by Xinhua writer Xiong Maoling
WASHINGTON, April 20 (Xinhua) -- An International Monetary Fund (IMF) official has said that with the tightening of global financial conditions, it's important for policymakers to enhance global cooperation to tackle debt vulnerabilities "in a timely and in an orderly way."
"When you look at this issue of a crisis upon crisis, one aspect which is important to bear in mind is the legacies from this succession of economic and financial shocks," Vitor Gaspar, director of the IMF's fiscal affairs department, told Xinhua in a virtual interview earlier this week.
And one of the "legacies" is high debt levels all around the world, Gaspar said. The IMF estimates that almost 60 percent of low-income developing countries are in debt distress or at high risk of debt distress.
Globally, public debt is expected to fall in 2022 and then stabilize at about 95 percent of gross domestic product over the medium term, 11 percentage points higher than before the pandemic.
"In a context where inflation is high, monetary policy is pivoting to give priority to fighting inflation," Gaspar said. "When you have a global credit cycle tightening, the vulnerabilities associated with debt become much more pressing, much more visible."
According to the IMF's newly released Fiscal Monitor, the fiscal outlook is subject to "elevated uncertainty," as the full consequences of the Russia-Ukraine war and spillovers from sanctions on Russia are "unknown and will vary across countries."
"Governments' responses will be shaped against the difficult background of high and increasing inflation; slowdown in growth; high debt and tightening credit conditions," the report said, noting that fiscal policy has "a special role" to play when things go wrong.
Although inflation surprises can reduce deficits in the short term, their relief to public finances is usually "temporary," the report noted. "If inflation expectations and inflation volatility increase, government bonds become less attractive to investors, and the costs of borrowing rise," it said.
"It is true that the market for sovereign bonds benefits from price stability, because when you have credible price stability, the issuers of treasuries find a very willing market on the part of investors to absorb such assets," Gaspar said.
"With high and variable inflation, the demand for treasuries goes down," he continued. "So it's very important for the stability of sovereign bond markets that inflation is low and stable, that price stability is maintained."
That's why in the 2022 Spring Meetings of the IMF and the World Bank, one of the key messages is that major central banks "must act decisively to control inflation and inflation expectations, so as to deliver price stability over the medium term," Gaspar said.
"If that fails to materialize, the adjustment problems and transition costs are likely to be much more severe," he added.
The Fiscal Monitor report noted that high uncertainty and marked divergences across countries require a "tailored" and "agile" fiscal policy response, adding that in many emerging markets and low-income developing countries, "trade-offs are harsher. "
Sound and credible medium-term fiscal frameworks help to manage market expectations, containing sovereign borrowing costs, according to the report.
In the case of China, Gaspar said Chinese authorities "have the room to maneuver" to respond to current developments, despite the expectation that the country's public debt will rise in the next few years.
"We do see a need for adjustment over the medium term. And it is desirable that debt is stabilized over the medium term, but we do regard debt as sustainable," he said.
The IMF official added that the fiscal response of the Chinese authorities in 2022 is "appropriate" given that the economy has weakened more than previously anticipated.
Gaspar also highlighted the issue of global food security, which often impact the poorest countries and the most vulnerable households.
Giving high, rising and volatile food prices in a very uncertain situation, "it is imperative for governments to really focus on the priority of guaranteeing food security," Gaspar said.
"Countries that have good information systems, good social safety nets systems can act by using targeted cash transfers for the duration of this disturbance focusing on vulnerable households," said the IMF fiscal chief.
Low-income countries are especially vulnerable to food price rises, given the large share of food spending in their households' budgets, Gaspar said, adding that these countries need support from the international community.
At the global level, he added, there is a need for coordination to avoid export restrictions in particularly in the area of staple foods.
The latest Fiscal Monitor noted that measures to address immediate needs from high food and energy prices should not detract from action to tackle long-standing challenges such as climate change.
"We are off track to deliver on our ambitions for 2030. And so, the more we allow for fossil fuels to be used under the current circumstances in 2022, the more progress we will have to deliver in the remainder of the decade to be in the position to deliver on the ambitions of the Paris agreement of 2015," Gaspar said.
The IMF official also noted that he believes China is one of the most important stakeholders in the global economic order.
"I would insist that there are many areas where it is urgent that China and the global partners of China, U.S. India, European Union and others, get together, to make progress, " Gaspar said.
"Just think about health policy and the need to stop COVID-19 as a pandemic and to prevent and manage future pandemics. Just think about food and energy security in the world today. Just think about climate change and let's not forget debt and development," he said.
"In all of these areas, the contribution from China is absolutely necessary," he added. ■
