(Yicai Global) April 17 -- While economic stimulus policies are necessary to lessen the impact of the Covid-19 pandemic, countries must take their particular financial situations into consideration to avoid over leveraging, the International Monetary Fund said.

Unprecedented stimulus measures will lead to a widening of fiscal deficits, and some emerging market economies will face debt pressures, the IMF said in its 2020 Fiscal Monitor report released on April 6.

Budget deficits and debts will sharply increase this year in almost all countries, particularly in the US, China, and several European and Asian economies, the Washington-based agency said. Global debt is seen hitting 96.4 percent of gross domestic product this year, 13 percentage points more than last year.

“As public sector support is provided on an extraordinary scale, including vehicles such as loans and guarantees, transparency is crucial to manage fiscal risks,” the report said. “As countries contain the pandemic and shutdowns end, broad-based, coordinated fiscal stimulus -- depending on countries’ financing constraints -- will become a more effective tool to foster the recovery.”

The IMF Executive Committee has approved immediate debt service relief worth USD500 million to 25 of its poorest and most vulnerable member states through its Catastrophe Containment and Relief Trust, the IMF said on April 15. This will permit the payment of grants to cover their debt obligations to the IMF over the next six months to two years, allowing them to direct scarce funds to healthcare, it added.

Exit strategies from such extraordinary relief measures will also be important. “Once economies recover, achieving progress on ensuring debt sustainability will be needed,” the report said.

Fiscal Support

One of the most important roles of fiscal policy is to save lives and livelihoods, according to the IMF’s Fiscal Monitor report. It should provide lifelines to vulnerable households and businesses to “protect the most-affected people and firms from income losses, unemployment, and bankruptcies, and reduce the likelihood that the pandemic results in a deep, long-lasting slump.”

“Many workers and companies worldwide are in danger of income losses, unemployment, and closures owing to liquidity problems,” the IMF added. “In response, governments are providing cashflow support in the form of loans, umbrella guarantees, and other liquidity support.”

These include gifting wage subsidies, sending checks to low-income households, providing enhanced unemployment benefits, granting temporary tax relief, deferring social security contributions as well as paying for leave to those who are unwell, have to self-isolate or need to stay home to take care of children as schools shutter.

To address supply-side constraints and falling demand, special investment allowances or temporary value-added-tax rate cuts could also be used for certain projects as that would allow planned investment to be done earlier, the report said.

“The size of the impact of Covid-19 on public finances is highly uncertain at this time and will depend not only on the duration of the pandemic but also on whether the economic recovery is swift or the crisis casts a long shadow,” the IMF said.

Editor: Kim Taylor