Not quick cuts, IMF advises

The International Monetary Fund (IMF) is warning developing countries not to be hasty in cutting critical fiscal policy support as they grapple with the economic fallout from the COVID-19 pandemic.

This caution came on Tuesday during the IMF’s 2020 annual meetings, which are being held virtually from October 12 to 18.

Addressing the press briefing on the release of the October 2020 World Economic Outlook: A Long and Difficult Ascent, Director of the IMF Research Department Gita Gopinath said the world was beginning to adapt to the changes brought on by the pandemic.

However, she warned that the crisis was far from over, adding that employment levels remained below pre-COVID levels, with low-skilled individuals, women and youth hardest hit.

“The poor is also getting poorer, with up to 90 million people expected to fall into extreme poverty this year,” she said, adding that withdrawing support prematurely could be devastating to households and firms.

“The ascent out of this calamitous great lockdown is likely to be long, uneven and highly uncertain. It is therefore essential that fiscal and monetary policy support are not prematurely withdrawn as best as possible.”

Acknowledging that developing countries were tasked with dealing with the pandemic with far fewer resources than their more developed counterparts, Gopinath said “these economies will need to prioritise critical spending on health and support for the poor, and also ensure maximum efficiency”.

“They will also need continued support in the form of international grants, concessional aide, and, in several cases, debt relief. Where debt is unsustainable, it should be restructured sooner than later to free up finances to deal with this crisis,” said the IMF economist.

Gopinath said investment in education, health, green energy and digital infrastructure could help countries achieve inclusive and sustainable growth, but added that it would also require significant innovation in policies.

She said national policies should also focus aggressively on limiting economic damage from the pandemic.

“Governments should continue to provide income support to households and work to prevent a rise in bankruptcies and job destruction through support to viable but vulnerable firms,” she said, adding that, over time, policies should shift to sectors that are growing.

The IMF continues to project a deep global recession for this year with the global economy expected to decline some 4.4 per cent, a small upgrade from the 5.2 decline it forecast in June.

For emerging markets and developing economies, excluding China, the IMF is downgrading its growth forecast to -5.7 per cent this year, compared to the -5 per cent it predicted in June.

The Caribbean is expected to record growth of -5.4 per cent, before rebounding with an optimistic 3.9 per cent in 2021.

The IMF is projecting that global growth will rebound to 5.2 per cent in 2021.

“Countries that rely heavily on contact intensive services and oil exports are faced with weaker recoveries compared to manufacturing led economies,” Gopinath said.

She said it was expected that the health crisis would leave financial scares well into the medium-term as labour markets take time to heal and investments are held back due to uncertainty and worsening balance sheets.

The economist also warned that if there should be a resurgence in COVID-19 cases, resulting in lockdowns, and the prospects for a vaccine weaken, then the blow to economic activity would be severe, leading to economic turmoil in some ways.

She also pointed out that a rise in geopolitical uncertainty could affect the global economic recovery.

However, she noted: “On the upside, faster and better news on treatments and vaccines and further stimulus could significantly improve the outlook.”

Indicating that a lot of work still needs to be done, despite some efforts by countries, Gopinath said there was need for greater international collaboration to end the crisis and to ensure high production and widespread distribution of vaccines. (MM)