The International Monetary Fund (IMF) has urged governments to prioritise protecting vulnerable groups through targeted support while keeping a tight fiscal stance to help reduce consumer inflation.
This comes as food prices have risen by half since 2019 and supply disruptions have persisted in both food and energy markets, mainly due to the ongoing war in Ukraine.
IMF director of fiscal affairs Vitor Gaspar said yesterday that higher prices were threatening people’s standard of living everywhere, prompting governments to introduce a variety of fiscal measures, including price subsidies, tax cuts and cash transfers.
During the third day of the IMF/World Bank Annual Meetings in Washington DC, Gaspar estimated the median fiscal cost of such measures at 0.6% of national gross domestic product, on top of pre-existing subsidies, among countries for which estimates were available.
“Most governments face further pressure on public finances already strained by the pandemic,” Gaspar said.
“Rising inflation, weakening currencies and climbing interest rates have led to surging credit spreads in many countries and higher interest expense going forward.”
As a result, Gaspar said the global public debt was projected to remain elevated at 91% of gross domestic product in 2022, after receding from a historic high in 2020, and remained about 7.5 percentage points higher than pre-pandemic levels.
He said low-income countries were particularly vulnerable, with nearly 60% of the poorest economies in debt distress or at high risk of it.
Gaspar was speaking at the IMF’s release of its latest Fiscal Monitor report, which discusses how policymakers can approach these trade-offs, helping people bounce back from the current crisis and better cope with future challenges.
The report emphasises that policymakers should prioritise targeted support through social safety nets to the most vulnerable people facing high debt levels and rising borrowing costs.
It said that in some countries this might entail providing discounts on utility bills for basic usage to vulnerable low- and middle-income families.
“Faced with long-lasting supply shocks and broad-based inflation, governments should not attempt to limit price increases through price controls, subsidies, or tax cuts,” it said.
“Such a move would be costly to budgets and ultimately ineffective. With limited resources, many low-income countries will need greater global efforts in humanitarian assistance and emergency financing.”
The report also highlighted that governments needed to build resilience over time to a range of adverse shocks, and build fiscal buffers.
It said several fiscal tools that had proven useful during the pandemic could be made part of a more permanent toolkit, depending on countries’ capacity and available fiscal space.
Job-retention schemes, for example, proved effective during the pandemic by stabilising more than 40% of individual income loss in the EU.
“We have seen how major global crises during the past decade-and-a-half have led to innovative and forceful fiscal responses, against the backdrop of rising debt and constrained monetary policy,” Gaspar said.
“Countries should rethink the role of fiscal policy in a shock-prone era – how it can better buffer against losses during crises and build resilience –and learn from experiences across the world.”
BUSINESS REPORT
Now watch: