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Source: International Monetary Fund

October 14, 2020


Vitor Gaspar, Director, Fiscal Affairs Department

Cathy Pattillo, Assistant Director, Fiscal Affairs Department

Paolo Mauro, Deputy Director, Fiscal Affairs Department

Ting Yan, Communications Officer, Communications Department

Ms. Yan ‑ Good morning, everyone. Welcome to this press conference on the IMF’s Fiscal Monitor. I am Ting Yan from the Communications Department. I hope you and your families are all doing well and are staying safe.

I am pleased today to be joined by my colleagues from the Fiscal Affairs Department. Let me introduce them to you. I have Vitor Gaspar, Director of Fiscal Affairs Department; and Cathy Pattillo, Assistant Director of Fiscal Affairs Department. Also joining us remotely is Paolo Mauro, Deputy Director of Fiscal Affairs Department. Thank you all for joining us today.

Vitor will have some opening remarks first, and then we will be happy to take your questions. With that, Vitor, the floor is yours.

Mr. Gaspar ‑ Thank you, Ting. Good morning. Good afternoon. Good evening. Fiscal policy is at the center of all macroeconomic policy debates right now so it would be most welcome to this press conference on the Fiscal Monitor.

On March 11, 2020, the WHO declared COVID‑19 a pandemic. It has now claimed more than 1 million lives. It immediately affected economic activity and financial markets in a sudden and violent way. The size and speed of the policy response was unprecedented. Fiscal policy action amounted to around US$12 trillion globally and this policy action contributed to restored orderly financial market conditions and extended critical lifelines to households and firms.

More than six months into the pandemic, the Fiscal Monitor emphasizes the importance of not pulling the plug of fiscal support too soon. It looks into how fiscal policies should be adapted to the various stages of the pandemic. It also evaluates difficult policy tradeoffs that different countries around the world face. Finally, it makes the case for public investment.

Prior to the pandemic, global public debt was already high and rising. In 2020, it will take an unprecedented jump up to almost 100 percent of GDP. The major increase in the primary deficit and the sharp contraction in economic activity are the main drivers of this jump up in debt. But after this exceptional development, public debt is expected to stabilize at about 100 percent of GDP until 2025. This is explained by the negative interest growth differentials and the decline in the primary deficit.

This implies that for us that high public debt levels are not the most immediate risk. The near‑term priority is to avoid premature withdrawal of fiscal support. Support should persist at least into 2021 to sustain the recovery and to limit long‑term scarring. Health and education should be priorities everywhere.

Maintaining support now does not remove the need for medium to long‑term fiscal strategies virtually in all countries. This does include advanced economies, which do enjoy exceptionally easy financing conditions but face long‑term fiscal challenges associated with population aging.

The equation is even more challenging for fiscally constrained economies. They will have to prioritize the protection of the most vulnerable, eliminate wasteful spending and find the right balance between supporting the economy and facing rollover risks, increasing financing costs, and depleted buffers.

Tradeoffs can be especially painful and urgent in the poorest countries. We estimated the number of people affected by extreme poverty will increase by 80 to 90 million by 2020, even after accounting for COVID‑related social assistance.

The risk of malnutrition is equally on the rise. Access to health and education is threatened. The international community must act with debt relief, access to grants, and concessional financing now and going forward to help the poorest countries tackle these terrible challenges.

Confidence in the global financial system requires that international financing be available for all countries that face temporary financial challenges. That is the purpose of the financing capacity of the IMF that now stands at US$1 trillion, of which just above one fourth is now committed.

For countries with unsustainable debt, options for orderly debt restructuring must be considered.

Finally, the Fiscal Monitor makes the case for public investment. The relevant macroeconomic context includes very low interest rates, high precautionary savings, weak private investment, and a gradual erosion of the public capital stock over time. But the novel argument in the Fiscal Monitor relates to uncertainty. The Fiscal Monitor shows that investment multipliers are particularly high when macroeconomic uncertainty is elevated, as it is now.

The Fiscal Monitor specifically estimates that the 1 percent of GDP increasing public investment in advanced and emerging markets has the potential to, within two years, push up GDP by 2.7 percent, private investment by 10 percent, and most importantly to create between 20 and 33 million jobs directly and indirectly.

Public investment can also support the transformation of our economies going forward. Investment in health and education, in digital and green infrastructure can connect people, improve economy‑wide productivity, and improve resilience to climate change and future pandemics. Overall, fiscal policy can provide a bridge to smart, resilient, green, and inclusive growth. Thank you for your attention, and at this point I and my colleagues are ready to answer any questions that you may have.

Ms. Yan ‑ Thank you so much, Vitor. Thank you, everyone. Now we are happy to take your questions. Let me remind you that you can submit your questions on IMF Press Center and this time we also have the option for you to ask questions through WebEx. We have already received a number of questions online. So before I turn to WebEx, let me take one question online.

The first question is from India. He has two questions, actually. The first one is, “The report expresses concerns over mounting global public debt. Where is this headed to? In view of the ongoing coronavirus pandemic, how do you address this challenge?” His second question is “What is your assessment of the fiscal situation of India, as the report notes, has the largest projected increasing debt ratio among large non‑oil exporters? What are the dangers of high debt ratio? What are your recommendations to the Indian government?

Mr. Gaspar ‑ Thank you. I will address the question on public debt and my colleague, Paolo Mauro, will address the question on India.

On public debt, the question allows me to elaborate briefly on the message I already gave in the introductory remarks.

There is quite a sharp increase in public debt in 2020, and that is due to the need for decisive action to tackle COVID‑19, and fiscal policy was crucial to mitigate the impact of COVID‑19 on economic activity and developments in financial markets, while at the same time protecting lives and livelihoods. The mechanics of the increase in debt come from the widening of the primary deficit plus the sharp fall in economic activity.

Going forward, and over the medium term, there is a stabilization of the public debt to GDP ratio in the world at around 100 percent, with a slight downward trend towards 2025. That is explained by a narrowing of the primary deficit while there is a gradual recovery in economic activity in our baseline.

So the immediate priority for the countries that can afford it is to continue fiscal support, sustain the recovery, and avoid long‑term scarring. But, of course, public finance risks associated with interventions of this magnitude have to be managed, and public debt is one of the legacy issues that has to be dealt with.

We recommend to all countries around the world to emphasize their medium‑term fiscal frameworks in order to be able to anchor fiscal policy along fiscal sustainability and to contribute to resilient long‑run growth going forward.

Ms. Yan ‑ Thank you. Paolo, do you want to answer the India question?

Mr. Mauro ‑ Yes. India has been hit hard by the pandemic. One hundred thousand people have died. Let me focus on the fiscal measures with which the government has responded. We estimate that the government has provided, on budget support primarily to people for an amount of almost 2 percent of GDP and, in addition, it has provided about 4 percent of GDP in guarantees and loans to firms.

The priority going forward remains to fight the pandemic, continue supporting people and firms, especially vulnerable households, small‑ and medium‑sized enterprises. More support can and should be provided, particularly to help the poor and vulnerable. At the same time, it makes sense for the authorities to commit to medium‑term fiscal stabilization.

Let me just remind that India has been a success story over the past two to three decades. It has had growth of about 7 percent, and it has lifted tens of millions of people out of extreme poverty.

The debt ratio during that period has hovered with ups and downs around 70 percent and, indeed, last year it was 70 percent of GDP.

For this year we project that it will jump to almost 90 percent. If growth returns to its previous path of 7 percent after the pandemic is over, we forecasted the debt ratio will stabilize around 90 percent. Thank you.

Ms. Yan ‑ Thank you, Paolo. Thank you very much for your patience. Now we can take questions on WebEx. Our first question from WebEx comes from Egypt.

