Debts have become smaller, but more expensive – Newspaper Kommersant No. 65 (7510) dated 04/14/2023

The tightening of the fiscal policy in 2022 allowed most states to reduce the budget deficit – this effect was most pronounced in developed countries, follows from the review of the International Monetary Fund. Inflation supported the growth of budget revenues, but now its reduction will require synchronization of fiscal and monetary policies, which will allow regulators not to resort to more pronounced tightening. The fund sees trade fragmentation as an additional risk for economies — the restructuring of supply chains in the long term can lead to a decrease in global GDP.

Fiscal policy tightened in many countries last year, with three-quarters of economies cutting government spending and debt after record spending during the pandemic, in parallel with monetary tightening. At the same time, in 19% of the countries of the world, such monetary tightening was accompanied by a softer fiscal policy, according to a review of the International Monetary Fund (IMF). Fiscal cuts should have helped ease inflationary pressures, but now more expensive debt servicing is becoming a key issue.

The level of government debt burden last year decreased from 95.5% to 92.1% (the peak was reached in 2020 – 99.7% of GDP), but now countries are increasing not only military spending, but also support for high-tech industries (over through the allocation of incentives to national producers). Therefore, this year the debt burden will increase again – up to 93.3%, the IMF predicts. By 2028, the figure may reach the level of 2020.

The average budget deficit last year decreased from 6.6% to 4.7%, including in developed countries – from 7.5% to 4.3% (in developing countries it remained unchanged – 5.2%). The debt burden has fallen to 113% of global GDP, but it remains higher than it was before the pandemic. In the medium term, this figure, according to the IMF forecast, will grow to 118% of GDP. In developing countries, the average deficit is expected to widen by 1.6 percentage points this year. Most states will also face higher debt service costs and lower revenues. This also applies to countries that export raw materials.

The acceleration of inflation last year had a positive impact on budget revenues – in developed countries, this effect is estimated at 3.1% of GDP, in developing countries – at 2.5% (it was even more pronounced for commodity exporters). The same circumstance made it possible to reduce the level of deficits, but relying only on inflation is not a very sustainable strategy, the IMF warns. At the same time, the fund emphasizes that fiscal and monetary policies should be synchronized to fight inflation – this will allow central banks to pursue a less stringent policy.

At the same time, the IMF is also concerned about the possible consequences of the fragmentation of world trade. The GDP of some countries will shrink by 12% in the long term, Kristalina Georgieva, head of the fund, said yesterday at a press conference during the spring session of the governing bodies of the IMF and the World Bank. According to her, the analysis of the fund’s experts showed that, in general, for the global economy, the costs of fragmentation could amount to 7% of GDP. The higher level of losses may be due to “technological decoupling” and fragmentation of capital flows, including direct investment.

Tatyana Edovina