Vulnerable And Fiscal Risks

IMF Projects Strain For Emerging, Advanced Economies

Nat Bayjay, nat.bayjay@frontpageafricaonline.com (202-445-3622)

-Washington, DC, United States

The International Monetary Fund (IMF) in its Fiscal Monitor analysis is projecting financial risks and vulnerability for advanced and emerging economies respectively.

Published twice a year to track public spending and government debt and deficits around the world, the Fiscal Monitor is one of three publications of the Fund that complements the overviews presented in its World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR).

According to the Fiscal Monitor, emerging economies remain vulnerable to reversal of fortunes with rising food and fuel prices straining some low-income countries’ coffers while advanced economies need to reduce public debt.

During a press briefing on Day Two of ongoing joint IMF/World Bank Springs Meeting Tuesday being held at the Fund’s headquarters in the United States, Carlo Cottarelli, heading the Fund’s Fiscal Affairs Department told journalists during that Sub-Saharan African countries ,for instance, must seek internal resources for increased spending.

“Linking to my earlier remark, it is clear that over the medium term these countries in Sub-Saharan Africa will have to find a way of finding internal resources to finance increased spending”, Cottarelli warned.

The experienced fiscal expert advised that for these countries to achieve the Millennium Development Goals (MDG’s), the revenue to gross domestic product (GDP) ratio would increase to four percent points of the GDP.

The report projects that despite low-income countries surviving the recent financial crisis relatively well, the pace at which low-income countries reduce debts and deficits will slow by this year amid risks from rising food and fuel prices.

“Both emerging and low-income countries have to manage a delicate balancing act of addressing the social costs of high food and fuel prices, while keeping debt levels and deficits on a sustainable path”, it states.

The last edition of the IMF’s Fiscal Monitor had projected that many countries’ deficits would fall in 2011, reflecting fiscal tightening, particularly in Europe, and improved economic conditions.

The report said emerging economies’ deficits are expected to fall 1¼ percent of GDP this year but with big differences across regions.

John Lipsky, First Deputy Managing Director of the IMF during a separate briefing few hours later told journalists that one of the most important roles of the emerging economies is “increasing willingness to hold investors in their own currencies”.

Lipsky who was lecturing on ‘The Changing Role Of The IMF In The International Monetary System’ stated that the way to help countries cope with financial matters is “not just crisis solution but crisis prevention”.

For advanced economies, average deficit is expected to fall by ¾ percent of GDP to 7 percent, which represents a slower pace than projected in the November 2010 report.

With fears that Spain would follow next in line to Portugal relative to financial woes, the Fiscal Affairs Department doubts the possibility on grounds that Spain started good fiscal accounts prior to the crisis: “The policy response of the Spanish authorities has been strong and is deservedly being recognized by financial markets.”

Cottarelli and his team confirmed that the IMF has already sent its team in Portugal in response to that country’s appeal for the Fund’s intervention in its financial crisis.

For Japan whose devastating earthquake in March is said to be one of the worst in recent history, the IMF said the Asian nation requires additional government spending for immediate humanitarian needs as well as its reconstruction. Although it is too soon to estimate the fiscal costs, the country has ample funds to finance its rebuilding, the IMF said.

With its current deficit budget debate that has overtaken the world’s biggest economy, the IMF said United States will require significant deficit cuts in 2012 and 2013 to meet their commitments over the next few years.

The IMF said all countries that need to reduce their deficits must also take action to ensure that the burden of the fiscal adjustment and the benefits of the economic recovery are distributed fairly.