IMF urges largest economies to be prepared to engage in coordinated policy action

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Published: October 16, 2019 8:00:23 PM

Speaking at the IMF headquarters on the occasion of release of Fiscal Monitor, Gasper said that major economies should be prepared for coordinated action in case of a severe downturn.

This situation of low, very low, zero or negative interest rates does not apply to most countries around the world, he noted. Most countries around the world do have positive costs associated with financing their public debts.

The IMF on Wednesday urged the largest economies of the world, including India, to be prepared to engage in a coordinated policy action, a day after it downgraded the 2019 global growth rate to 3 per cent – the slowest pace since the 2008 global financial crisis. The remarks by Vitor Gaspar, Director of the International Monetary Fund’s Fiscal Affairs Department, came a day after the IMF painted a grim picture of the global economy. “It is timely for the largest economies to be prepared to engage in a coordinated policy action if downside risks to the global economic growth materialise,” Gaspar told PTI in an interview. “More explicitly, in case there is a severe slowdown in the global economy, we need to be ready to work together, to face it and solve it,” he said.

Responding to a question, he said that his example of successful international cooperation is what the G-20 agreed to back in 2008. “India was part of that process. India should be a part of a similar process today,” he said. “I’ve been very impressed by the performance of the Indian economy in the last generation. Growth in India is strong.

India must continue its process of reform and transformation to be able to sustain growth as it has done in the past,” he said. Noting that in a large number of advanced economies, they have very low interest rates, he said many of those economies have zero or negative nominal interest rates. “Inflation in some of these countries is below target and inflation expectations are drifting down. So, our recommendation is that economies that benefit from these low or negative interest rates and have fiscal space should use it now to invest,” he said.

“For example, in infrastructure or in people so that they can at the same time contribute to an expansion of aggregate demand while increasing the potential of the economy from a medium to long-term perspective,” he said. This situation of low, very low, zero or negative interest rates does not apply to most countries around the world, he noted. Most countries around the world do have positive costs associated with financing their public debts. And as a matter of fact, most countries around the world have rising public debt to GDP and debt service ratios, he said.

“All countries, should conduct fiscal policy from the viewpoint of a medium to long-term framework, and make sure that they keep public debt at safe levels, or if they have very high levels of public debt, they reduce public debt to safe levels,” Gasper said. “It is important to avoid that low interest rates lead to complacency and over borrowing. And as we have seen too many times in the past, that may be followed by investors’ panic and financial markets’ disruptions,” he said. Speaking at the IMF headquarters on the occasion of release of Fiscal Monitor, Gasper said that major economies should be prepared for coordinated action in case of a severe downturn. “Moreover, with inflation and inflation expectations drifting below target and interest rates in negative territory, in many advance economies the time is now for countries with budgetary room to use it to support aggregate demand,” he said. In most other economies, however, monetary policy is not constrained.

Public debt and interest-to-tax ratios are high and rising. “Therefore, we advise policymakers to follow prudent fiscal policies, anchored by a medium-term framework. Otherwise, as has often happened in the past, complacency fuelled by low interest rates will lead to overborrowing, followed by investors’ panic and markets’ disruption,” he said.

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