IMF urges tighter fiscal policy to help tame inflation

WASHINGTON ( – The International Monetary Fund (IMF) on Wednesday (12/4/2023) urged fiscal policy makers to adopt tighter fiscal policies to help central banks fight inflation.

“Amid high inflation, tightening financing conditions, and rising debt, policy makers should prioritize keeping fiscal policy consistent with central bank policies to promote financial and price stability,” the IMF said in a blog released in its latest Fiscal Monitor.

The report argues that many countries will need a tighter fiscal stance to support the ongoing disinflationary process – especially if high inflation proves more bearable.

“Tighter fiscal policy would allow central banks to raise interest rates less than they should, which would help limit borrowing costs for governments and guard against financial vulnerability,” said the blog, authored by IMF economist Francesca Caselli and colleagues.

Meanwhile, the IMF noted that tighter fiscal policy requires “better targeted safety nets to protect the most vulnerable households,” including addressing food insecurity, while restraining overall spending growth.

According to the newly released Fiscal Monitor, following 2020’s historic surge in public debt to nearly 100 percent of gross domestic product (GDP) due to economic contraction and heavy government support, the fiscal deficit has since decreased.

In the last two years, global debt posted its steepest decline in decades and reached 92 percent of GDP at the end of last year, which is still around 8.0 percentage points above the pre-pandemic projection.

“Reducing debt vulnerability and rebuilding the fiscal buffer over time is a top priority,” the blog notes. In low-income developing countries, higher borrowing costs are also weighing on public finances, with 39 countries already in or close to experiencing debt difficulties.

The IMF called on policy makers to increase efforts to develop a “credible risk-based fiscal framework” that reduces debt vulnerability over time and builds the space needed to deal with future shocks.

Noting that low-income countries face “very formidable challenges”, the IMF said international cooperation was “essential” to help these countries resolve their unsustainable debt burden in an orderly and timely manner.

Also read: IMF warns that deeper financial turmoil will hit world growth
Also read: IMF: Geopolitical fragmentation can increase the risk of financial stability
Also read: IMF: Global debt is far above pre-pandemic levels despite the decline
Also read: Economists: Anticipate fiscal normalization and monetary tightening in 2023

Translator: Apep Suhendar
Editor: Biqwanto Situmorang


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