IMF warns cutting spending too soon could derail recovery

Business: IMF warns cutting spending too soon could derail recovery

As governments rushed out funding to prevent an economic collapse amid the coronavirus pandemic, global public debt swelled to the highest in history, but the International Monetary Fund (IMF) warned Friday that cutting back too soon could undermine the recovery.

Continuing to provide the support as the economic slowdown drags on will be “paramount,” the IMF’s fiscal policy chief Vitor Gaspar told AFP in an interview.

“The risk of premature withdrawal of fiscal support is the dominant risk,” even more than rising debt levels, Gaspar said, noting that the economic recovery from the global financial crisis was slowed by that misstep.

As the health crisis spread and businesses were shuttered worldwide to contain the spread of COVID-19, governments provided “a massive fiscal response” of close to U$11 trillion (about R184 trillion) in just a few months to help support households and prevent bankruptcies, a “stronger and faster” response than in 2008-2010.

As a result, even amid record low interest rates, the debt figures are staggering.

Global public debt will reach “its highest level – as a percentage of GDP – ever recorded in history,” at over 100 percent of global GDP, Gaspar said.

Deficits in advanced economies are projected to be five times higher than pre-pandemic estimates for 2020.

The Washington-based crisis lender, which historically has always advocated for governments to restrain spending, is in the unusual position of urging authorities to flood their countries with cash while also sounding the warning about pitfalls ahead, especially if there is a renewed spike in virus cases.

With over 12 million cases worldwide and 555,000 deaths, “priority number one” is the health crisis and policies to contain the spread of COVID-19 so that life and the economy can return to normal, Gaspar said.