On public debt, Vitor Gaspar, Director, Fiscal Affairs Department said there is quite a sharp increase in public debt in 2020, and that is due to the need for decisive action to tackle COVID‑19.
“And fiscal policy was crucial to mitigate the impact of COVID‑19 on economic activity and developments in financial markets, while at the same time protecting lives and livelihoods. The mechanics of the increase in debt come from the widening of the primary deficit plus the sharp fall in economic activity”
Going forward, and over the medium term, Gaspar advised that there is a stabilization of the public debt to GDP ratio in the world at around 100 percent, with a slight downward trend towards 2025. That he said is explained by a narrowing of the primary deficit while there is a gradual recovery in economic activity in our baseline.
“So the immediate priority for the countries that can afford it is to continue fiscal support, sustain the recovery, and avoid long‑term scarring. But, of course, public finance risks associated with interventions of this magnitude have to be managed, and public debt is one of the legacy issues that has to be dealt with.”
The International Monetary Fund (IMF) has said that they have recommended to all countries around the world to emphasize their medium‑term fiscal frameworks in order to be able to “anchor fiscal policy along fiscal sustainability” and to contribute to resilient long‑run growth going forward.
Gaspar stressed that the equation is even more challenging for fiscally constrained economies. “They will have to prioritize the protection of the most vulnerable, eliminate wasteful spending and find the right balance between supporting the economy and facing rollover risks, increasing financing costs, and depleted buffers.”
Trade-offs can be especially painful and urgent in the poorest countries. We estimated the number of people affected by extreme poverty will increase by 80 to 90 million by 2020, even after accounting for COVID‑related social assistance.
The risk of malnutrition is equally on the rise. Access to health and education is threatened. The international community must act with debt relief, access to grants, and concessional financing now and going forward to help the poorest countries tackle these terrible challenges.
“Confidence in the global financial system requires that international financing be available for all countries that face temporary financial challenges. That is the purpose of the financing capacity of the IMF that now stands at US$1 trillion, of which just above one fourth is now committed.
For countries with unsustainable debt, options for orderly debt restructuring must be considered. Public investment can also support the transformation of our economies going forward.
Investment in health and education, in digital and green infrastructure can connect people, improve economy‑wide productivity, and improve resilience to climate change and future pandemics. Overall, fiscal policy can provide a bridge to smart, resilient, green, and inclusive growth.
By Zainab Iyamide Joaque