Question ‑ Good morning to all. Hope you are doing well and safe. Thank you for taking my question. My question is in light of the IMF estimations and the pandemic has caused 100 percent of levels of external and internal debt, how these levels are expected to erode the emerging markets and low‑income countries, efforts to achieve the SDG agendas. Thank you.

Ms. Yan ‑ Thank you.

Ms. Pattillo ‑ Thank you for this question. So for many low‑income, developing countries, the pandemic has imposed a major setback in their plans to and progress toward achieving the Sustainable Development Goals by 2030. For instance, gains in recent decades in reducing poverty could be reversed.

Before COVID, we had estimated that most low‑income countries needed significant additional financing, including from the private sector, to achieve the SDGs.

Now, the pandemic is leaving most of these countries with higher spending needs and higher levels of debt. Debt vulnerabilities were rising in some countries even before the pandemic and now over half of low‑income countries, 54 percent, are either in debt distress or at high risk of debt distress.

This clearly makes the ambitious SDG timeline even more daunting. So the poorest countries will clearly need support from the international community, concessional financing, debt relief, and this will help minimize the scarring effects of the pandemic and allow them to continue making progress toward the SDGs, especially to reduce poverty and hunger.

It is worrisome that some countries who rightly are fighting COVID have then had to not spend as much on some routine health spending like vaccinations for childhood diseases. This could have long‑term consequences for people’s health and well‑being. So clearly support from the international community is needed.

When the crisis subsides, these countries will also need to boost their own revenue capacity.

Now, the official sector has stepped up with bilateral debt relief under the G‑20 and Paris Club Debt Service Initiative. Forty‑four of 73 eligible countries are benefiting from this initiative, which is estimated to have freed up about U.S. $5 billion for countries in 2020 to cope with the health and economic impact of the crisis.

The Fund has provided debt relief. US$500 million to 29 of the poorest and most vulnerable countries through the Catastrophe Containment and Relief Trust, and also emergency financing to countries to allow them to cover COVID‑related expenditures.

Ms. Yan ‑ Thank you. So now I think we can take the next question. Our next question comes from Today News Africa. Simon, please go ahead.

Question ‑ Thank you for taking my question. My questions are also on debt distress for countries in sub‑Saharan Africa. I was wondering if the IMF has been tracking all the money that has been given to African countries. As you know, since this crisis started months ago, the IMF has given countries in sub‑Saharan Africa more money than it has given them in the past ten years. Is the IMF satisfied with the way the money has been spent because we understand that the money was able to go to the people. I am wondering if the IMF is satisfied and if they are not satisfied, what steps should the African countries take from now.

Ms. Pattillo ‑ So the Fund has provided very rapid and sizable support in response to the crisis. US$15 and a half billion in the last six months, which is concessional for the low‑income countries in the region and also debt relief.

This support has allowed financially constrained countries to cover support to people and firms who have been very hard hit from multiple shocks, from the health crisis, from the economic disruptions, from lower tourism receipts, lower export prices, capital inflows, and remittances. These countries had less fiscal space and had to adapt innovative ways to channel scarce resources to people in need.

They have responded then with social safety nets, with cash transfers, with targeted spending then to help hard‑hit firms. And transparency and accountability is key in this spending.

In terms of the fiscal policies that were recommended, for countries that are still facing the spread of the pandemic, fiscal policy should continue to give priority to saving lives and livelihoods. Again, transparency and accountability, and there are specific measures we can note are key.

Then where the spread of the virus is contained, countries should move to unwind some of those crisis‑specific lifelines, rebalance spending to prioritize growth spending, like public investment, but policymakers are going to face difficult choices, balancing debt sustainability and supporting growth.

As the health crisis subsides, they are going to have to eventually consolidate their fiscal positions to bring debt back to a sustainable footing without jeopardizing long‑term growth. This will need to be supported by a range of different measures to support growth and jobs.

Ms. Yan ‑ Thank you, Cathy. Our next question is from Reuters, please go ahead.

