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IMF Paper Advises On Fiscal Support Exit Strategies

Thursday, February 25, 2010

A new report from the International Monetary Fund (IMF) has analyzed the ramifications of removing stimulus from the globe’s economies, and has recommended stimulus exit strategies depending on individual situations. In general, the IMF has recommended that faster growing emerging market economies should begin fiscal consolidation immediately, while advanced economies, in general, should wait.

The IMF says that the global economy is beginning to recover as a result of fiscal and monetary support but the cost of combating the crisis around the world runs into trillions of dollars. As the crisis winds down, the Fund has observed that it is now more urgent that policymakers "formulate, communicate, and begin to implement strategies for exiting from crisis-related intervention policies." This is the talking point of the IMF’s new paper, released on February 23, entitled ‘Exiting from Crisis Intervention Policies’.

On the question of when to exit, one senior official at a press briefing on the paper said that, in principle, “the answer is when private demand is ready to take up the relay and growth can be sustained.”

According to the paper, the timing of policy shifts depends on country circumstances, particularly the pace of recovery and the government debt position. IMF officials had the following key messages:

  • Most advanced economies should maintain stimulus in 2010, and begin tightening in 2011 if the recovery proceeds as currently projected;
  • Fast-growing emerging markets can start tightening now; and,
  • In some cases, market concerns imply that tightening is needed ahead of recovery.

IMF officials noted that the crisis has left scars in the form of large public debt increases, particularly in advanced countries. They emphasized, however, that the debt increase reflects mostly revenue losses from the recession, not the cost of the stimulus.

"The strategic goal should be to reverse the rise in debt, not just to stabilize it at post-crisis levels. This will take several years and will involve difficult choices and measures, but history tells us it can be done," the Fund argues.

It is suggested that removal of stimulus measures could be done in a phased way, with fiscal measures being unwound ahead of monetary policy. “The reality is that one more year of deficits is much more costly than one more year of low interest rates. So when the choice is available, fiscal exit should come first, monetary tightening second”, the IMF official said.

In the more immediate term, IMF officials added that actions that do not impact negatively on demand should be implemented now, as this can alleviate the tension between exiting too soon and too late.