The fiscal monitor of the International Monetary Fund (IMF) is prepared to analyse the latest public finance developments, update fiscal implications of crises and asses policies to put public finances on a sustainable footing.
The report is prepared twice in a year by the agency’s fiscal affairs department and its projections are based on the same database used for the World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR).
The just released 2020 second edition of the monitor is tagged: policies for the recovery and it emphasises the importance of not pulling the fiscal support plug too soon and also makes a case for public investment in the journey to recovery.
The COVID-19 pandemic has increased the financial needs of virtually every economy around the world, both in advanced, emerging and low-income countries.
Although, countries across the world are facing record-high public debt levels and limited access to further obtain fiscal support, more needs to be done to prevent a large rise in poverty and income inequality as well as promote strong recovery.
On the fiscal recovery roadmap, this edition of the fiscal monitor outlined three flexible phases that fiscal strategies should adapt to: the outbreak with lockdowns, partial reopening under uncertainty, and a high degree of control of the virus through medical advances.
The monitor has, however, stated that “policymakers will need to tailor recovery measures to their country-specific conditions.”
Devotion must be to the health sector and the provision of lifelines to people and firms in the lockdown phase
In this phase, fiscal policy should be largely devoted to fully accommodating additional health and emergency services to fight the pandemic, and lifelines must be provided to protect the most affected people and firms, according to the fiscal monitor.
Also, the monitor stated that all “fiscal measures should be complemented with actions by central banks and regulators with effective health measures following prompt and continued government support which can help facilitate recovery.”
Public health must remain a priority in the phase of gradual reopening under uncertainty
Economic activities will remain depressed if the easing of social distancing measures is not followed with public confidence that the pandemic is being brought under control, according to the fiscal monitor.
Resources should also be directed to fund smart containment strategies comprising intensive testing and tracing, localised mobility restrictions, and real-time risk assessment.
“As many countries have limited fiscal space, resources should be prioritised toward safeguarding enhanced safety nets and reopening the economy,” stated the fiscal monitor.
Public investment can make a crucial contribution toward the goal of economic recovery
Especially in the partial reopening phase, governments need to prepare their economies for a safe and successful reopening, foster a recovery in employment and facilitate transformation to a post-pandemic economy that can be more resilient.
The fiscal monitor stated that “public investment and its crowding-in effects on private investment can mitigate secular stagnation and the savings glut which predates the onset of the pandemic but has been made worse since uncertainties have dampened private investment.”
“Public investment can encourage investment from businesses that might otherwise postpone their hiring and investment plans,” said IMF.
The case for public investment is, however, strongest in many advanced and emerging economies that have low interest and inflation rates and can easily finance an investment scale up.
For low-income economies to benefit from public investment, the IMF has said that governments must meet the “Sustainable Development Goals (SDGs) call for reallocating spending, enhancing domestic revenue mobilisation, and improving investment efficiency.”
The investment must be timely and efficient with first priority given to “maintenance spending and existing projects, as the implementation of new projects too quickly will impede investment quality.”
On another hand, the fiscal monitor stated “government should identify a pipeline of projects that can be carefully appraised and ready for implementation within the next 24 months and then followed by projects with a longer timeline particularly projects that increase resilience to crises and climate change.”
The third pointer from the IMF dwells on the strengthening of procedures for selection and procurement of investment projects.
“Project outcomes are more often disappointing, and short and long term fiscal multipliers are lower in countries with weak public investment management practices,” said IMF.
1% increase in public investment as a percentage of GDP can push GDP up by 2.7%
The fiscal monitor estimates that “a 1 percent of GDP increase in public investment, in advanced economies and emerging markets have the potential to push GDP up by 2.7 percent.”
The estimates get even more interesting as slight improvements to public investment can “boost private investment by 10 percent and most importantly help to create between 20 and 33 million jobs, directly and indirectly.”
Governments must, however, ensure that they allocate resources for digital investment, to train displaced workers and allow them to move to jobs that satisfy pandemic and post-pandemic needs.
The international community has a role to play in the recovery of economies
The October edition of the fiscal monitor addressed that fiscally constrained countries require a high level of financial support from the international community.
In the face of spending reallocation, investment efficiency, and domestic revenue mobilisation, “official aid will also be needed to support low-income developing countries through the crises they are facing,” stated the report.
Although, private finance for cleaner activities has increased rapidly at the global level since 2008, it is, unfortunately, less viable for these countries since they have limited access to capital markets.
The recovery needs that will require the aid of the international community include: easy and low-cost access to vaccines when they are ready, development of digital infrastructure to mitigate the effect of the pandemic on the economy and human capital, and investment in adaptation in light of the looming global warming.
When the pandemic is finally under control, the goal will be to promote an inclusive and green recovery
According to the fiscal monitor, when therapies become widely accessible, the goal will be to promote an inclusive and green recovery as well as the structural transformation of the economy.
Also, in this third phase, higher corporate and public debts would have to be addressed to return them to sustainable levels so as to ensure that every fiscal buffer is available in the face of another unexpected crisis.
