Interview: IMF official sees "great financing divide," warns of pandemic's scarring effects on poor countries

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by Xiong Maoling, Tan Yixiao

WASHINGTON, Oct. 13 (Xinhua) -- An International Monetary Fund (IMF) official has voice his concerns over a "great financing divide" between advanced economies and low-income developing countries, warning of the pandemic's scarring effects and calling for strengthened multilateral efforts.

"In the case of low-income developing countries, there is a very persistent financing gap. And we sometimes label this financing gap into contrast with advanced economies as one important aspect of a great financing divide," Vitor Gaspar, director of the IMF's Fiscal Affairs Department, told Xinhua in a remote interview earlier this week.

In advanced economies, fiscal policy remains supportive of economic activity and employment, while in emerging markets and low-income developing countries, fiscal support -- already more limited -- is waning further due to tightening financing constraints, according to the IMF's latest Fiscal Monitor released Wednesday.

IMF estimation showed that aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 percent in 2024. By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 percent below the pre-pandemic forecast in 2024.

Overall poverty is expected to decline in 2021, partly offsetting the large increase in 2020, but an estimated 65 million to 75 million more people will fall into poverty by the end of 2021 than the case without the pandemic.

"So despite the fact that in the aggregate, we have a situation that looks relatively benign in advanced economies, when you go deeper ... you actually see that the potential for lasting scarring effects is much greater than the aggregate figures would suggest," Gaspar said.

Noting that it's very important to ensure that resources are available where they're most needed, the IMF official said the multilateral lender's rapid financing facilities have made a difference, and the largest Special Drawing Rights (SDR) allocation in history makes liquidity available to vulnerable countries.

"But we believe that more is needed," Gaspar said. "And in particular voluntary channeling of SDRs by countries that have a comfortable external position (to low-income developing countries)."

"I would call it enlightened self-interest," Gaspar said. "At this point in time during our annual meetings, we very much call the attention of the world to three major problems of a global nature, the great vaccine divide, the great financing divide and climate change."

The IMF fiscal chief noted that all these global problems require "complementary, decisive" actions at the national level and at the global level, adding that such actions should be rolled out in a "harmonious" way.

Fiscal packages in the European Union and the United States -- in implementation and in consideration -- are expected to have positive global effect overall, according to the Fiscal Monitor, which also cautioned against adverse spillovers for some countries.

"They support growth and sustainability in the U.S. and in Europe, but they do more than that. They impact positively GDP growth around the world. They impact trade positively. They do sustain employment, and those are the positive spillovers," Gaspar said.

There are, however, "exceptions" and countries do not benefit uniformly from these positive spillovers, Gaspar noted. "It depends on the strength of their trade links with the U.S. and Europe. It depends on their composition of their trade. And it depends on for example, the composition of their financing," he said.

For example, in IMF simulations, oil exporters benefit particularly from this type of packages, while for a country dependent on financing, denominated in a foreign currency, "you may be effected negatively by the increase in interest rates," he said.

On the spending bills under consideration in U.S. Congress, the IMF official said the priorities in those plans are "well-taken," noting that the case for infrastructure investment in the United States is "overwhelming," and the social spending plan will have a very favorable effect on poverty.

"It could perhaps have been better targeted and so could have had similar effects at a less expensive price tag, but those things are, I would say, details of fine tuning," Gaspar said.

According to the Fiscal Monitor, global debt, which includes both public and non-financial private sector debt, jumped by 14 percent to a record high of 226 trillion U.S. dollars in 2020 as policymakers responded to the pandemic, and public debt now amounts to 88 trillion dollars, close to 100 percent of global gross domestic product (GDP).

In 2021 and 2022, public debt is expected to decline by about 1 percentage point of GDP each year; after that, it should stabilize at about 97 percent of GDP, the report showed.

While debt is expected to increase in the next few years, China's deficit is projected to fall by 2.5 percentage points this year compared with 2020 because most pandemic-related fiscal measures are expiring and public investment is being reduced, the report noted.

"China is one of the few countries in the world, where economic activity did not contract in 2020. China is not very far from its pre-COVID-19 growth path. So the time profile of fiscal policy in China in 2020 and 2021 seems broadly appropriate," Gaspar said.

The IMF official, meanwhile, noted that China is in a process of growth transition, which should allow the composition of spending to move gradually from investment to consumption, from manufacturing to services, and from exports to domestic demand.

Noting that fiscal policy has a role to play in China's rebalancing of growth model, he urged Chinese policymakers to strengthen the social protection system, highlighting the potential of increased medical and unemployment benefits.

Gaspar noted that China is also using technology to improve social protection. "A digital wallet has been used to reach a segment of the population that would be hard to reach otherwise," he added.

The IMF urged policymakers to calibrate policies to the pandemic and to economic developments and prospects, prioritize transformation to make economies smarter, greener, and more resilient and inclusive, gradually increase tax revenues where necessary and improve spending efficiency.

It also encouraged countries to strengthen the credibility of fiscal policy to create room for further support in the short term without jeopardizing public credit.

Noting that strengthening the credibility of fiscal policy is "extremely important," Gaspar said countries that benefit from credible medium term fiscal frameworks "are able to manage their trade-offs better." Enditem

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