Question ‑ Thank you for taking my question. Good morning. I had a question regarding the U.S. situation. I have been following the debate over another round of stimulus. Certainly the U.S. has done a lot so far. Things have kind of stalled out. I am wondering, talk about sort of what a delay in a second round of stimulus from this climate might do for the U.S. situation without putting at risk the progress that the U.S. has made, as well as for the global economy. And then sort of following up on that, normally in Fiscal Monitor, you call for consolidation over the medium term. Is that really possible in this case or are we looking at a situation where essentially we are going to try to grow our way out of this dark time [inaudible] to make them grow again, make them more sustainable, more equitable. How do you see that medium‑term outlook, particularly for the United States? Thanks.

Mr. Gaspar ‑ Thank you, David, for your two questions. I like them very much. I think the sequence is very good. The U.S. back in March acted quickly and it acted decisively against COVID‑19 and its economic and fiscal consequences. Monetary policy and fiscal policy acted in tandem and they put a floor on disruptions to economic activity and to financial markets, while at the same time provided support to people’s lives and to people’s livelihoods.

The impact on debt in the United States is quite sizable with the public debt to GDP increasing by more than 20 percentage points of GDP to a level slightly above 130 percent of GDP on an international comparable basis. We focus on general government public debt.

Going forward, in our projections, the debt in the United States will continue to grow. Now, at this point in time, we only reflect in our baseline for the U.S. the measures that have already been enacted, and we do see that the United States has room for further fiscal support, and we see that as a positive in terms of the continuation of economic recovery in the United States and in terms of boosting the long‑term growth prospects for the U.S. economy.

The U.S. is one of the advanced economies that faces long‑term public finance challenges associated with population aging and a medium to long‑term framework would very much help tackling those issues. But there is a link between the two questions that you did ask. The normalization of conditions in financial markets that was made possible by the action of the Fed and other major central banks did change, as Tobias Adrian emphasized yesterday, the financing conditions that were relevant for major emerging market economies, and in the aggregate we have that these countries have issued a lot in international capital markets, in hard currency, and as a matter of fact, the issuance levels in 2020 are at record levels.

Emerging market economies are very different across their spectrum and one will see a systemic relation between the credit rating of a country and both the financing conditions and their evolution. The lower the credit rating, the higher the cost of financing, the harder it is to get financing. So a lot of differentiation.

For all of these cases, your emphasis on long‑run growth is spot on. A restoration of growth is a very important favorable condition to tackle the high public debt level. I stop here.

Ms. Yan ‑ Thank you, Vitor. So let me come back to online questions. We have a question from The Economist. His question is “I am interested by the argument in a forthcoming Charles Goodhart book that inflation is the only way for rich countries to escape the high debts built up during the pandemic. What does Vitor make of it?”

Mr. Gaspar ‑ So Charles Goodhart is somebody I know quite well. Charles Goodhart is a scholar and a historian of central banking, is deeply knowledgeable about monetary policy and financial stability. I do believe it is very important to listen to Charles Goodhart and to take his argument seriously.

The contribution from Charles Goodhart’s book is important. He emphasizes the relevance of demographic transitions and, in particular, the relevance of the future projected decline in population and population growth and broader macroeconomic implications from this trend. That is very important, and it puts the right emphasis on long‑run trends.

When it comes to inflation, Charles Goodhart makes an argument against the consensus view that we are on for lower for longer, as Tobias Adrian emphasized yesterday. My take is that on balance, the current state of the macroeconomy does point toward lower for longer, and just as a superficial reaction to the Charles Goodhart argument, I would use the example of Japan that basically from 1999 has been at the zero lower bound for interest rates and where inflation has averaged close to zero. Japan is the country in the world that is the most advanced in terms of the demographic transition that Charles Goodhart talks about. Thank you.

Ms. Yan ‑ Thank you, Vitor. Let us move back to WebEx. We have a question from the Xinhua News Agency.

