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    Tailoring Government Support
    <p>By <a href=””>Vitor Gaspar</a>, <a href=””>W. Raphael Lam</a>, <a href=””>Paolo Mauro</a>, and <a href=””>Mehdi Raissi</a></p>
    <p><a href=””><span dir=”RTL” lang=”AR-SA”>عربي</span></a>, <a href=””>中文</a>, <a href=”″>Español</a>, <a href=””>Français</a>,&nbsp;<a href=””>日本語</a>, <a href=””>Português</a>, <a href=””>Русский</a></p>
    <p>The race to vaccinate against COVID-19 continues, but the pace of inoculation varies widely across countries, with access unavailable to many. <span id=”more-32550″></span>Global cooperation must be stepped up to produce and distribute vaccines to all countries at affordable costs. The sooner vaccinations curb the pandemic, the faster economies can return to normal.</p>
    <div class=”blockquote” readability=”8″>
    <p><strong>The sooner vaccinations curb the pandemic, the faster economies can return to normal.</strong></p>
    <p>If the global pandemic is controlled via vaccination, the resulting stronger economic growth would yield more than $1 trillion in additional tax revenues in advanced economies by 2025—and save more in fiscal support measures. The COVID-19 vaccination will thus more than pay for itself, according to the <a href=””> April 2021 Fiscal Monitor</a>, providing excellent value for the public money invested in it.</p>
    <p><strong>Varying degrees of fiscal support</strong></p>
    <p>In the first year of COVID-19, fiscal policy has reacted quickly and forcefully to the health emergency. Lifelines have saved lives and protected livelihoods. Fiscal support has also prevented more severe economic contractions and job losses than the world would otherwise have seen, including by easing financial stress when monetary and fiscal policies acted together.</p>
    <p>Countries’ ability to scale up fiscal support has varied, depending on their capacity to access low-cost borrowing. In the meantime, economic recoveries are diverging, with China and the United States pulling ahead while other countries lag behind or stagnate.</p>
    <p>In advanced economies, fiscal actions have been sizable and cover several years (6 percent of GDP in 2021), such as those recently approved in the United States and featured in the 2021 budget of the United Kingdom. Among emerging markets and developing countries, fiscal support has been more limited owing to financing constraints, but the rise in deficits is still notable as tax receipts have fallen. Average overall fiscal deficits as a share of GDP in 2020 reached 11.7 percent for advanced economies, 9.8 percent for emerging market economies, and 5.5 percent for low-income developing countries.<img class=” wp-image-32552 aligncenter” src=”” alt width=”560″ height=”585″ srcset=”×209.png 200w,×300.png 287w,×418.png 400w,×627.png 600w, 650w” sizes=”(max-width: 560px) 100vw, 560px”></p>
    <p>As a result, average public debt worldwide approached 97 percent of GDP at the end of 2020 and is expected to stay just below 100 percent of GDP over the medium term. Unemployment and extreme poverty have also increased significantly. The pandemic thus risks <a href=””> leaving a deep scar</a>.<img class=” wp-image-32553 aligncenter” src=”” alt width=”609″ height=”527″ srcset=”×173.png 200w,×259.png 300w,×346.png 400w,×519.png 600w,×664.png 768w,×692.png 800w,×885.png 1024w,×1038.png 1200w, 1300w” sizes=”(max-width: 609px) 100vw, 609px”></p>
    <p>Until the pandemic is brought under control, however, fiscal policy will have to remain flexible and supportive. The need and scope for such support varies across sectors and economies, with responses tailored to country circumstances. However, governments should prioritize the following:</p>
    <li><em>More targeted support to vulnerable households. </em> The pandemic has had a disproportionately negative effect on poor people, youth, women, minorities, and workers in low-paying jobs and the informal sector. Policymakers should ensure that social protection is available and spending is sustainable over the duration of the crisis by expanding the coverage of social safety nets in a cost-effective way (for example, by limiting the leakage of benefits to unintended beneficiaries).</li>
