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.
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