Question ‑ Thank you for doing this. I have two questions. First is about poverty. You just said, Vitor, 80 to 90 million people are likely to fall into extreme poverty this year as a result of the pandemic, even after additional social assistance, so could you talk a little bit about how should fiscal authorities better react to deal with this issue.

Secondly, about China, can you comment on how China has reacted so far and give some suggestions for further fiscal policy to support its economic recovery going forward. Thank you.

Ms. Pattillo ‑ On the first question, a very short version of the answer would be keep fighting the pandemic with health and other measures that are going to support vulnerable people and firms; second, support a job‑rich recovery; and, third, strengthen social protection systems.

A slightly more detailed answer is that, yes, we project that sadly some of these hard‑won gains in pulling people out of extreme poverty are going to be reversed with the crisis and the additional social assistance is expected to have a relatively modest impact in mitigating this increase in poverty, containing the rise to 80 to 90 million people.

This reflects that, particularly low‑income developing countries have provided more limited support due to financing constraints and in some cases capacity constraints. For example, while on average countries have spent close to an additional 1 percent of GDP on social protection measures to fight the pandemic, the increase was much more modest at less than half that in low‑income countries.

So what to do? Tackling this rising poverty and inequality has become more urgent around the world, and it means there is a need to safeguard social spending, education and health, and build strong resilient social protection systems that can guard against this crisis, as well as future shocks and epidemics.

Now, in countries where containment strategies or the shocks are weighing heavily on informal sector workers, then governments should invest particularly in delivery systems and identification systems that will allow for reaching out more to those who are not currently covered by social programs. We have seen a lot of innovative approaches using local communities in Rwanda, mobile money and digital cash transfers in a lot of countries, and countries can build on that.

So ensuring the post‑COVID recovery is more inclusive, is critical, and the Fund is committed to that through our lending, through our policy advice, and importantly for our department, for the Fiscal Affairs Department, through our capacity development, which is an important part of our operations. Thank you.

Ms. Yan ‑ Thank you, Cathy.

Mr. Gaspar ‑ China contained COVID‑19. Economic activity is rebounding. In our projections, China is one of the few countries that is expected to have a significant positive growth in 2020. In the 2021, we expect even a stronger rebound, but COVID‑19 will have lasting impacts on the level of potential output in China, as in other countries.

Gita Gopinath yesterday did emphasize the importance of risk and uncertainty associated with the epidemic and its ramifications, and China is affected by those as well.

Now, the recovery in China is also uneven in the sense that it is very much based on the production of goods, the export of goods, and on the spending side is much more based on investment than on consumption, which basically leads to the policy recommendations that would make China adjust to a new growth path, which would be inclusive, resilient, and green.

In order to do so, fiscal policy can help a lot. Households can be supported by a broadening of the safety net and the emphasis could move away from investment. Overall, it is crucial to maintain a strong focus on financial stability.

In terms of the balance between domestic and external, it is important that the growth be based on domestic dynamism, and there will be some rebalancing of external balances.

China is a very large economy in the world. It is a global player. So it is important that China continues to contribute to finding global solutions by cooperating in the area of health, think of testing, therapeutics, vaccines, in the area of debt, collaborating with the other partners in the international community to provide debt relief, to ensure debt transparency, to adapt the international architecture to the particular situation, to be constructive of issues of trade, and to push forward a consensus in the important area of climate change. I stop here.

Ms. Yan ‑ Thank you. Now let us take a few more questions from online. AFP has two questions. The first one is, “The report urges governments to alter tax policies to close loopholes and raise taxes on wealthier individuals and corporations, but tax reform usually takes time. How fast does this need to happen to be effective and what should they do in the interim.” Her second question is, “How should policymakers handle the shift in support away from old jobs and toward new jobs without being accused of picking winners and losers.

