the recovery is very different across emerging markets. We have cases of countries that can finance themselves relatively easily and others that are shut out from global financial markets. Last but not least, more recently we are seeing that some countries have high inflation at this point, whereas others still have inflation under control. So, depending on those, the prescription would differ. What is common to all of these countries is the importance of explaining to the public and to investors what is the medium‑term fiscal framework.

On energy prices, maybe Paulo, you can say a little bit more.

Mr. Medas ‑ Sure. Let me give you a bit of context. So, the increase to some degree was expected because it followed the large recession last year with falling prices, so this partially a recovery. Second, economies are now much less dependent on oil and gas than a few decades ago, so that is going to help manage this increase. But the reality is that if these large price increases that we have observed in some regions of the world were to persist, they would dampen economic growth. They would affect families' budgets. So, the question is what can the governments do, especially, as you mentioned, we are trying to get out of the pandemic. Many families and businesses are still suffering.

So, I think one of the points we wanted to make is that we do not recommend generalized energy subsidies, fuel subsidies. The reason is because usually they are very costly. They benefit rich households who do not need support, and they are not friendly to the environment. In fact, they lead to very negative incentives. But there are measures governments can take in the short term to try to alleviate the impacts. One of the things we stress is obviously using more targeted support to those that are more vulnerable and hardest hit by these increases. For example, countries can use targeted cash transfers. If they do not have these, they can use existing systems they may have in their safety networks. One example some countries are using is subsidized electricity bills for the families that have low incomes. Countries that have regular domestic prices can also include rules that smooth the price increase so that families have to see large volatility in their monthly prices, and it takes more time to adjust. So, these are several measures governments can take in the short term.

But look, the reality is we have faced this large volatility in oil and gas prices for a long time. The only way to deal with this in a permanent way is move ahead towards a greener economy. Countries need to invest more in a diversified energy matrix based on renewable and clean energy. This is going to be the only way you build resilient economies and protect households from these very large volatility in oil and gas prices. Of course, this is a critical part of the climate agenda, so it needs to be pursued.

Ms. Yan ‑ Thank you. Next, we have a question from Shuichiro from Jiji Press, Japan. Please go ahead.

Question ‑ I have two questions. One is related to the DSSI. Vitor mentioned that the target of the DSSI is expiring at the end of this year. How should we make active the Common Framework? What is your view on that point? The second question is on Japan. Japanese debt level is still high, which is expected over 200% to GDP, and do you expect it to last long? Can you say it is nearly sustainable, especially given Japanese much older and aging society? Thank you.

Mr. Gaspar ‑ Thank you so much. I will tackle your second question first and then the first. So, on Japan, debt in Japan, as in other advanced economies, increased quite sharply in 2020. And in our forecast, it is projected to continue to increase this year. After that, as happens in many advanced economies as well, it will come gradually down, although at a level substantially higher than pre‑pandemic. We do not see risks associated with this high level of debt for Japan in the short run. Rollover risks are low, given the current complementarity between fiscal and monetary policy, and the savings base in Japan is quite solid.

Now, if you look beyond the current situation, you should recognize, first, that compared with our forecast one year ago, the projections for the public debt‑to‑GDP ratio in Japan have been revised quite significantly down, so things are now looking better than a year ago, but they are very long‑run challenges that the Japanese economy is facing. Some dates that I find mnemonic having to do with demographic transition in Japan is that total population in Japan started declining in 2010, so already 11 years ago. The labor force started declining in 1995, and the Bank of Japan has been operating under the shadow of the effective lower bound since 1999.

To tackle issues that have to do with low neutral real interest rates, low growth, and the demographic transition in Japan, Japan needs a very long‑run perspective. And in that context, the advice in Chapter 2 of the Fiscal Monitor, to reinforce medium to long‑term fiscal frameworks, is a recommendation that would serve Japan well to follow.

Now, on the issue of the DSSI and the Common Framework, Paulo has already mentioned that the DSSI played an important role last year and this year, but it does expire at the end of the year. A significant number of countries are in debt distress or at high risk of debt distress. They need a framework that allows an orderly approach to the management of their debt challenges and enables them access to finance for sustainable, inclusive development purposes. That is the aim of the Common Framework. That is why it is urgent to make progress just now.

Ms. Yan ‑ Thank you, Vitor. I think we have one more question from WebEx from Reuters.

Question ‑ Good morning. Thank you for taking my question. Good morning. Vitor, I just wanted to ask you about the Common Framework, and I know you just spoke about that, but yesterday Mr. Malpass, or it might have been Monday, suggested that there should be some extension of the suspension of debt that would be perhaps connected with the Common Framework. Up to now, there has not been a lot of demand partly because I think people are waiting to see how it goes with the countries that have applied, and it has been very complicated. What do you think needs to happen for the Common Framework to be effective? I just had a real quick question on the RST. You mentioned that work should proceed on this, but it has been very slow and halting, and it will not be operational now it looks like until next year. Is that too late and why is it taking so long? Thank you.

