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COVID-19 causes major increase in fiscal deficits, public debt ratios: IMF - Daily News Egypt

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COVID-19 causes major increase in fiscal deficits, public debt ratios: IMF

Transparency is crucial to managing fiscal risks, says Fiscal Monitor report


The economic consequences of the ongoing coronavirus (COVID-19) outbreak will cause a major increase in fiscal deficits and public debt ratios, the International Monetary Fund (IMF) said in its Fiscal Monitor report on Wednesday.

The  health expenditure, tax, and spending measures required to support people and business will also have direct fiscal costs. The expenditures, currently estimated at over $3tn globally, support financial and non-financial enterprises, whilst also create fiscal risks, the report added.

The cash injections that governments worldwide are currently injecting into their economies include public sector loans and equity injections, worth $1.8tn, and guarantees and other contingent liabilities worth $2tn.

Based on policy responses to date, fiscal balances in 2020 are expected to almost universally deteriorate. Sizable estimated expansions will occur in the US, China, and several European and other Asian economies, the report said.

Although a sizable increase in deficits this year is necessary and appropriate for many countries, the starting position in some cases presents vulnerabilities as global public debt was 83% of GDP in 2019.

The situation is more worrisome for emerging markets and developing economies that face multiple shocks. These include the pandemic, an abrupt worsening in financing conditions, weak external demand, and (for commodity exporters) lower commodity prices.

Even after the global community’s efforts to alleviate such constraints, these countries will need to reprioritise expenditure toward the health sector. At the same time, they will need to safeguard key public services such as transport, energy, communications and social protection.

The size of the coronavirus’ impact on public finances is currently highly uncertain, and will depend not only on the pandemic’s duration. It will also depend on whether the economic recovery is swift or the crisis casts a long shadow, the report said.

As public sector support is provided on an extraordinary scale, including loans and guarantees, transparency is crucial to managing fiscal risks. As countries contain the pandemic and shutdowns end, broad-based, coordinated fiscal stimului depend on each country’s financing constraints. These will become a more effective tool to foster the recovery.

Exiting the exceptional measures introduced during the crisis will also be appropriate, the report said. It added that once economies recover, achieving progress on ensuring debt sustainability will be needed.

The human cost of the pandemic has intensified at an alarming rate, and the impact on output and public finances is projected to be massive. Government responses should be swift, concerted, and commensurate with the severity of the health crisis, with fiscal tool staking a prime role.

The first priority, that of saving lives, requires spending on testing and treatment. This in turn calls for global coordination, including support to countries with limited health capacity. They would receive grants and concessional financing, and the development of a universally low-cost vaccine, the report said.

Saving lives also requires social distancing, which is a key component of collective protection domestically and globally, that imposes even larger costs through lower output, lower tax revenues, and the need to protect the most-affected people and firms, said the report.

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