Governments must target fiscal support to vulnerable populations hit hardest by rising energy and food prices, and now facing growing food insecurity as a result of Russia’s war in Ukraine, the International Monetary Fund (IMF) said on Wednesday.
Higher food and energy prices have heightened the risks of social unrest, especially in low-income countries already struggling with high debt levels after the COVID-19 pandemic, and now facing higher borrowing costs amid interest rate hikes, the IMF said in its latest report on global fiscal developments.
“Government acting in its special role to protect the vulnerable when things fall apart goes a long way to keep social cohesion,” IMF Fiscal Affairs Director Vitor Gaspar told Reuters in an interview.
Gaspar said there was ample evidence that financial crises, pandemics, and volatile or surging prices could exacerbate divisions and strife, and fiscal policy had an important role to play in addressing such concerns.
“It is an absolute imperative for public policies everywhere to provide food security for all,” he said, arguing in favor of targeted, temporary measures such as cash transfers instead of broader, generalized subsidies that could be costly.
Measures taken by many countries to limit the rise in domestic prices could also exacerbate global mismatches between supply and demand, driving prices even higher.
Gaspar said poor households spent up to 60% of their budgets on food, compared to just 10% for the average household in advanced economies.
However, many countries lack the spending power to fully address the latest crisis, after unprecedented outlays during the height of the COVID pandemic that drove global debt to $226 billion in 2020 – the largest one-year surge in debt since World War Two.
“We believe that the global debt risks are quite significant. They affect some countries in all country groups,” Gaspar said, pointing to high yield spreads on some emerging market debt that reflected growing market perception of risk.
The IMF said it expects global public debt to fall to 94.4% of gross domestic product in 2022 after peaking at 99.2% in 2020, stabilizing around 95% over the medium term. But that level is 11 percentage points higher than before the pandemic.
Gaspar said the IMF would continue to push for changes to ensure greater clarity about the Group of 20’s common framework debt restructuring process and quicker timelines, as well as a freeze in debt payments during negotiations, and comparable treatment of private and public creditors.
“The case for a global solution is very strong. And we are working hard to try to make it happen,” he said.
“It’s in the best interest of creditor countries, it’s in the best interest of debtor countries, and it is in the best interest of private creditors as well.”
Copyright 2022 Thomson/Reuters