The following remarks were made by the Chair at the conclusion of the Executive Board’s discussion of the Fiscal Monitor, Global Financial Stability Report, and World Economic Outlook on September 28, 2021.

Executive Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities. They welcomed the continuing recovery, despite the resurgence of the pandemic driven by more contagious new variants of the virus and the ongoing supply shortages that brought the inflation risk to the forefront. Directors acknowledged that economic divergences, especially between advanced economies and low-income countries, brought on by the pandemic seem more persistent, a reflection of differentiated vaccine access and early policy support. In this context, Directors highlighted the importance of global cooperation to ensure universal access to vaccines and a strong financial safety net. To ensure a successful exit from the crisis, these efforts will need to be coupled with sound policy frameworks and ambitious domestic reforms, which would facilitate new growth opportunities, including from digitalization and green technology, while confronting climate change and rising inequality.

Directors concurred that uncertainties around the baseline projections remain large and that the risks to growth outcomes are tilted to the downside. They stressed that the economic outlook continues to depend heavily on the path of the health crisis and the speed at which widespread vaccination can be reached. Directors also acknowledged that the uncertainty surrounding inflation prospects—primarily stemming from the path of the pandemic, the duration of supply disruptions, and how inflation expectations may evolve in this environment—is particularly large. They noted that while inflation expectations appear well-anchored, inflation risks could prompt a faster-than-anticipated monetary normalization in advanced economies. Higher debt levels and large government financing needs in many countries are also a source of vulnerability, especially if global interest rates were to rise faster than expected.

Directors highlighted that policy choices have become more difficult, confronting multidimensional challenges—subdued employment growth, rising inflation, food insecurity, the setback to human capital accumulation, and climate change—with limited room to maneuver. They stressed that multilateral efforts to avoid international trade and supply chain disruptions, speed up global vaccine access, provide liquidity and debt relief to constrained economies, and mitigate and adapt to climate change continue to be essential. Directors further agreed that it is crucial to ensure that financially constrained countries can continue essential spending while meeting other obligations, and highlighted the expected contribution of the recent General Allocation of Special Drawing Rights in providing the much-needed international liquidity. At the national level, Directors agreed that policy priorities should continue to be tailored to local pandemic and economic conditions, aiming to overcome the still-evolving health crisis and promote an inclusive recovery while protecting the credibility of policy frameworks. As the recovery progresses, policymakers will need to shift to measures that aim to reverse scarring from the crisis.

Directors noted that fiscal policy should remain supportive but needs to be well-targeted, carefully calibrated, and tailored to country-specific circumstances. In countries with high levels of vaccination and low funding costs, fiscal policy should gradually shift from pandemic-fighting emergency measures toward promoting a transformation to more resilient and inclusive economies. In countries with lower vaccination rates and tighter financing constraints, health- related spending and protecting the most vulnerable will remain top priorities. As countries converge back to precrisis GDP trends, the focus should shift toward ensuring fiscal sustainability, including through establishing credible medium-term fiscal frameworks, which would also promote fiscal transparency and sound governance practices. Given likely long-lasting negative impacts on budget revenues in developing economies, further efforts will be needed to mobilize revenues in the medium term and improve expenditure efficiency. While recognizing that the international community provided critical support to alleviate fiscal vulnerabilities in low-income countries, Directors noted that more is needed, including through debt relief in the context of early and timely implementation of multilateral initiatives, such as the G20 Common Framework.

Directors concurred that monetary policy should remain accommodative where there are output gaps, inflation pressures are contained, and inflation expectations are consistent with central bank targets. However, they noted that central banks should be prepared to act quickly if the recovery strengthens faster than expected or if inflation expectations are rising. Directors stressed that transparent and clear communication about the outlook for monetary policy is critical at the current juncture to avoid de-anchoring of inflation expectations and prevent financial instability.

Directors noted that financial vulnerabilities continue to be elevated in several sectors—including nonbank financial institutions, nonfinancial corporates, and the housing market—masked in part by the very substantial policy stimulus. They highlighted that a prolonged period of extremely easy financial conditions, while needed to sustain the economic recovery, may result in overly stretched asset valuations and further fuel financial vulnerabilities. Directors agreed that policymakers should act preemptively to address vulnerabilities and avoid a buildup of legacy problems. They should also tighten selected macroprudential tools to tackle pockets of elevated vulnerabilities while avoiding a broad tightening of financial conditions.

Directors agreed that some emerging and frontier markets continue to face large financing needs. While the outlook for capital flows has improved and monetary conditions remain still broadly accommodative, a sudden change in the monetary policy stance of advanced economies may result in a sharp tightening of financial conditions, adversely affecting capital flows and exacerbating pressures in countries facing debt sustainability concerns. They concurred that the policy response in these countries will need to be centered on implementing structural reforms, rebuilding buffers, and strengthening financial market governance and infrastructure.