IMF Warns of ‘More Frequent and More Disruptive Fiscal Crises Across the World’

The International Monetary Fund logo outside the headquarters building during the IMF/World Bank spring meeting in Washington, on April 20, 2018. (Yuri Gripas/Reuters)

The International Monetary Fund (IMF) warned of a global fiscal crisis that only underscores the need by developed countries to assist poorer nations with more “orderly debt restructuring.”

Many of these countries are experiencing rising level of debt and mounting fiscal pressures that may lead to major social unrest among their poorest citizens, according to Vitor Gaspar, the IMF’s fiscal affairs director, who spoke at the annual meetings of the IMF and World Bank.

“The rise of extreme poverty and food insecurity that began before the pandemic should be addressed at the global level by a broad set of initiatives,” Gaspar declared, who said that the present situation was being exacerbated by food and energy shortages and climate change.

Gaspar also requested that countries narrowly implement fiscal measures targeting those most in need, as well as instituting policies that reduce domestic demand in an era of energy shortages.

“Facing high debt levels and rising borrowing costs, policymakers should prioritize targeted support through social safety nets to the most vulnerable people,” said the IMF in its blog.

The IMF fiscal affairs chief also emphasized that additional efforts need to be taken to reduce the accumulated debt of vulnerable countries.

Fiscal Responsibility and Global Debt Relief

Meanwhile, the monetary fund’s latest Fiscal Monitor report, released on Oct. 13, laid out the issues facing global policymakers as they look at how to protect low-income families from financial insolvency while keeping a tight fiscal stance to help fight inflation.

Inflationary pressures remain stubbornly persistent and more widespread than anticipated, despite the economic slowdown this year.

Rising global inflation has led to a decline in the standards of living worldwide, with many governments instituting various fiscal relief policies to stave off discontent.

“With inflation elevated and financing conditions tightening, policymakers should prioritize macroeconomic and financial stability above all else,” warned the IMF.

The IMF report noted that massive government spending to alleviate rising costs is adding undue pressure on central banks to raise interest rates even higher, exasperating existing government deficits, perpetuating the inflationary cycle.

Many countries are offering their struggling citizens benefits, like energy price subsidies, tax cuts, and cash transfers, all of which are estimated to absorb on average of at least 0.6 percent of their national gross domestic product (GDP).

“This is especially relevant as recent developments in bond markets show increased market sensitivity to deteriorating (or bad) fundamentals. That raises the prospect of more frequent and more disruptive fiscal crises across the world,” said the report.

“But they must also reduce vulnerabilities from large public debts and, in response to high inflation, maintain a tight fiscal stance so that fiscal policy does not work at cross-purposes with monetary policy,” it continued.

The IMF said that global public debt is projected to remain high at 91 percent of GDP this year, with developing countries being the most vulnerable to a financial crisis.

Debt has declined from its historical high in 2020, but still 7.5 percent above pre-pandemic levels.

The report also said that 60 percent of the poorest nations are currently or on the verge of debt distress.

China, the G-20, and Global Financial Policy

Meanwhile, there has been growing criticism around the world toward China for its lack of participation regarding the matter, said Reuters.

Western countries are irritated by China, the world’s largest sovereign creditor, for being hesitant toward any moves to restructure the debts of Zambia and Chad after agreeing to help resolve it at the G-20 summit in late 2020.

At an event hosted by the Bretton Woods Committee, Treasury Secretary Janet Yellen said that implementation of the agreed upon G-20 framework was “very disappointing” and that “it’s simply not going well,” according to Reuters.

Yellen accused the Chinese of “not participating” enough in efforts to assist countries in dire financial straits after they requested help from the G-20.

“We really call on China to step up. The situation’s becoming very serious,” Yellen said.

Beijing has said that it would not participate in the relief plan unless the IMF or the World Bank themselves took a more fiscally responsible policy.

“They’re preferred creditors. And it’s important, we think, to maintain that status,” Yellen responded, noting that the purpose and framework of the two financial institutions.

Gaspar stated that “the Fiscal Monitor message is clear: Be prepared. Be prepared for a shock-prone world.”

Reuters contributed to this report.