The International
Monetary Fund (IMF) on Wednesday said that governments around the world will
have to rebuild fiscal buffers over medium and long-term period after having
spent $11.7 trillion in response to the COVID-19 pandemic.

Vitor
Gaspar, director of the IMF’s Fiscal Affairs Department, said swift and decisive
fiscal action was crucial in saving lives, along with supporting vulnerable
people and firms and soften the economic fallout, PTI reported.

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However, a
sharp increase in primary deficits and the decline in economic activity caused
the global public debt to shoot up to 100% of the GDP in 2020.

“Going
forward, over the medium-term, public debt is projected to stabilise, at a high
level – close to 100% of GDP – up to 2025,” Gaspar told PTI.

“In our
view, the priority is to bring COVID-19 under control. As for fiscal policy, it
is important to avoid premature withdrawal of fiscal support. It is necessary
to sustain the recovery and to avoid permanent scarring to economies and
societies,” he added.

Gaspar said
that the composition of fiscal support should change over time, while the
support for firms and workers should shift towards facilitating resource
reallocation and economic transformation, including investment in people and
capital.

“Countries
will need to rebuild fiscal buffers over the medium term to long term. It is
important to think ahead about long term challenges. It is also important to
reinforce the respect for principles of transparency and good governance,”
Gaspar said.

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The virus,
which has killed over a million people globally, has triggered a substantial increase
in public finance risks, with a medium to long term fiscal framework helping countries
to deal with the relevant trade-offs over time.

“For
example, for countries with fiscal space and deeper scarring, a slow reduction
in the fiscal deficit could be appropriate. That would be particularly the case
if the increase in debt were used efficiently to finance productive public
investment. Under such conditions the favourable impact on growth could even
foster public finance resilience,” he explained.

However,
for countries dealing with financial constraints, rising financing costs and roll-over
challenges, fiscal consolidation is necessary for a stable and sustainable recovery,
the IMF official said, adding that some developing nations will need more financial support
and debt relief.

“Budget
support has amounted to more than nine per cent of GDP in Advanced Economies
(AEs) and to about four per cent of GDP in Emerging and Developing Economies
(EMDEs). Financial support including equity injections, loans, and credit
guarantees, amounted to another 11 per cent of GDP in AEs and two per cent of
GDP in EMDEs,” he said.

The varying
size and composition of the policy support across countries reflects their
underlying fundamentals, health capacity and preparedness, available fiscal and
borrowing space and difference in timing of infections, he said.

Gaspar said
that the first priority for governments was to support health systems, adding
that countries also adopted lifelines to protect households, workers and
businesses.

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“Financial
support measures, such as equity injections and direct or guaranteed loans have
been necessary to prevent bankruptcies and mass layoffs. Countries have also
used temporary tax deferrals and cuts which have helped maintain businesses’
cash-flow,” Gaspar said.

He said that
fiscal policy for the future will depend on the evolution of COVID-19 and its
economic implications, adding that it is necessary to form contingent plans given
the uncertainty over the situation.

“The Fiscal
Monitor emphasises the importance of not removing fiscal support too soon or
too fast. The consequences of doing too little are worse than doing too much.
But countries will also need to plan for a gradual adjustment to bring deficits
down and stabilise debt.”

Flexible use
of a set of fiscal measures is necessary to navigate tentative reopening and to
facilitate structural transformation to a new, post-pandemic economy, Gaspar
said.

“Specifically,
as lockdowns ease and become more selective, governments should ensure that
lifelines are not withdrawn too rapidly. Improvements in the ability of social
protection systems to reach, target, and deliver benefits to the most
vulnerable people should be preserved.”

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When health
risks are mitigated, support should shift from protecting employee-firm relationships
to helping workers find new jobs, helping vulnerable firms reopen and
supporting structural transformation.

“Given
the unprecedented nature of the shock, the immediate priority in India is a
comprehensive policy response to fight the virus, prevent long-term damage to
productive capacity, and provide social insurance to the most vulnerable.
Although medium-term fiscal consolidation will be necessary, fiscal support can
and should be deployed as needed to support the poor and kickstart the
recovery,” he said.