Mr. Gaspar ‑ So, on your two questions, I believe that the question on taxation leads to a broader theme, which is for fundamental reforms that take time, how does one deal with the conduct of policy over time. What we say in general is that it is very important to keep support in the short run and the medium term as much as possible, while at the same time, give clear guidelines about what is going to happen in the medium to long term. In cases where tax reform is an important element, the elements of tax reform can be announced right away, while implementation should be conditional on the evolution of COVID‑19 and the evolution of economic and financial conditions. So one should delink the announcement from the actual enactment or execution of the measures.

In the context of an epidemic, it is important that those that can best afford do contribute to compensate the most vulnerable. That applies to individuals in our societies. It also applies to the poorer countries and the support from the international community. Cathy Pattillo has been emphasizing that element very much, and that is very important.

Could you repeat the second question?

Ms. Yan ‑ Yes, so the second question is, “How should policymakers handle the shift in support away from old jobs and toward new jobs without being accused of picking winners and losers.”

Mr. Gaspar ‑ Right. So initially the response that was quick and decisive in most countries around the world was aimed at extending lifelines to households and firms. That is a very quick reaction. It is characteristic of an emergency.

As we move forward in the crisis, the priority that should be given to a transition to a new growth model that is resilient, smart, green, and inclusive gains ground. That can be done by designing the system of support in a way that facilitates change. For example, one can move from job retention schemes to measures that support workers and facilitate their mobility across sectors.

It is possible to design systems to facilitate change without going into the business of picking winners, but as a general point, there are important complementaries between public sector intervention and the private sector. Just think about the argument for public investment that argues that in a moment of uncertainty, public investment can provide a bridge over the current uncertainty and allow the private sector to pick good, profitable opportunities for investment going forward.

Ms. Yan ‑ Thank you, Vitor. Paolo, do you have anything to add on this?

Mr. Mauro ‑ Just on the public investment side as Vitor was already mentioning, of course, the transition from the old jobs to the new jobs is one of the most difficult challenges that policymakers will face. One thing they can do is to invest in infrastructure, digital infrastructure, green energy. That is going to be the post‑pandemic economy, and this does not involve telling people or firms what to do. You are essentially providing the infrastructure that is appropriate for the new economy, and then that does not involve telling firms exactly what kinds of sectors to go into, but it does give them the tools to do so and to adapt.

Ms. Yan ‑ Thank you. I think we have time for one last question. The question is Agencia Estado in Brazil. His question is “How harmful would it be for the Brazilian economy if the fiscal reforms do not continue in 2021. Does Brazil have fiscal room to support extraordinary social measures in 2021 adopted this year to mitigate the recession caused by the pandemic?”

Mr. Gaspar ‑ You may recall you asked me about a year ago how the process of fiscal reform was going in Brazil. In October 2019, there was a landmark pension reform in Brazil and before COVID‑19, Brazil already had entrained an ambitious set of reforms of public finances that include control of government spending, tax efficiency, and decentralization of fiscal resources. This agenda is a powerful agenda that should indeed be pursued.

COVID‑19 in Brazil is unfortunately affecting millions of people. We have more than 100,000 fatalities to regret, but it must be recognized that the response of macroeconomic policies in Brazil has been very forceful and we can identify fiscal discretionary measures of about 18 percent of GDP. This is among the largest even in the context of the G‑20. The primary deficit did increase in our projections by about 12 percent of GDP and public debt will jump up to more than 100 percent of GDP.

It is very important to recognize that emergency aid that is based on cash programs helped 23 million Brazilians keep out of poverty.

In our projections, the debt does stabilize in the medium term, and that is because interest rates will stay lower than what was the case in Brazil’s tradition, and growth will indeed pick up.

Brazil is a very interesting case where the trade‑off between fiscal support in the short run is competing with financial stability, treasury financing conditions, rollover risks, and the way out is to emphasize medium to long‑term public finance stability. And there in the case of Brazil, the expenditure ceiling has an extremely important role to play as the long‑run fiscal anchor. I will stop here.

Ms. Yan ‑ With that, thank you very much for joining us today. Next we will have our Managing Director’s Opening Press Conference at 10:15. I hope to see you again virtually. Have a great day.

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