Lima, April 12, 2021.- The global average of public debt approached 97% of gross domestic product (GDP) at the end of 2020, and is expected to remain just below 100% in the medium term, said the International Monetary Fund (IMF) in its Fiscal Monitor of April 2021.
It believes that, despite the increase in debt, average interest payments have generally declined in advanced economies and in many emerging markets, given the downward trend in market interest rates.
Under their mandates, central banks lowered policy rates and bought bonds, facilitating fiscal responses to the pandemic.
For low-income countries, however, financing large deficits remains a problematic task, given limited market access and little scope for short-term revenue growth, is indicated in the report.
As a result, it indicates, these countries need to receive assistance through grants, concessional financing, or, in some cases, debt restructurings.
"Over the medium term, fiscal deficits are projected to contract in countries in all income categories as the pace of recovery accelerates and fiscal adjustments resume."
Therefore, for most countries, it is expected debt-to-GDP ratios to stabilize or decline, although public debt will continue to increase in a few countries due to factors such as aging and development needs.
The uncertainty surrounding the fiscal outlook is unusually high, the IMF points out.
"The upside is the progress of vaccination at a faster than expected pace that could bring forward the end of the pandemic, which would stimulate revenue collection and reduce the need for further fiscal support," it stresses.
On the downside, it is estimated that the recovery could be hindered by a more protracted economic slowdown, a tightening of financial conditions amid heavy borrowing, an increase in corporate bankruptcies, volatile commodity prices or worsening social unrest.
In general, the longer the pandemic continues, the greater the challenge for public finances, it adds.
Given this backdrop, the IMF states that fiscal policy priorities are to continue to provide support as needed as the vaccination progresses and as the recovery takes hold.
There, it highlights implementing without delay the announced fiscal measures by strengthening capacities for project implementation and improving procurement procedures; undertaking a green, digital and inclusive transformation of the economy; and addressing long-standing deficiencies in public finances once the recovery has taken hold.
Also, it includes outlining a medium-term strategy to manage fiscal and financial risks; and renewing efforts to achieve the Sustainable Development Goals (SDGs).
Proposals for actions
In order to meet these priorities, the IMF recommends expanding global cooperation to contain the pandemic, especially by accelerating affordable vaccination in all countries.
In a favorable scenario in which the pandemic is brought under control sooner in all countries, more dynamic economic growth by 2025 would generate more than $1 trillion in additional tax revenues in advanced economies, on a cumulative basis, and save billions more in fiscal support measures.
In this way, vaccination would pay for itself, and would provide an excellent return on the public money invested in the global scale-up of vaccine production and distribution. Measures should be better targeted and tailored to countries' administrative capacity so that fiscal support can be maintained for the duration of the crisis, bearing in mind that recovery may be uncertain and uneven. "In view of the low interest rate environment, a synchronized green public investment campaign by countries with fiscal space can stimulate global growth," the multilateral entity adds.