    <li><em>More focused support to viable firms.</em> If the pandemic persists, widespread corporate insolvencies could result, destroying millions of jobs, particularly in contact-intensive service sectors and small and medium enterprises. At the same time, governments would do well to prevent resource misallocations and limit the rise of nonviable firms. Governments could gradually roll back blanket loans and guarantees, and limit public support to circumstances in which there is a clear need for intervention. Partnering with the private sector to assess the viability of firms before providing support can improve targeting and reduce administrative costs.</li>
    <p><strong>Setting the stage for an economic transition</strong></p>
    <p>Policymakers will have to strike a balance between providing fiscal support now, on the one hand, and keeping debt at a manageable level on the other. Some countries may need to start rebuilding fiscal buffers to lessen the impact of future shocks. Developing credible multiyear frameworks for revenue and spending will therefore be vital, especially where debt is high and financing tight.</p>
    <p>Many low-income countries, even after doing their part, face challenges in dealing with the pandemic in the near term and for development over time, as indicated in <a href=”″> recent IMF research</a>. They will need additional assistance, including through grants, concessional financing, the extension of the Debt Service Suspension Initiative, or, in some cases, debt treatment under the <a href=””> Common Framework</a>.</p>
    <p>Done properly, fiscal policy will enable a green, digital, and inclusive transformation of the post-pandemic economy. To make this a reality, governments should prioritize:</p>
    <li>Investing in health systems (including expanded vaccinations), education, and infrastructure. A coordinated green public investment push by economies that can afford it can foster global growth. Projects—ideally with the participation of the private sector—would aim at mitigating the effects of climate change and facilitating digitalization.</li>
    <li><a href=””> Helping people get back to work </a> and change jobs, if needed, through hiring subsidies, enhanced training, and job search programs.</li>
    <li>Strengthening social protection systems to help counter inequality and poverty, and reinvigorating efforts to achieve the <a href=””>Sustainable Development Goals</a>.</li>
    <li>Reforming domestic and international tax systems to promote greater fairness and protect the environment. To help meet pandemic-related needs, a temporary COVID-19 recovery contribution levied on high incomes is an option. Over the medium term, revenue collection should be bolstered, especially in in low-income developing countries, which could help finance development needs.</li>
    <li>Cutting wasteful spending, strengthening the transparency of spending initiatives, and improving governance practices to reap the full benefits of fiscal support.</li>
    <p>In sum, governments have gone to exceptional lengths to shore up their economies, but further work is needed to get ahead of the COVID-19 pandemic, provide flexible yet targeted support now, adjust when a recovery is firmly in place, and set the stage for a greener, fairer, and more durable recovery.</p>

    <!– AddThis Advanced Settings above via filter on the_content –><!– AddThis Advanced Settings below via filter on the_content –><!– AddThis Advanced Settings generic via filter on the_content –><!– AddThis Share Buttons above via filter on the_content –><!– AddThis Share Buttons below via filter on the_content –><!– AddThis Share Buttons generic via filter on the_content –> <p><strong><a href=””></a></strong> <a href=””>(Why?)</a></p> Wed, 07 Apr 2021 12:00:04 +0000 IMFBlog
    Global Economy
    Fiscal Monitor

    An Asynchronous and Divergent Recovery May Put Financial Stability at Risk
    <p>By <a href=””>Tobias Adrian</a></p>
    <p><a href=””><span dir=”RTL” lang=”AR-SA”>عربي</span></a>, <a href=””>中文</a>, <a href=”″>Español</a>, <a href=””>Français</a>, <a href=””>日本語</a>, <a href=””>Português</a>, <a href=””>Русский</a></p>
    <p>After enduring a tumultuous 2020, the global economy is finally emerging from the worst phases of the COVID-19 pandemic, albeit with prospects diverging starkly across regions and countries—and only after a “lost year” spent in suspended animation. <span id=”more-32516″></span>The economic trauma would have been much worse if the global economy had not been supported by the unprecedented policy actions taken by central banks and by the fiscal measures implemented by governments.</p>
    <div class=”blockquote” readability=”7″>
    <p><strong>Global markets are watching the current rise of US long-term interest rates.</strong></p>
