International Monetary Fund. Western Hemisphere Dept.
The economic outlook is mainly characterized by sluggish growth and a weak fiscal stance, which have put public debt on an unsustainable path. The widening current account deficit would put strong pressures on international reserves, which could decline to very low levels. Low capital buffers would remain a drag on the financial system. Main risks continue to be a court decision that leads to larger than expected liabilities to the former owners of the nationalized companies and weaknesses in the systemic bank.
In the aftermath of the debt crisis of the early 1980s, many of the IMF’s poorest member countries embarked on far-reaching programs of adjustment and economic reform. The severity and structural nature of the economic problems to be addressed suggested a need for longer-term financial support than that available under the IMF’s conventional instrument for members’ use of its resources, the Stand-By Arrangement. At the same time, given the low per capita incomes and typically large external debts of the countries concerned, there was a desire in the international community to ease the burden of new IMF loans by offering them to eligible borrowers on highly concessional terms. Those benefiting would be expected to combine strong macroeconomic policies with extensive reform of their economic systems, to remove distortions, enhance efficiency, and redirect the role of government in the economy. These circumstances led to the creation of the IMF’s Structural Adjustment Facility (SAF) in 1986, followed a year later by its successor, the Enhanced Structural Adjustment Facility (ESAF). By the end of 1994, 36 countries had drawn on the ESAF, in support of 68 multiyear programs.1
The COVID-19 pandemic has struck amid a preexisting sluggish global growth outlook, historically low nominal interest rates, and low inflation. The pandemic has elevated the need for fiscal policy action to an unprecedented level. For some countries, however, high debt levels and tightening financing conditions are constraining the policy response. But whereas in other economic downturns a key goal of fiscal policy is to stimulate demand, this crisis is like no other—and in its early stages the primary objectives are to boost resources for health care and to provide emergency lifelines to people and firms.
Low growth and investment, adverse shocks, and low inflation and interest rates during the past few years put fiscal policy at the forefront. The COVID-19 pandemic of 2020 has strengthened the case for fiscal policy action and heightened its urgency. In the past few years, growth has been subdued in advanced economies, reflecting various factors including a moderation in capital accumulation (Box 2.1). Sustained high and inclusive growth is critically needed for development in emerging market and developing economies. Inflation has trended down since the 1980s and is currently below targets in two-thirds of inflation-targeting countries. In advanced economies, inflation expectations are anchored at low levels. Nominal interest rates are at historical lows, shifting the balance of cyclical demand support toward fiscal policy. This is because the natural rate of interest—the interest rate that keeps the economy at full employment with stable inflation—is estimated to have fallen significantly and is now below zero in some economies (Rachel and Summers 2019). Consequently, the effective lower bound on policy rates binds more frequently. Moreover, the nominal interest rate on new government borrowing, although at times volatile, is currently negative in many advanced economies (something historically unprecedented). These patterns have been exacerbated by the COVID-19 pandemic (Chapter 1), resulting in a global recession this year, and are likely to persist during the post-shutdown recovery.