Transcript of the Press Conference on the Release of the October 2016 Fiscal Monitor
IMF News, October 5, 2016
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- Published: October 5, 2016
Key findings from the Fiscal Monitor
- Database coverage: 113 countries.
- Global debt:
- Total: 152 trillion dollars.
- Share of GDP: 225 percent of GDP.
- Composition: Two thirds of this debt is private.
- Main risks identified:
- High and rapidly increasing private debt often leads to financial crisis.
- Financial recessions are longer and deeper than normal recessions.
- Weak initial financial positions exacerbate financial recessions.
- Debt distribution:
- Debt is very unevenly distributed and mainly concentrated in advanced and a few systemically important emerging market economies.
- Debt levels generally lower in low income countries, with substantial dispersion within country groups.
Debt drivers and notable country situations
- China:
- Non‑financial corporations’ debt is growing very fast and significantly affects global debt trends.
- Challenge should be tackled urgently; authorities are aware and have means to address it.
- Advanced economies:
- Debt reduction has been slow, often associated with monetary policies near the effective lower bound.
- Key explanatory factor: low nominal growth.
- Hard to reduce debt ratios without returning to strong growth with inflation back to target.
- Low income countries (sub‑Saharan Africa overview):
- Private debt levels still low but gradually increasing due to financial sector development (microfinance, mobile banking).
- Public debt generally low after HIPC debt relief but on an upward trend since around 2010 in some cases.
- Top quartile of low income African countries: average increase in debt since 2010 has exceeded 30 percent of GDP.
- Frontier markets used more non‑concessional bond financing and financing from China while pursuing ambitious public investment plans.
- Important policy question: are borrowings translating into increases in infrastructure and public capital stocks that will support future growth and debt sustainability?
- Nigeria:
- Recession and fiscal deterioration after slump in oil prices.
- Debt profile weakening: interest payments now account for more than 45 percent of federal government revenue.
- Priorities: increase non‑oil revenues, implement independent price‑setting to minimize fuel subsidies, improve public service delivery.
- Ghana:
- IMF program in place; deficit reduced from 12 percent in 2012 to about 6 percent currently.
- Implementation broadly satisfactory but outlook difficult; priorities include strict control of spending (especially wages) and avoiding election‑related spending overruns.
- Mexico:
- IMF recommends creation of an independent fiscal council, closer links between deficit targets and debt objectives, and further investment in fiscal rules to combine short‑run flexibility with a well‑anchored longer‑term public debt path.
- United Kingdom (post‑Brexit fiscal stance):
- Chancellor announced fiscal strategy details to be presented in the Autumn Statement; presentation date recalled as November 23rd.
- IMF emphasizes pragmatism: short‑ to medium‑term flexibility combined with a reinforced medium‑term framework and focus on high‑return public investment and public investment efficiency.
- Germany:
- Quantified IMF fiscal space: about 2 percentage points of GDP over the next three years; could be used for a significant increase in public investment and other priorities (child care, migrant integration).
- Greece:
- IMF supports realistic fiscal adjustment and structural reforms complemented by improved debt relief from Europe to restore debt sustainability.
- United States example cited among six case studies of targeted interventions.
Targeted fiscal interventions: definition and design
- Definition: Interventions aiming to facilitate repair of private sector balance sheets.
- Modes:
- Direct: targeted tax rebates, subsidies on mortgage interest payments, support for household restructuring (example: Iceland).
- Indirect: interventions through the banking sector (e.g., bank recapitalization).
- Design principles:
- Proper targeting.
- Conditionality and behavior requirements on beneficiaries to restore balance sheet health and economic viability.
- Framing within robust regulatory and supervisory environment and functional insolvency regimes.
- Illustrative cases: six case studies covered — Finland, Iceland, Japan, Korea, Thailand, and the United States.
Fiscal policy role, sequencing, and the interaction with other policies
- Core message: Fiscal policy can play a more active role, but no one size fits all.
- Countries with fiscal space can and should use it; not a blanket call for broad fiscal stimulus as in 2008.
- All countries, including those consolidating, should pursue growth‑friendly fiscal policies by changing the composition of expenditures and revenues to minimize drag on growth.
- Resolving the debt-growth paradox:
- High debt hampers growth, but reducing debt ratios requires higher nominal growth.
- Short‑term targeted fiscal expansion that boosts nominal growth and potential growth, supported by structural reforms and appropriate monetary policy, can restore sustainability over the medium term.
- Coordinated approach:
- Staff discussion note advocates a comprehensive, consistent, and coordinated approach across policies within a country, over time, and across countries.
- Under current circumstances (monetary policy near the effective lower bound), spillovers across countries are particularly strong, strengthening the case for coordination.
Fiscal space: definition and implications for spillovers
- IMF definition: A country has fiscal space when it can increase expenditure or reduce revenues without undermining fiscal sustainability or bond market access.
- Judgment on fiscal space depends on debt sustainability, market access, and many country‑specific circumstances.
- Spillover effects:
- Using fiscal space in one country can have cross‑border impacts; coordinated action may yield larger global effects, especially when monetary policy is constrained.
Markets, interest rates, and risks
- Low global interest rates have contributed to debt accumulation in some emerging markets.
- Importance of ensuring debt sustainability as monetary policy normalizes.
- Need for policy strategies that are appropriate now and deliver long‑term stability and inclusive growth.
Concluding policy priorities and messages
- Urgent priorities where relevant:
- Early proactive interventions when private debt is on unsustainable paths to prevent financial instability and financial recessions.
- Careful design of targeted fiscal interventions with conditionality and institutional supports.
- Boost nominal growth through a mix of short‑term fiscal support (where appropriate), structural reforms, and monetary support when possible.
- Strengthen fiscal institutions (e.g., independent fiscal councils, fiscal rules) to balance short‑run flexibility with medium‑term debt anchors.
- For low income and frontier economies: prioritize revenue mobilization capacity to finance infrastructure, education, and health needed for development while maintaining debt sustainability.
Source: Transcript of the Press Conference on the Release of the October 2016 Fiscal Monitor.