    <p>Global markets are watching the current rise of US long-term interest rates, worried that a rapid and persistent increase may result in tighter financial conditions, potentially hurting growth prospects. Since August 2020, the yield on the US 10-year Treasury note has risen by 1¼ percentage points to around 1¾ percent in early April 2021, returning close to its pre-pandemic level of early 2020.</p>
    <p>The good news is that the rising rates in the United States have been spurred in part by improving vaccination prospects and strengthening growth and inflation. As described in the latest <a href=””>Global Financial Stability Report</a>, both nominal and real interest rates have risen, although nominal yields have risen more, suggesting that market-implied inflation—the difference between yields on nominal and inflation-indexed Treasury securities—is recovering. Allowing a modest amount of inflation has been an intended objective of easy monetary policy.<img class=” wp-image-32518 aligncenter” src=”” alt width=”492″ height=”577″ srcset=”×234.png 200w,×300.png 256w,×469.png 400w,×703.png 600w,×900.png 768w,×938.png 800w,×1024.png 873w,×1407.png 1200w, 1300w” sizes=”(max-width: 492px) 100vw, 492px”></p>
    <p>The bad news is that the increase may reflect uncertainty about the future path of monetary policy and possibly investor concerns about the increased supply of Treasury debt to finance the fiscal expansion in the United States, as reflected by sharply rising term premia (investors’ compensation for interest-rate risk). Market participants are beginning to focus on the timing of the Federal Reserve’s tapering of its asset purchases, which could push long-term rates and funding costs higher, thereby fueling a tightening of financial conditions, especially if associated with a decline in risk assets’ prices.<img class=” wp-image-32519 aligncenter” src=”” alt width=”483″ height=”583″ srcset=”×242.png 200w,×300.png 248w,×483.png 400w,×725.png 600w,×928.png 768w,×966.png 800w,×1024.png 848w,×1449.png 1200w,×1536.png 1272w, 1300w” sizes=”(max-width: 483px) 100vw, 483px”></p>
    <p><strong>Global implications</strong></p>
    <p>To be clear, global rates remain low by historical standards. But the speed of the adjustment in rates can generate unwelcome volatility in global financial markets, as witnessed this year. Assets are priced on a relative basis, and the price of every financial asset—from a simple mortgage loan to emerging market bonds—is directly or indirectly linked to benchmark US rates. The rapid and persistent rise in rates this year has been accompanied by an increase in volatility, with a risk that such fluctuations might intensify.</p>
    <p>Any abrupt and unexpected increase in rates in the United States may translate into a tightening of financial conditions, as investors shift into “reduce risk exposure, protect capital” mode. This could be a concern for risk asset prices. Valuations appear stretched in some segments of financial markets, and vulnerabilities are rising further in some sectors.</p>
    <p>Thus far, overall global financial conditions have remained easy. But in countries where the recovery is slower and where vaccinations are lagging, their economies may not yet be ready for tighter financial conditions. Policymakers may be forced to use monetary and exchange-rate policies to offset any potential tightening.</p>
    <p>While government bond yields have also risen somewhat in countries in Europe and elsewhere, albeit less so than in the United States, the greatest concern comes from emerging markets, where investor risk appetite may shift quickly. With many of those countries confronting large external financing needs, a sudden sharp tightening in global financial conditions could threaten their post-pandemic recovery. The recent volatility in portfolio flows to emerging markets is a reminder of the fragility of these flows.</p>
    <p><strong>Meeting the needs of tomorrow</strong></p>
