‘Please Spend as Much as You Can, but Keep the Receipts’


The Role of the IMF in the Post-COVID-19 Fiscal Stabilization and Recovery. Key Points 

‘We should use fiscal stimuli to create green jobs, move digitalization forward in an equitable way and ensure that we build shock resilient economies.’ 

IMF Managing Director Kristalina Georgieva tackled in her remarks the consequences of COVID-19 pandemic globally, explained how the International Monetary Fund is responding to it, as well as her views about where the world is headed. 

  • This is a crisis like no other. It will induce an abrupt change in countries’ fortunes for the first time since the Great Depression. It, moreover, applies to the whole world: 170 economies globally will shrink and finish this year with their standards of living lower than they started. This reversal of fortune is a shock that is, fortunately, being met with a significant reaction.
  • As a unique crisis, it is matched by an unprecedented response. Governments and central banks around the world acted decisively and rapidly, and so did the IMF. We are seeing a massive increase of liquidity, monetary easing, conventional and unconventional monetary policy measures, as well as massive fiscal stimuli.

The European Union also deserves credit; I am very hopeful about the recovery fund, Next Generation EU’, that materialized in response. I trust it will act as an engine that will restart economic convergence in Europe.’ 

  • At the IMF, we injected a massive amount of capital and formulated massive emergency financing packages. We took on an important role, which is consistent with our surveillance function. We take the pulse of each economy, as well as the pulse of our global economy. Back in April, we projected that the pandemic-induced crisis would result in a 3 per cent contraction of global GDP. Our forthcoming projections will, unfortunately, amount to even deeper losses. We also took surveillance of what each country did to tackle the crisis to contribute to our projections

These are the two new and pivotal actions from the IMF, firstly to incorporate into our macroeconomic models the views and projections of the epidemiologists, and secondly to create a global survey, country by country, where we monitor all actions taken and compare them across countries. Now, this mechanism is looking at the deconfinement process and measures. 

  • On stabilizing the global economy, countries are encouraged to spend as much as possible, but keep the receipts and keep in mind that growth needs to follow. This is one of the lessons we learned from the 2007-2009 Great Recession, is that fiscal support should not be withdrawn too early. Also, the global banking sector is at much sounder footing today than in 2007. Importantly, sovereigns, households and firms benefit from an ultra-low to negative interest rate environment, which allows them to maintain a capacity to function while borrowing. We can successfully say we put a floor under the world economy, which will prevent government bankruptcies.
  • The current situation is especially hard on emerging markets that typically have difficulty financing themselves in international capital markets. The loss and outflow of capital has been astounding, counted in billions. Countries with sound economic fundamentals were better positioned to tap into liquidity, but fragile states experienced serious problems while trying to stay current on their debt payments. That is why the IMF and the World Bank called for a debt standstill. 
  • China is a relatively new lender, with multiple ministries and institutions that agree on consolidation of debt provision. Within China, there is now a view that the government organizations which loan funds must be consolidated, and debt must be managed more effectively. The Sino-American tensions were the main concern for the global economy before the crisis and now it is more pressing than ever. Protectionism was the main fear that will stale growth. Now, after the pandemic, this fear is even further accentuated. The European Union has been smarter and pushes back on protectionism, but our biggest task as a global community going forward is to stop protectionism. We need to revitalize trade and globalization and if we fail in this, costs will rise, incomes will drop and poverty will rise. Debt sustainability will become a big issue, without free trade, and global value chains, and, poverty and inequality rise as a result. We need to come out of this with greener more resilient economies which must also be smart and fair.

We should use fiscal stimuli to create green jobs, move digitalization forward in an equitable way and ensure that we build shock resilient economies. Tax policies will also need to be changed. A price on carbon will also be needed as well as how we tax the digital sector. The last tool we will have are tools for structural changes which ensure that the economies remain fair and create jobs. We need a greener, smarter world.  

  • Regarding tax policy, we should be careful that we do not withdraw support too quickly. We have to think ahead and consider that changes in tax policies take time so we should tackle it without too much delay. Two issues which complicate this is the increased income inequality and unequal access to opportunity. Education, for example, is getting worse in Europe, especially for poor people. This impacts things like research and development which prevent competition in the information economy. The second is a need for greener structural changes. 
  • The big winner of this crisis is the digital sector, which is to only grow and deepen but is under-taxed. I do not advocate for a rapid shift but we must find ways to amend the distribution of wealth and smarter public expenditures. On public wealth, when interest rates are low, why not use it to protect the economy? We should not move to austerity rapidly, the IMF is saying we must spend, just spend smartly. However, money cannot be free forever, we need to think clearly about how we move forward. One of our biggest worries is deflation, too. 
  • The new face of the global economy will be rapidly digital. We jumped two years thanks to this. We also know that debt will be increasing and we need to manage it in the future. We don’t know how the green economy will pick up, because of concerns about jobs in older, carbon-negative sectors. I hope we do put effort into the green transition as climate change will be far worse than the pandemic. Also, we don’t know the fallout of trade tensions or what travel and tourism will look like coming forward. We also know that solidarity has proven to be a pretty way of boosting the quality of life and opportunities. This is also the time for European leadership on all these issues and I hope the EU embraces this opportunity
  • Regarding carbon pricing, the IMF has come to the conclusion, supported by empirical evidence, that a carbon tax is the most efficient measure when it is used properly. That is, by using the income to aid people with lower incomes, there is public support. By distributing these incomes like this, it produces an incentive to move to lower carbon solutions. In Ireland, they began quite low and by slowly increasing you can transition an economy. Now maybe the time to use incentives to encourage European economies to adopt them. Right now, carbon is at 2$ globally and needs to be at 75$

We are encouraging countries to audit their own spending and we will help countries trace this money to see how it was used. We are encouraging countries to move rapidly toward e-government. On SDRs, we don’t have the support for a new SDR allocation because many advanced economies hold them when they do not really need them, which is an issue.  

  • Emerging economies are building up large amounts of debt which is needed right now. Flexible arrangements can be used to encourage growth, as they have been used in Latin America. For countries with quite sizeable debt, we are looking at the paths they can take towards debt sustainability, while being conscious that there is no easy debt resolution mechanism, outside of the Paris Club. We need to build an alliance on cooperation for debt sustainability. It is mostly being done on a country by country basis. The IMF has luckily been able to triple the IMF’s lending capability and although the IMF is a lender of last resort, we are ready to support our members. 

The full debate with Ms Kristalina Georgieva, IMF Managing Director can be watched here:

The debate The Role of the IMF in the Post-COVID19: Fiscal Stabilization and Recovery, was jointly organised by GLOBSEC Bruegel, and Institut Montaigne.