## The Policymaker’s Trilemma

_IMF Blog, May 12, 2021_

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## Bibliographic details
- Authors: Abebe Aemro Selassie, Andrew Tiffin
- Published: May 12, 2021

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### Context and framing
- Region: sub-Saharan Africa.
- Pandemic context: second wave eased earlier in the year, risk of further waves as winter approaches.
- Global backdrop: global recovery well underway; key economies rebounding sharply; global trade improved; commodity prices higher; investment flows resumed.
- Near-term outlook for sub-Saharan Africa: growth prospects described as somewhat more subdued while widespread vaccination remains out of reach.

### The three challenges (the trilemma)
- Immediate challenges facing finance ministers:
  - Meet increased spending needs.
  - Contain a pronounced increase in public debt.
  - Mobilize more tax revenues.
- Tradeoffs: addressing one element typically comes at the expense of one or both of the others (e.g., higher spending requires more debt or higher taxes; boosting tax revenue can support spending or help contain debt).

### Demand for government spending — key findings
- Pre-existing development needs were already daunting in the context of rapid population growth.
- The crisis setback: the region’s development path has been set back by almost a decade.
- Labor market and poverty impacts in 2020:
  - Regionwide employment fell by about 8½ percent in 2020 due to COVID-19.
  - More than 32 million people were thrown into poverty.
  - Disruptions to education have jeopardized the prospects of an entire generation of schoolchildren.
- Distributional impact: a large proportion of the region’s most marginalized workers were concentrated in some of its hardest-hit sectors, adding to inequality.
- Demographic pressure: by 2030 nearly one in two new entrants into the global labor force will come from sub‑Saharan Africa.

### Rising concerns about debt — key statistics
- Public debt increased to almost 58 percent of GDP in 2020 — the highest level in almost 20 years and a jump of more than 6 percentage points in just one year.
- Interest burden:
  - Interest payments reached a worrying 20 percent of tax revenue for the region as a whole in 2020.
  - Interest payments exceeded one-third of revenue in a number of cases, diverting resources from social and development needs.

### Limited progress in raising tax revenues
- Tax revenue mobilization remains the main policy lever to bridge spending pressures and sustainable public debt, but progress has typically been slow.
- Country-specific needs for mobilization:
  - Streamlining exemptions for some countries.
  - Increasing efficiency of existing tax systems for others.
- Political and social constraints: raising taxes is politically difficult, especially given businesses and households have fewer resources post-crisis.
- Temporary relief measures: in some countries, many relied on tax forbearance or delayed tax payments to get through the year.

### Policy recommendations and measures to relax the trilemma
- Immediate international support priorities:
  - Ensure swift and affordable access to vaccines.
  - Provide resources through grants and concessional financing.
  - Extend the G20 Debt Service Suspension Initiative.
  - In some cases, provide debt treatment under the Common Framework.
- Domestic policy priorities (bold and transformative reforms):
  - Strengthen transparency and governance reforms to lift the efficiency of public spending and target resources to those who need it most.
  - Improve tax administration, including through the use of new digital technologies, to broaden the tax base.
  - Raise more revenue in ways that protect the vulnerable and support growth.
  - Adopt medium-term fiscal frameworks to balance short-term supportive fiscal stance with medium-term consolidation to contain borrowing costs and sustain confidence, especially where debt is high and financing tight.
  - Accelerate reforms to promote private sector activity and economic diversification to lift potential growth, resilience, and job creation.
- IMF role: provide program engagement, emergency financing, technical assistance, and policy advice; stands ready to help.

*Source: The Policymaker’s Trilemma — Abebe Aemro Selassie, Andrew Tiffin, May 12, 2021.*

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_Source: https://www.imf.org/en/blogs/articles/2021/05/12/blog-the-policymakers-trilemma_