    <p>While several emerging market economies have adequate international reserves, and external imbalances are generally less pronounced as a result of the large import compression, some emerging market economies may face challenges in the future, especially if inflation rises and borrowing costs continue to grow. Emerging market local currency yields have risen meaningfully, driven importantly by an increase in term premia. Our estimate is that a 100 basis point rise in US term premia is associated, on average, with a 60 basis point rise in emerging market term premia. Many emerging markets have sizeable financing needs this year, so they are exposed to the risk of higher rates once they refinance debt and fund large fiscal deficits in the months ahead. Countries that are in weaker economic positions, for example owing to limited access to vaccines, may also face portfolio outflows. For many frontier market economies, access to funding remains a primary concern given limited access to bond markets.<img class=” wp-image-32522 aligncenter” src=”” alt width=”543″ height=”630″ srcset=”×232.jpg 200w,×300.jpg 259w,×464.jpg 400w,×696.jpg 600w,×891.jpg 768w,×928.jpg 800w,×1024.jpg 883w,×1392.jpg 1200w, 1300w” sizes=”(max-width: 543px) 100vw, 543px”></p>
    <p>As countries adjust policies to overcome the pandemic, major central banks will need to carefully communicate their policy plans to prevent excess volatility in financial markets. Emerging markets may need to consider policy measures to address excessive tightening of domestic financial conditions. But they will have to be mindful of policy interactions and their own economic and financial conditions, as they make use of monetary, fiscal, macroprudential, capital-flow management, and foreign-exchange intervention.</p>
    <p>Continuing policy support remains necessary, but targeted measures are also needed to address vulnerabilities and to protect the economic recovery. Policymakers should support balance-sheet repair—for example, by strengthening the management of nonperforming assets. Rebuilding buffers in emerging markets should be a policy priority to prepare for a possible repricing of risk and a potential reversal of capital flows.</p>
    <p>As the world begins to turn the page on the COVID-19 pandemic, policymakers will continue to be tested by an asynchronous and divergent recovery, a widening gap between rich and poor, and increased financing needs amid constrained budgets. The Fund remains ready to support its member nations’ policy efforts in the uncertain period ahead.</p>

    <!– AddThis Advanced Settings above via filter on the_content –><!– AddThis Advanced Settings below via filter on the_content –><!– AddThis Advanced Settings generic via filter on the_content –><!– AddThis Share Buttons above via filter on the_content –><!– AddThis Share Buttons below via filter on the_content –><!– AddThis Share Buttons generic via filter on the_content –> <p><strong><a href=””></a></strong> <a href=””>(Why?)</a></p> Tue, 06 Apr 2021 14:30:45 +0000 IMFBlog
    Global Economy
    financial stability
    fiscal policy
    interest rates
    United States

    Managing Divergent Recoveries
    <p>By <a href=””>Gita Gopinath</a></p>
    <p><a href=””><span dir=”RTL” lang=”AR-SA”>عربي</span></a>,&nbsp;<a href=””>中文</a>, <a href=”″>Español</a>, <a href=””>Français</a>, <a href=””>日本語</a>, <a href=””>Português</a>,&nbsp;<a href=””>Русский</a></p>
    <p>It is one year into the COVID-19 pandemic and the global community still confronts extreme social and economic strain as the human toll rises and millions remain unemployed. <span id=”more-32497″></span>Yet, even with high uncertainty about the path of the pandemic, a way out of this health and economic crisis is increasingly visible. Thanks to the ingenuity of the scientific community hundreds of millions of people are being vaccinated and this is expected to power recoveries in many countries later this year. Economies also continue to adapt to new ways of working despite reduced mobility, leading to a stronger-than-anticipated rebound across regions. Additional fiscal support in large economies, particularly the United States, has further improved the outlook.</p>
    <div class=”blockquote” readability=”7″>
    <p><strong>Recoveries are diverging dangerously across and within countries.</strong></p>
    <p>In our latest <a href=”″>World Economic Outlook</a>, we are now projecting a stronger recovery for the global economy compared with our January forecast, with growth projected to be 6 percent in 2021 (0.5 percentage point upgrade) and 4.4 percent in 2022 (0.2 percentage point upgrade), after an estimated historic contraction of -3.3 percent in 2020.<img class=”aligncenter wp-image-32499″ src=”” alt width=”649″ height=”512″ srcset=”×158.png 200w,×237.png 300w,×316.png 400w,×474.png 600w, 650w” sizes=”(max-width: 649px) 100vw, 649px”></p>
