The major question facing policy-makers at the World Bank and International Monetary Fund’s (IMF) Annual Meetings this week will be how to support economic recovery. Until the Covid-19 pandemic is contained, there will continue to be great uncertainty about the future health of the global economy. We can however be certain that as the world emerges from the crisis, economies will be smaller, firms will have gone bankrupt and governments will be more indebted and collecting less revenues than before the crisis begun.
Despite these weaknesses, there is an expectation in the largest global markets that governments will make full use of fiscal policy to help economies quickly bounce back. For instance, the German government – not known for its fiscal proclivity – announced back in June a €130 billion stimulus package to support recovery.
By contrast, in lower income countries there is growing concern that as the pandemic subsides, governments will be obliged to make expenditure cuts in order to quickly settle loans accumulated to prop up economies in recent months. The most recent IMF Fiscal Monitor suggests that governments in lower income countries are already cutting back on investment as they seek to make ends meet during the crisis. There is a very real risk that growth rates could remain depressed for years to come. What then can policy-makers do to avoid this?