High debt levels to persist until FY24, says IMF

Updated October 17, 2019

Email

The Inter­national Monetary Fund (IMF) on Wednesday projected Pakis­tan’s primary deficit to turn positive one per cent of GDP in the FY21 from a negative 0.5pc in FY20 but said the country’s debt levels are likely to remain elevated at above 65.4pc until FY24 despite continuous decline. — Reuters/File
The Inter­national Monetary Fund (IMF) on Wednesday projected Pakis­tan’s primary deficit to turn positive one per cent of GDP in the FY21 from a negative 0.5pc in FY20 but said the country’s debt levels are likely to remain elevated at above 65.4pc until FY24 despite continuous decline. — Reuters/File

WASHINGTON: The Inter­national Monetary Fund (IMF) on Wednesday projected Pakis­tan’s primary deficit to turn positive one per cent of GDP in the FY21 from a negative 0.5pc in FY20 but said the country’s debt levels are likely to remain elevated at above 65.4pc until FY24 despite continuous decline.

In one of its flagship publications released by IMF Director Fiscal Affairs Department Vitor Gaspar on the eve of annual meetings of the World Bank and the IMF, the fund noted that the government expenditure would generally remain stubborn above 22pc.

The Fiscal Monitor 2019 put the budget deficit at 8.8pc of the GDP in 2019 with projection for FY20 at 7.4pc as IMF-supported programme comes into force. The fiscal deficit is likely to go down to 5.4pc of GDP in FY21, followed by 3.9pc in FY22 and 2.8pc in FY23. It will then stay at 2.6pc of GDP in FY24, adds the report.

On the other hand, primary balance would be negative 0.5pc of GDP in FY20 and then turn surplus to the extent of 1pc of GDP in FY21. The primary balance would further improve to 2.1pc of GDP in FY22 followed by 2.7pc of GDP over the subsequent two years.

The revenue-to-GDP ratio, at 12.8pc, is expected to increase to 16.3pc of GDP during current fiscal year because of current year’s taxation measures and further go up to 17.9pc in FY21. This ratio will increase to 19pc in FY22 and then remain unchanged at 19.6pc in FY23 and FY24.

The government expenditure will generally keep moving within a narrow band of 22-23pc of GDP all along until FY24.

The general government debt at 76.7pc of GDP in FY19 will further go up to 78.6pc in FY20 and come down to 76.1pc of GDP in FY21. The debt-to-GDP ratio will further reduce to 72.5pc in FY22 followed by 69pc in FY23 and 65.4pc in FY24.

IMF’s Vitor said the fiscal policy is now at the center of economic policy debates globally because it was playing a central role in, for example, managing the synchronised slowdown; preparing for downside risks; contributing to financial stability; financing the Sustainable Development Goals (SDGs) and, finally, in addressing climate change—the topic of the Fiscal Monitor.

He advised that major economies should be prepared for coordinated action in case of a severe downturn. Moreover, inflation and its expectations are drifting below target and interest rates are negative, in many advanced economies.

Hence, the time is now for countries with budgetary room to use it to support aggregate demand.

In other economies, however, monetary policy is not constrained. Public debt and interest-to-tax ratios are high and rising. Therefore, the IMF advised policymakers to follow prudent fiscal policies, anchored by a medium-term framework. Otherwise, as has often happened in the past, complacency fueled by low interest rates may lead to over borrowing, followed by investors’ panic and market disruption.

Sovereign bond yields are negative across the maturity spectrum in most advanced economies. We are now deep into zero or negative territory, he said. Further decreases in policy interest rates are limited. This contrasts with the situation just before the Global Financial Crisis.

In emerging markets and low-income developing countries, public debt ratios are high and rising. The cost of servicing debt is also increasing, unlike advanced economies, where low interest rates have compensated for high debt levels. Some countries are vulnerable to exchange and interest rate shocks.

In China, the largest emerging market economy, we expect the economic slowdown and fiscal stimulus to widen the deficit. We recommend that fiscal policy helps to dampen the negative impact on growth from trade disputes, and that it supports long-term re-balancing of the economy.

Fiscal policy has an important role to play in the development agendas of many countries to substantially increase spending to meet the SDGs by 2030, particularly low-income developing economies.

The spending needs to be framed in the context of a comprehensive growth and development strategy. Building tax capacity is necessary to enable a country to generate the extra revenue that underpins inclusive development. In addition, improving the efficiency of a country’s spending is a crucial aspect of good governance. It is also necessary to ensure complementarities between public finance, private investment, and official development assistance.

On the efforts to address climate change, the report said that current pledges under the Paris Agreement are not enough. They will limit global warming to 3°C. This is well above the safe level. To limit global warming to 2°C or less — the level deemed safe by scientists — finance ministers need to take further substantial fiscal policy actions.

How much more? The simplest way to illustrate the point is to focus on a single instrument, such as carbon taxation. Each country would have to take measures that are as ambitious as a carbon tax rising to $75 per tonne by 2030.

The carbon tax would lead to higher prices for consumers. The goal is to reshape the tax system and fiscal policy more generally to discourage emissions. It is crucial that additional revenues from carbon taxation are used appropriately to reduce burdens and make the reform more politically acceptable.

Published in Dawn, October 17th, 2019