Freetown, SIERRA LEONE – In addressing the challenges posed by soaring public debt, the International Monetary Fund (IMF) emphasizes the necessity for a renewed emphasis on fiscal policy, asserting that it must be adapted to meet current demands. Gita Gopinath, IMF’s First Deputy Managing Director, highlighted four crucial priorities during her introductory remarks at the IMF Conference on “Fiscal Policy in an Era of High Debt.”
Firstly, Gopinath emphasized the growing demands on government budgets, ranging from social support to funding the green transition and increased defence spending. In the face of political resistance to spending cuts or tax hikes, she cautioned against relying on debt-financed spending, stating that such a move could lead to an unsustainable debt trajectory as borrowing costs escalate.
Governments, she asserted, must reassess their roles, recognizing that they cannot be the primary insurer for all shocks. Revenues must align with spending, and the IMF must balance cautionary policy advice with an understanding of the economic and social factors influencing political choices.
Secondly, Gopinath underscored the importance of understanding the interactions between monetary and fiscal policies. She noted instances where fiscal and monetary policies were not aligned, complicating the fight against inflation. As an example, she pointed to significant fluctuations in long-term government bond yields and questioned their implications for monetary policy, especially in advanced economies.
The third priority highlighted the need for evaluating vulnerabilities arising from both public debt levels and the composition of debt, considering factors such as the identity of creditors, currency, and maturity composition.
Lastly, Gopinath stressed the importance of assisting countries in achieving a sustainable fiscal path. While acknowledging that reducing debt ratios involves limiting budget deficits, she emphasized the need for effective fiscal rules with clear mechanisms to address non-compliance. Independent fiscal councils, she suggested, could enhance checks and balances in this regard.
In her comprehensive address, Gita Gopinath urged global cooperation and concerted efforts to address the challenges posed by mounting public debt, emphasizing the importance of adapting fiscal policies to current global economic realities. ZIJ/20/11/2023