    <p>Nonetheless, the future presents daunting challenges. The pandemic is yet to be defeated and virus cases are accelerating in many countries. Recoveries are also diverging dangerously across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliance on tourism do less well.</p>
    <p>The upgrades in global growth for 2021 and 2022 are mainly due to upgrades for advanced economies, particularly to a sizeable upgrade for the United States (1.3 percentage points) that is expected to grow at 6.4 percent this year. This makes the United States the only large economy projected to surpass the level of GDP it was forecast to have in 2022 in the absence of this pandemic. Other advanced economies, including the euro area, will also rebound this year but at a slower pace. Among emerging markets and developing economies, China is projected to grow this year at 8.4 percent. While China’s economy had already returned to pre-pandemic GDP in 2020, many other countries are not expected to do so until 2023.</p>
    <p><strong>Daunting challenges ahead</strong></p>
    <p>These divergent recovery paths are likely to create wider gaps in living standards across countries compared to pre-pandemic expectations. The average annual loss in per capita GDP over 2020–24, relative to pre-pandemic forecasts, is projected to be 5.7 percent in low-income countries and 4.7 percent in emerging markets, while in advanced economies the losses are expected to be smaller at 2.3 percent. Such losses are reversing gains in poverty reduction, with an additional 95 million people expected to have entered the ranks of the extreme poor in 2020 compared with pre-pandemic projections.<img class=”aligncenter wp-image-32500 size-full” src=”” alt width=”650″ height=”575″ srcset=”×177.png 200w,×265.png 300w,×354.png 400w,×531.png 600w, 650w” sizes=”(max-width: 650px) 100vw, 650px”></p>
    <p>Uneven recoveries are also occurring within countries as young and lower-skilled workers remain more heavily affected. Women have also suffered more, especially in emerging market and developing economies. Because the crisis has accelerated the transformative forces of digitalization and automation, many of the jobs lost are unlikely to return, requiring worker reallocation across sectors—which often comes with severe earnings penalties.</p>
    <p>Swift policy action worldwide, including $16 trillion in fiscal support, prevented far worse outcomes. Our estimates suggest last year’s severe collapse could have been three times worse had it not been for such support.</p>
    <p>Because a financial crisis was averted, medium-term losses are expected to be smaller than after the 2008 global financial crisis, at around 3 percent. However, unlike after the 2008 crisis, it is emerging markets and low-income countries that are expected to suffer greater scarring given their more limited policy space.<img class=”aligncenter wp-image-32501 size-full” src=”” alt width=”650″ height=”614″ srcset=”×189.png 200w,×283.png 300w,×378.png 400w,×567.png 600w, 650w” sizes=”(max-width: 650px) 100vw, 650px”></p>
    <p>A high degree of uncertainty surrounds our projections. Faster progress with vaccinations can uplift the forecast, while a more prolonged pandemic with virus variants that evade vaccines can lead to a sharp downgrade. Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways. This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.</p>
    <p><strong>Working together to give people a fair shot</strong></p>
    <p>Policymakers will need to continue supporting their economies while dealing with more limited policy space and higher debt levels than prior to the pandemic. This requires better-targeted measures to leave space for prolonged support if needed. With multispeed recoveries, a tailored approach is necessary, with policies well-calibrated to the stage of the pandemic, the strength of the economic recovery, and the structural characteristics of individual countries.</p>
    <p>Right now, the emphasis should be on escaping the health crisis by prioritizing healthcare spending—on vaccinations, treatments, and healthcare infrastructure. Fiscal support should be well targeted to affected households and firms. Monetary policy should remain accommodative (where inflation is well behaved), while proactively addressing financial stability risks using macroprudential tools.</p>
