“Just as increasing vaccinations offered hope, Russia’s invasion of Ukraine disrupted the global economic recovery. One of the most visible global effects has been the acceleration of energy and food prices, triggering concerns about episodes of food shortages and increasing the risks of malnutrition and social unrest,” four International Monetary Fund (IMF) experts, namely Jean-Marc Fournier, Vitor Gaspar, Paulo Medas and Roberto Accioly Perrelli said in a blog post.
World food prices surged by 33.6% in March from a year earlier, according to the Food and Agriculture Organisation of the United Nations.
Economies around the world have accumulated layer upon layer of legacies from past shocks since the global financial crisis. Extraordinary fiscal actions in response to the pandemic led to a surge in fiscal deficits and public debt in 2020, they indicated.
Moreover, the outlook remained uncertain as the world navigated an unprecedented environment, with rising inflation and increasing divergence in recoveries—and then Russia invaded Ukraine, pushing geopolitical risks sharply up.
Global deficits and debt are falling from record levels, but the risks around the outlook are exceptionally high and vulnerabilities are rising. Global public debt is expected to fall in 2022 and then stabilize at about 95% of gross domestic product (GDP) over the medium term, 11% higher than before the pandemic.
“Large inflation surprises in 2020-21 helped reduce debt ratios, but as monetary policy tightens to curb inflation, sovereign borrowing costs will rise, narrowing the scope for government spending and increasing debt vulnerabilities”.
Moreover, the fight against poverty has suffered a setback, especially in emerging markets and low-income countries. Relative to pre-pandemic trends, the COVID-19 crisis pushed 70 million more people worldwide into extreme poverty in 2021.
In many advanced economies, households were protected by direct government support or job-retention schemes. Households spent less and saved more because of social distancing, mobility restrictions, and uncertainty about the future. These excess savings are an important buffer but, if spent quickly, they could further add to the inflation momentum. The situation is much more dire in other countries with large numbers of poor people—where rising inflation could push more into poverty and exacerbate the food crisis.
Governments face difficult choices in this highly uncertain environment and they should focus on the most urgent spending needs and raise revenue to pay for them.
“We recommend agile fiscal strategies tailored to individual country circumstances. In the economies hardest hit by the war in Ukraine and sanctions on Russia, fiscal policy needs to respond to the humanitarian crisis and economic disruptions. Given rising inflation and interest rates, fiscal support should be targeted to those most affected and priority areas”, the experts pointed out.
In nations where growth is stronger and inflation pressures remain elevated, fiscal policy should continue its shift from support to normalisation.
In many emerging markets and low-income economies facing tight financing conditions or the risk of debt distress, governments will need to prioritise spending and raise revenues to reduce vulnerabilities; Commodity exporters that benefit from higher prices should seize the opportunity to rebuild buffers, they concluded.
