Gita Gopinath, Chief Economist of the International Monetary Fund (IMF) has urged policymakers around the world to provide fiscal stimulus to boost a relatively faster recovery from the ghastly repercussions inflicted by the pandemic, as the world economy stares at a liquidity trap.
“For the first time, in 60 per cent of the global economy — including 97 per cent of advanced economies — central banks have pushed policy interest rates below 1%,” said Gita Gopinath. Central Banks have attempted to tackle this issue with unconventional measures, but despite all efforts, consistently low inflation and in some cases intermittent deflation has raised the concern of negative real rate, in case of another blow to the global financial system.
Central banks’ policies have played a role but are limited to stimulate demand. Hence, shaping new dynamic fiscal policies is the need of the hour. Fiscal authorities can actively support demand through cash transfers which support consumption and large-scale investment in medical facilities, digital infrastructure and environmental protection. This will result in large-scale job-production, give a boost to private investment and lay the foundation of a speedier but more sustainable recovery.
Many countries have lowered interest rates and further reduced the debt-servicing costs which will stimulate investment in many economies, without compromising debt sustainability or bond market access. The stimulant size shall vary according to the country’s financial standing and economic outlook. Those who have entered the crisis with heavy debts shall require financial support while spending will be prioritized.
Gopinath further expressed that this is a once in a lifetime global financial crisis and policymakers should respond accordingly. In the World Economic Outlook report released last month, the IMF forecasted a contraction to the global economy of 4.4%. The way out is likely to be long, eventful and uncertain but a global fiscal push can elevate prospects for all.
