Policymakers should carry on with stimulus measures and let cheap borrowing costs ease their fears, Fund officials say.
Global economies should extend fiscal relief to households and businesses at least into 2021 to avoid long-lasting scarring from the pandemic-driven recession, the International Monetary Fund said, adding that high levels of debt do not pose an immediate concern.
The COVID-19 health crisis triggered unprecedented global fiscal response of about $12 trillion as governments reacted with impressive speed to provide critical lifelines such as loan guarantees and wage subsidies to households and businesses hurt by lockdowns and illnesses. Such lifelines are likely to remain critical for some time, to ensure economic and financial stability, according to the IMF.
“Pull the plug too early, and then we can see serious, self-inflicted harm,” IMF Managing Director Kristalina Georgieva says. “Avoid, avoid doing that.”
Global government debt is forecast by the IMF to soar to almost 100% of GDP this year, driven by surging deficits and a deepening economic contraction. Global economic output is expected to contract by 4.4% this year. And over the next five years, the crisis could cost $28 trillion in output losses, the IMF says.
The high debt level, however, is not of immediate concern, according to the IMF. Benefiting from cheaper borrowing costs, the world economy will see public debt stabilize at this year’s level until 2025, according to IMF forecasts in the Fiscal Monitor report.
Cheap borrowing conditions will also allow benefiting countries—mostly advanced economies—to worry about fiscal consolidation later.
Public investment has a positive impact on GDP growth, the IMF says. Increasing public investment by 1% of GDP in advanced and emerging market economies would create between 20 million and 33 million jobs overall, according to the IMF forecasts.
An Uneven Ascent
Despite extreme uncertainty about the fight against COVID-19 and the ultimate exit from the crisis, the IMF sees a partial and uneven recovery next year, with growth of 5.2%.
“All countries now face a long ascent, a journey that will be difficult, uneven, uncertain and prone to setbacks,” Georgieva says, citing the rising number of COVID-19 infections in several parts of the world.
The uneven outlook means poorer countries are once again those likely to suffer the most. Low-income developing countries have limited fiscal room to respond to the pandemic.
In emerging market and middle-income economies, fiscal deficit is projected to widen by about 6 percentage points of GDP this year compared to 2019, with Brazil and South Africa taking the lead. The deficit bump is almost half as large as the increase in advanced economies, according to the IMF.