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23-10-2020 | Insight

IMF cheers on fiscal deficits

  • Jaap  van der Hart
    Jaap
    van der Hart
    Equity Fund Manager

In October, the IMF published the World Economic Outlook. The ‘good’ news is that the projected global growth for 2020 is -4.4%. While undoubtedly dire, this figure represents a less severe contraction than anticipated in June. Economic recovery began sooner than expected as lockdowns were gradually scaled back in the second quarter of this year.

Worldwide governmental monetary and fiscal support sought to limit the economic impact of the pandemic and to support the economic recovery. The consequences are, however, massive fiscal deficits and rising government debt. Debt as a percentage of national income had already shot up considerably in the period following the 2008 global financial crisis. 

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Yet, it is now soaring to record highs as a result of the ‘Great Lockdown’ and is reaching levels comparable to those after World War II. Emerging markets are also seeing historic government debt levels.

No warning this time

Normally, this type of towering debt would have triggered a warning from the IMF. But now the IMF is actually underlining the importance of government spending in stabilizing the economy. It goes without saying that this is due to the unparalleled situation we find ourselves in, but the tone is different this time round as well. 

In the Fiscal Monitor, also published this October, the IMF applauded government investments, stressing their positive effect on the economy. It also recommended investing in sustainable energy and urged governments to inject capital into society’s poorer populations. “Fiscal policy can be a bridge to smart, resilient, sustainable, and inclusive growth”.

The IMF also advocates only gradually scaling back government support next year, when, hopefully, the Covid-19 pandemic will be under control. It is then that concerns over long-term debt sustainability will resurface. This will apply in particular to countries that were already in a weaker financial position to start with, such as South Africa, Brazil and India. 

But for now, enough money is flowing into emerging markets, helped by the generous monetary and fiscal policies across the globe. The priorities for now are taming the Covid-19 virus and safeguarding the economic recovery – budget deficits will be addressed in 2021, with moral support from the IMF.

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