Keep up the stimulus, but devise credible exit strategies: IMF

In yet another sign of global economic recovery, across the G-20 nations including India, the average overall deficit is projected to fall from 7.9 percent of GDP in 2009 to 6.9 percent of GDP next year, according to the IMF.

Both these figures are somewhat better than projected in July 2009, the International Monetary Fund (IMF) said in its latest edition of the Cross-Country Fiscal Monitor released here Tuesday.

However, excluding losses from financial sector support measures, deficits are projected to widen in advanced G-20 economies in 2010, with reduced stimulus measures more than offset by higher automatic stabilisers as the output gap widens, and by increases in other types of spending.

Spending pressures affect nearly all emerging G-20 countries and particularly Argentina, China, India, Russia, and Saudi Arabia, the fund stated, noting revenue declines relative to 2007 are larger in commodity producers Russia and South Africa.

Moreover, the simulations suggest potentially more adverse debt dynamics for countries where debt levels were higher at the onset of the crisis or where fiscal balances have deteriorated sharply during 2009.

Even in the baseline, debt ratios will remain above 60 percent of GDP for Brazil and India and will increase markedly for Mexico, South Africa, and Turkey, the Fund said, noting: "The results underscore the importance for these countries of securing the projected medium-term fiscal adjustment."

The Fiscal Monitor draws on projections from the October 2009 World Economic Outlook and shows that:

Government debt in advanced G-20 economies is projected to reach 118 percent of GDP in 2014. New IMF research confirms that stabilising debt at these levels would imply increases in interest rates of up to 2 percentage points globally.

Communication of exit strategies now can help contain any potential adverse market response, it said, suggesting credible exit strategies for advanced countries will need to go well beyond the non-renewal of stimulus measures.

Weak pre-crisis structural fiscal positions in many countries have been further eroded by underlying spending pressures, the Fund said.

To get debt below 60 percent by 2030 will require raising the average structural primary balance by 8 percentage points of GDP over 2010-20 and then keeping it there for a further decade.

This could be achieved by a combination of non-renewal of stimulus measures; a freeze in real per capita spending excluding pensions and health; reforms to keep the growth of pension and health spending in line with that of GDP; and tax increases averaging about 3 percentage points of GDP for advanced G-20 countries.

Fiscal policy will continue to provide substantial support to aggregate demand in most countries this year, and is projected to remain supportive of economic activity in advanced countries in 2010, the Fund said.

Though maintenance of fiscal support remains appropriate, governments need to devise and communicate credible exit strategies now, it added.

Last updated on Nov 3^rd, 2009 at 21:13 pm IST--IANS