Mr. Gaspar ‑ So I would claim that the progress that has been possible to make in 2021 when it comes to making finance available to vulnerable countries has actually been quite impressive. As I said in my introductory remarks and Paolo again repeated, the SDR allocation of $650 billion is the largest in the history of the Fund. It makes liquidity immediately available to low‑income developing countries, and it makes a difference. We have already documented that our rapid financing facility channeled financial resources in a way that made a difference in the countries that needed it most. At this point in time, we also documented that the Debt Suspension Service Initiative did contribute to making resources available to low‑income developing countries.

Now, more is needed, and both Paulo and I very much emphasized that the voluntary channeling of SDRs from countries that have a comfortable external position to countries that are in need will contribute to international convergence. It will contribute to Sustainable Development Goals. And it can be used to help the transition that is implied by the fight against climate change, and that is something which is envisaged in the new Resilience and Sustainability Trust that we would like to be endorsed in strong terms before long. The RST and the Common Framework need further progress. And, of course, we would like to see them deliver in an operational way, but this thing naturally takes time, and the fact that they take time means that it is urgent to make as fast progress as possible right now.

Ms. Yan ‑ Thank you, Vitor. Now let us go back to the Online Press Center and take one question on inflation. It is from Anthony Rowley, South China Morning Post. His question is: "To what extent is fiscal stimulus contributing to rising inflationary pressures in advanced and emerging economies?"

Mr. Gaspar ‑ So I may take that one if my colleagues are comfortable with that. The way I see it, we have inflation pressures around the world that have partially to do with the dynamics of COVID. For a while, COVID, with the restrictions on social mobility that were associated with it, transferred demand from services to goods. There were pressures on goods prices. When it comes to energy, Paulo has already mentioned that there are bottlenecks in some segments of the energy market and some price pressures on those markets. We have also documented supply‑demand imbalances in some other sectors, including disturbances to some global supply chains.

Now, what that means is that you have a number of prices that are being pushed up, and there is a recovery of prices given lows that happened in 2020. Now, a lot of these pressures are transitory, and that is clearly what we have under our baseline. These disturbances are very large, and they are on the order of magnitude away from the fiscal support that was extended. That is, the fiscal support was extended to fight COVID‑19, to enable the health system, to protect vulnerable firms and households, and it contributed to smooth economic activity and employment. The fiscal policy was very steady in advanced economies in 2020 and 2021, and so it cannot be blamed for high frequency behavior in prices.

In the Annual Meetings, we very much recommend that countries that benefit from strong monetary stability, and where the best judgment is that this inflation pressures will be transitory will look beyond the current peak in prices and focus on medium to long‑term price stability, including the stability of inflation expectations.

On the other hand, there are dangers of inflation pressures feeding on themselves. And in that case, forceful decisive action will be necessary. Country circumstances are very different, and what to do to tackle inflation depends crucially on those country circumstances.

Ms. Yan ‑ Thank you, Vitor. We have also got one question, and the question is: "The Fed will soon begin tapering its asset purchases and raise interest rates in late 2022. How do you analyze the risk of monetary tightening added to the high level of debt?"

Mr. Gaspar ‑ I think that the best way to answer that question is go back to the Fiscal Monitor. In the Fiscal Monitor, we compare, for example, what we have, say, in the vintage of projections one year ago and now.

If you look at the United States, we do have a situation where, under our baseline and over the medium term, we expect higher interest rates, say, in 2024 than we did one year ago. But the revision in the public debt‑to‑GDP ratio in the U.S. was down. Why was it down? Because the relatively small impact of increases in interest rates from historically extremely low levels of interest rates was more than compensated for by the upward revision in nominal GDP growth that comes from both stronger price dynamics but, more importantly, stronger real growth.

Ms. Yan ‑ Thank you. Let us take one last question from Henry Curr, The Economist. The question is: "What is the most important advice that you would give countries that are rethinking their fiscal rules?

Mr. Mauro ‑ I will take that one. If there is one thing, I would say please read our report, but maybe I will highlight one aspect of the report, which is, as countries design and communicate their fiscal frameworks to the public and to investors, there are three principles they should be taking into consideration: Sustainability, simplicity, and stabilization. By sustainability, we mean to pick fiscal objectives that, of course, do not let the debt grow and grow forever as a share of the economy. But perhaps even more importantly, those fiscal objectives should be both economically and politically realistic, particularly given that debts have gone up so much as a result of the pandemic.

For simplicity, it has to be something that people can understand. So, to take one example that many people are familiar with, many European countries chose to have a 3 percent of GDP limit on their fiscal deficit. That is the kind of thing that is very easy to understand for people, but then the most complicated one is stabilization. Stabilization means that, when you are in a recession, you have to allow the fiscal deficit to be a little bit larger. Look at the case of the pandemic. Very appropriately, countries that had fiscal rules, for example, used the escape clauses to allow the fiscal deficits to rise. Conversely, in good times, it is important for governments to save a little bit more. So, stabilization is important, but it does conflict a little bit with the simplicity of the framework. So, for the gory detail, I am afraid I am having to point our readers to the report. I will end on that note.

Ms. Yan ‑ Thank you very much, Paolo. Thank you, everyone, for joining us today, and thank you for your excellent questions.

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