Fiscal Monitor Press Briefing 2022 Annual Meetings
IMF News, October 12, 2022
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Bibliographic details
- Published: October 12, 2022
Overview and context
- Date: October 12, 2022
- Speakers: Vitor Gaspar (Director, Fiscal Affairs Department); Paolo Mauro (Deputy Director, Fiscal Affairs Department); Paulo Medas (Division Chief, Fiscal Affairs Department); Nicolas Mombrial (Moderator, Communications Department)
- IMF Communications contact: MEDIA RELATIONS, PRESS OFFICER: Nico Mombrial, Phone: +1 202 623-7100, Email: MEDIA@IMF.org
Global fiscal outlook and recent dynamics
- After an unprecedented expansion in 2020, monetary and fiscal policies have been "pivoting towards simultaneous tightening in 2022."
- Deficits: "deficits falling from 9.7 percent of GDP in 2021 to 4.7 percent of GDP in 2022."
- Drivers of recent fiscal changes: economic recovery, unwinding of pandemic‑related measures, and "inflation surprises".
- Cautions about inflation: "Once inflation becomes broad‑based and persistent, inflation expectations catch up. High and volatile inflation makes credit more expensive and its costs less predictable."
- Market sensitivity: "recent developments in bond markets show increased market sensitivity to deteriorating or weak fundamentals."
- Vulnerabilities: "Debt raises the specter of more frequent and widespread fiscal crisis."
Crisis responses: survey findings and policy shortcomings
- Survey coverage: measures taken in the first half of the year across "174 countries" with "about 750 measures."
- Composition by motive:
- Advanced economies: actions motivated by the energy surge dominate.
- Developing economies: food is "relatively much more relevant."
- Common policy measures: reductions in consumption taxes, custom duties, and energy subsidies aimed at dulling price pass‑through.
- Assessment of measures:
- Some measures were necessary for urgency, but "most have not been targeted enough."
- Risks of broad energy support: maintaining domestic demand at pre‑crisis levels is "not economically viable" and reduces available energy resources globally.
- Recommendation: use targeted measures or expand existing social safety nets to reconcile support for the most vulnerable with efficient resource allocation.
Poverty, food insecurity, and emergency financing
- Reversal of progress: "after decades of reduction in extreme poverty, extreme poverty has increased in the world, and it is projected to stay well above the pre‑pandemic expected path going forward."
- Food insecurity and nutrition: "food insecurity has increased significantly, as has the number of people that suffer from under‑nourishment."
- Africa specifics:
- "Some estimates indicate that more than 120 million people in Africa alone are suffering from food insecurity."
- World Bank estimate cited: "11 million more people will enter extreme poverty now than what would have been expected under pre‑pandemic trends."
- Debt distress: "19 out of 35 low‑income countries in Africa are already in debt distress or at high risk of debt distress."
- IMF tools and calls for collective action:
- Emergency financing: "some emergency financing will be available through the new Food Shock Window under the IMF's emergency financing toolkit."
- Additional measures needed: "lifting restrictions on food and fertilizer exports" and "rechanneling of wealthier countries' allocations of the IMF's Special Drawing Rights to poorer countries."
- Orderly debt treatment: need for "an orderly debt restructuring mechanism and forms of debt relief."
- IMF support since 2020: "the Fund has provided about 50 billion in financial support in different ways, through financing instruments, through debt relief, and through the expansion of SDRs."
Fiscal policy priorities and policy mix
- Fiscal policy priorities recommended:
- "a fair and broad‑based tax system"
- "a comprehensive and scalable social protection system"
- "building fiscal buffers and a return to fiscal rules"
- On policy mix and coordination with monetary policy:
- In the context of "high inflation, high debt, rising interest rates and elevated uncertainty," "consistency between monetary and fiscal policy is paramount for economic and financial stability."
- When inflation is the dominant priority, alignment of fiscal and monetary policy "is beneficial for the credibility of the disinflation policy stance, and it reduces the costs of disinflation."
- Mechanism for recent debt-to-GDP dynamics: in many advanced economies, with central banks at the effective lower bound, increased inflation reduced real interest rates and helped lower debt ratios via a denominator effect on nominal GDP.
Governance, social contract, and political economy
- Fiscal policy is intrinsically political; the Fiscal Monitor emphasizes that fiscal action in crises should be part of the social contract: governments that provide insurance in bad times should "build buffers and participating in the upside in good times."
- Suggestions to reduce social unrest risks:
- Strengthen fiscal transparency and governance so taxpayers "have the feeling that, when they are taxed, their money is well used."
- Consider more progressive taxation, including "taxation of rents, taxation of excess profits," especially in crises.
- Prioritize targeted food support over broad energy subsidies given political sensitivity of food and the high fiscal cost of universal energy subsidies.
Digitalization, social protection, and GovTech
- Digital delivery of cash transfers: India cited as an "impressive" example leveraging Aadhaar and mobile banking to reach hundreds of millions efficiently.
- IMF Fiscal Affairs Department (FAD) has a "gov tech" program to apply new technologies and digitalization to public administration and is collaborating with India and other countries.
- Recommendation: countries can learn from diverse international examples to improve targeting and scalability of social programs.
Regional and country notes (selected)
- Nigeria and similar cases:
- Countries with double‑digit inflation and high deficits should align fiscal policy to help monetary authorities ensure price stability.
- Commodity windfalls: oil exporters should consider saving part of higher commodity revenues to reduce debt and address emergencies.
- Low tax ratios: "tax revenues are really low" in some countries, undermining capacity to respond; domestic revenue mobilization is essential.
- Italy:
- Italy's debt‑to‑GDP rose considerably in 2020; IMF's "latest estimate" indicates a public debt‑to‑GDP path "below what we were forecasting one year ago" with a forecasted slow decline.
- Primary deficit in 2023 and 2024 "is already very close to the pre‑pandemic projected path." Emphasis on growth, sustainable growth, and structural reforms seen as a prudent strategy for a shock‑prone world.
Key policy recommendations (summary)
- Prioritize macroeconomic and financial stability by staying the budget on a tightening course in most countries.
- Target support to the most vulnerable (especially for food) and avoid untargeted, broad energy subsidies.
- Scale up domestic revenue mobilization and improve spending quality to create fiscal space.
- Strengthen social protection systems that are comprehensive, scalable, and digitally enabled.
- Pursue coordinated global action on food exports, fertilizer restrictions, SDR rechanneling, and debt relief/restructuring.
- Ensure consistency between fiscal and monetary policy to reduce the costs of disinflation and preserve market confidence.
- Accelerate climate transition financing and close ambition/implementation gaps at multilateral fora (COP27 referenced).
Transcript: Fiscal Monitor Press Briefing, October 12, 2022 — IMF Communications Department