IMF projects withdrawal of fiscal support by major economies towards emerging markets


The International Monetary Fund (IMF) has projected higher borrowing costs and a more disruptive policy adjustment as governments in major economies are set to slowly withdraw their fiscal policy support from emerging markets such as Zambia.

This could, in some cases, also exacerbate inflation with elevated public debt, according to the IMF in its World Economic Outlook Update, January 2024.

The IMF projected that could also lead to a negative impact on global growth later on.

On the risks to the outlook, the IMF showed: “Slower-than-assumed withdrawal of fiscal support: Governments in major economies might withdraw fiscal policy support more slowly than necessary and then assumed during 2024–25, implying higher-than-projected global growth in the near term.

“However, such delays could in some cases exacerbate inflation and, with elevated public debt, result in higher borrowing costs and a more disruptive policy adjustment, with a negative impact on global growth later on.”

On policy priority, the fund suggested rebuilding buffers to prepare for future shocks and achieving debt sustainability.

It pointed out that orderly debt restructuring may also be necessary for countries in or at high risk of debt distress.

“Faster and more efficient coordination on debt resolution, through the Group of Twenty Common Framework and the Global Sovereign Debt Roundtable, would help mitigate the risk of debt distress spreading,” the IMF indicated.

It noted that increasing fiscal balances over a sustained period, while protecting priority investments and support to the vulnerable, was needed in many cases.

The IMF explained that well-calibrated plans could support fiscal policy credibility, allow the pace of consolidation to be adjusted as a function of the strength of private demand, and avert disruptive front-loaded adjustments.

“Mobilising domestic revenue, addressing spending rigidities, and reinforcing institutional fiscal frameworks are likely to support adjustment efforts, both in economies with sizable spending needs and in others as well.

“With fiscal deficits above pre-pandemic levels and higher debt-service costs, fiscal consolidation based on credible medium-term plans, with the pace of adjustment depending upon country-specific circumstances, is warranted to restore room for budgetary maneuver,” it stated.

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