Thursday, 16 April 2015

Lower oil prices present opportunity to reform energy subsidies and taxation: IMF

However fiscal risks remain elevated, the report warns. Advanced economies face the triple threat of low growth, low inflation and high debt. 

In the global context of a moderate and uneven economic recovery, sound management of public finances can secure elusive growth and jobs.
 
In its latest Fiscal Monitor, the IMF recognizes influential factors that are assisting the recovery in many countries. Lower oil prices, growth-friendly monetary policy and slower rates of fiscal adjustment are all playing their part. 
 
However fiscal risks remain elevated, the report warns. Advanced economies face the triple threat of low growth, low inflation and high debt.  Emerging and developing economies have experienced softening growth and higher costs linked to financial and exchange rate fluctuations. Exporters of oil and commodities have been hit with lower revenues. 
 
Smart taxation and spending and strong fiscal frameworks make a huge difference. “Fiscal policy continues to play an essential role in building confidence and supporting growth,” said Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department.
 
The IMF Fiscal Monitor is published twice a year to track public finance developments around the world. The latest edition outlines three areas for action: 
  • Strengthening fiscal frameworks
  • Reforming energy subsidies
  • Using fiscal policy to stabilize output 
 
Advanced economies still slowed by debt 
Public debt continues to present a headwind to growth. Despite significant efforts since 2010, advanced economies’ average ratio of debt to GDP remains above 100 percent. This is expected to decline only slowly in coming years and some countries’ debt projections have been revised upward. 
 
Debt reduction efforts have been aided by stronger-than-expected growth in some countries, such as the United States. But they have been hampered by low levels of inflation levels in many advanced economies, notably in the euro zone. 
 
Growth and inflation have the potential to significantly ease the debt burden. If Austria, Italy, Japan and Portugal could attain 4 percent nominal growth by 2017, their debt ratio could drop by as much as 10 percentage points by 2020.
 
Emerging markets and low-income countries 
Average deficit for emerging, middle income and low-income countries is on the rise and expected to increase in 2015. Oil exporters have lost significant revenues due to the sharp drop in prices. While some have responded with fiscal tightening, others are accommodating the shock with increased deficits. 
 
Volatility in financial markets, capital outflows, and exchange rates have raised the cost of financing for countries such as Brazil, Ecuador and Russia. 
 
The recent Ebola outbreak added pressure to already fragile infrastructure in Guinea, Liberia and Sierra Leone. These countries were the first beneficiaries of the IMF’s newly established Catastrophe, Containment and Relief Trust. The trust will provide debt relief to countries public health crises of this kind and other disasters. 
 
Areas for action 
The Fiscal Monitor outlines three main recommendations. First, it advises strengthening fiscal frameworks so as to manage public finance risks and ensure debt is sustainable. Sound management can play a supporting role in delivering macroeconomic stability and growth. 
 
Second, falling oil prices present an opportunity to reform energy subsidies and energy taxes. More than 20 countries have recently taken steps to cut energy subsidies, including Angola, Cote d’Ivoire, Egypt, India, Indonesia and Malaysia. Getting energy prices right would be beneficial to the economy, environment and public health. It would assist governments with their fiscal consolidation efforts or to make further investment in critical areas such as education and health. In advanced economies, taxes on labor could be cut, and paid for with higher energy taxes.
 
Third, the Fiscal Monitor’s analytical chapter explains why a stable macroeconomic environment is a growth-friendly one. Its analysis of 85 economies over three decades has a clear conclusion. Fiscal policy can stabilize output and gain about 0.3% extra growth annually. A blog by the IMF’s Xavier Debrun sums it up as governments needing to save in good times so they can stabilize output in bad times.

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