The coronavirus crisis caused a much larger rise in public and private debt than the global financial crisis, the IMF said on Wednesday, as it highlighted a “great finance divide” between countries with access to finance and those without.
The debt was generally put to good use during the pandemic, according to Vitor Gaspar, head of fiscal policy at the IMF, cushioning households and companies from Covid-19, speeding the recovery and brightening economic prospects.
Almost 90 per cent of the active fiscal support deployed during the Covid crisis was taken by advanced economies and China. Although these countries also had better access to vaccines, the IMF said this demonstrated the value of being able to support economies with government spending during a crisis.
In contrast, the lack of access to cheap borrowing undermined prospects in emerging and low-income countries, said Gaspar. “The financing gap seems to translate into economic prospects. And in the case of low-income countries, [the great divide] seems to create difficulties that persists over the medium term.”
“In 2020, fiscal policy proved its power,” Gaspar added, given that poorer countries now face larger long-term economic damage from Covid-19, with depressed tax revenues and worsening underlying public finances.
In the IMF’s Fiscal Monitor, published on Wednesday, advanced economies have not come out of the pandemic unscathed, with debt levels likely to stabilise just under 100 per cent of national income. However, this was lower than expected six months ago.
Deficits are also likely to fall back towards manageable levels as economies recover to normal levels of output, close to their pre-pandemic trend. The IMF did not recommend these countries take additional steps to lower deficits.
When investing in the future, Gaspar said that the pandemic had already showed that borrowing for “well spent” capital spending would have a positive return, boosting economic performance and not adding to debt burdens in the long term.
“Probably, vaccination, at this point in time under Covid-19, is the highest return global public investment ever,” Gaspar said, adding that in many poorer countries, investment to help people adapt to global warming also had very high returns.
The IMF undertook a simulation exercise to evaluate the likely effects of the infrastructure and family support programmes proposed by the Biden administration in the US, alongside the EU recovery fund.
These huge programmes together would add 0.7 per cent to the level of global gross domestic product over the next few years, the IMF estimated, increasing investment and real interest rates in the process with the benefits felt most strongly in the US, the EU and in commodity-exporting countries.