    <p>As the pandemic is beaten back and labor market conditions normalize, support such as worker retention measures should be gradually scaled back. At that point, more emphasis should be placed on reallocating workers, including through targeted hiring subsidies, and reskilling of workers. As exceptional measures such as moratoria on loan payments are withdrawn, firm insolvencies could rise sharply and put one in ten jobs at risk in many countries. To limit long-term damage countries should consider converting previous liquidity support (loans) into equity-like support for viable firms, while developing out-of-court restructuring frameworks to expedite eventual bankruptcies. Resources should also be devoted to helping children catch-up on lost instructional time during the pandemic.</p>
    <p>Once the health crisis is over, policy efforts can focus more on building resilient, inclusive, and greener economies, both to bolster the recovery and to raise potential output. The priorities should include green infrastructure investment to help mitigate climate change, digital infrastructure investment to boost productive capacity, and strengthening social assistance to arrest rising inequality.</p>
    <p>Financing these endeavors will be more difficult for economies with limited fiscal space. In such cases, improving tax capacity, increasing tax progressivity (on incomes, property, and inheritance taxation), deploying carbon pricing, and eliminating wasteful expenditures will be essential. All countries should anchor policies in credible medium-term frameworks and adhere to the highest standards of debt transparency to help contain borrowing costs and eventually reduce debt and rebuild buffers for the future.</p>
    <p>On the international stage, first and foremost, countries need to work together to ensure universal vaccination. While some countries will get to widespread vaccinations by this summer, most, especially low-income countries will likely have to wait until end-2022. Speeding up vaccinations will require ramping up vaccine production and distribution, avoiding export controls, fully funding the <a href=””>COVAX</a> facility on which many low-income countries rely for doses, and ensuring equitable global transfers of excess doses.</p>
    <p>Policymakers should also continue to ensure adequate access to international liquidity. Major central banks should provide clear guidance on future actions with ample time to prepare, to avoid “taper-tantrum” kinds of episodes as occurred in 2013. Low-income countries will benefit from further extending the pause on debt repayments under the <a href=””> Debt Service Suspension Initiative </a> and operationalizing the G20 Common Framework for orderly debt restructuring. A new allocation of the IMF’s <a href=””> Special Drawing Rights </a> will provide needed liquidity protection in highly uncertain times.</p>
    <p>Even while all eyes are on the pandemic, it is essential that progress is made on resolving trade and technology tensions. Countries should also cooperate on climate change mitigation, on modernizing international corporate taxation, and on measures to limit cross-border profit shifting, tax avoidance, and evasion.</p>
    <p>Over the past year, we have seen significant innovations in economic policy and massively scaled-up support at the national level, particularly among advanced economies that have been able to afford these initiatives. A similarly ambitious effort is now needed at the multilateral level to secure the recovery and build forward better. Without additional efforts to give all people a fair shot, cross-country gaps in living standards could widen significantly and decades-long progress in global poverty reduction could reverse.<img class=”aligncenter wp-image-32538 size-large” src=”×1024.png” alt width=”564″ height=”1024″ srcset=”×300.png 165w,×363.png 200w,×726.png 400w,×1024.png 564w,×1089.png 600w,×1394.png 768w,×1452.png 800w,×1536.png 846w, 1092w” sizes=”(max-width: 564px) 100vw, 564px”></p>

    <!– AddThis Advanced Settings above via filter on the_content –><!– AddThis Advanced Settings below via filter on the_content –><!– AddThis Advanced Settings generic via filter on the_content –><!– AddThis Share Buttons above via filter on the_content –><!– AddThis Share Buttons below via filter on the_content –><!– AddThis Share Buttons generic via filter on the_content –> <p><strong><a href=””></a></strong> <a href=””>(Why?)</a></p> Tue, 06 Apr 2021 12:30:15 +0000 IMFBlog
    Global Economy
    advanced economies
    developing economies
    emerging markets and developing economies
    fiscal support
    low-income countries
    Special Drawing Rights
    United States

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