Coming Together
IMF Blog, August 10, 2021
Source details
- Canonical URL
- Coming Together
Other formats
Bibliographic details
- Authors: Vitor Gaspar, Gita Gopinath
- Published: August 10, 2021
Growing divergence and human costs
- Differences in vaccine access and the ability to deploy policy support are creating a growing divergence between advanced economies from many emerging market and developing economies.
- Without resolute measures to address this growing divide, COVID‑19 will continue to claim lives and destroy jobs, inflicting lasting damage to investment, productivity, and growth in the most vulnerable countries.
- The pandemic will further disrupt the lives of the most vulnerable, and countries will see a rise in extreme poverty and malnutrition, shattering all hope of attaining the Sustainable Development Goals.
- Narrowing the pandemic divide requires collective action to boost access to vaccines, secure critical financing, and accelerate the transition to a greener, digital, and more inclusive world.
Securing finance: fiscal pressures and IMF support
- Average overall fiscal deficits as a share of GDP in 2021:
- 9.9 percent for advanced economies
- 7.1 percent for emerging market economies
- 5.2 percent for low-income developing countries
- Global government debt is projected to approach 99 percent of GDP by the end of 2021.
- IMF emergency finance and relief:
- The IMF has extended $117 billion in new financing and debt service relief to 85 countries.
- This includes financial assistance to 53 low-income countries and grant-based debt service relief to 29 of its poorest and most vulnerable members.
- IMF support is estimated to have allowed additional spending in 2020 of about 0.5 percent of GDP in emerging market economies and nearly 1.0 percent of GDP in developing countries.
- Consequences for spending:
- Favorable global financial conditions enabled low credit risk countries to deploy sizable and durable expansions in government spending.
- In countries with more limited access to external financing, primary spending is now projected to be even lower than forecast before the pandemic.
- Examples of collective financing:
- The Next Generation European Union (NGEU) fund, of which 50 percent is grants, has been an important financing source for EU member states with limited fiscal space.
- The recently approved general allocation of $650 billion of SDRs by the IMF will provide countries with additional liquidity cushions and help them address difficult policy trade-offs.
- The IMF is engaging with its members on a new facility—the Resilience and Sustainability Trust—aimed at helping emerging and developing economies meet the challenges of climate change and build resilient economies.
- Channeling of SDRs from rich nations to developing nations is identified as a way to further boost support.
Vaccines, diagnostics, and multilateral proposals
- IMF staff’s recent $50 billion proposal, endorsed by WHO, World Bank, and WTO, sets targets:
- Vaccinating at least 40 percent of the population in every country by the end of 2021
- Vaccinating at least 60 percent by mid-2022
- Alongside ensuring adequate diagnostics and therapeutics
- The Taskforce on COVID-19 Vaccines has launched a dashboard to identify and urgently address gaps in access to COVID-19 tools.
- Progress has been made across several fronts, but a stronger push is needed to close gaps in access to vaccines and bring about an end to the pandemic.
Revenue mobilization, tax policy, and public spending quality
- COVID-19 has aggravated tensions between large development needs and scarce public resources; governments will have to mobilize resources at home and increase the quality of spending.
- To raise much-needed revenue, governments will need to strengthen tax systems despite challenges:
- Tax competition, issues in allocation of the tax base, and aggressive tax planning techniques have put income taxation under pressure.
- Recommended directions for revenue and spending:
- Improve efficiency, simplify tax codes, reduce tax evasion, and increase progressivity.
- Strengthen state capacity to collect taxes and leverage the role of the private sector.
- Ensure fiscal policy remains agile and responsive while the pandemic persists.
- International tax cooperation:
- An historic international corporate tax agreement endorsed by more than 130 countries includes a corporate income tax rate floor of at least 15 percent.
- The agreement aims to stop the race to the bottom in international corporate tax and should be worked out so it helps deliver resources for investments in health, education, infrastructure, and social spending in developing countries.
Policy implications and collective action
- Collective actions can help narrow divides and secure financing for the most vulnerable countries, but IMF assistance alone will not suffice; other sources of donor support will also be needed.
- The urgency of global challenges—COVID-19, climate change, and inclusive development—requires global action.
- The authors characterize 2021 as a decisive moment and "the year of coming together."
Vitor Gaspar, Gita Gopinath. August 10, 2021.