Interview: IMF fiscal chief urges targeted fiscal policy amid high food, energy prices

WASHINGTON, Oct. 13 (Xinhua) -- In a time of high inflation, fiscal policymakers should target those most affected by surging food and energy prices, while keeping a tight fiscal stance to help fight inflation, an International Monetary Fund (IMF) official has said.

"Fighting inflation with a steady hand is something which is, at this point in time and in our view, the first macroeconomic priority," Vitor Gaspar, director of the IMF's fiscal affairs department, told Xinhua in an interview earlier this week.

"So what fiscal policy can and should do -- based on the experience of the pandemic where fiscal policy was able to respond in an agile and flexible manner -- is that fiscal policy can target those most affected by the cost of living crisis," said Gaspar.

The cost of living crisis, he noted, is associated with this "broad-based inflation," but has "particularly strong dimensions associated with the food price surge and the energy price surge."

"What fiscal policy can do that monetary policy cannot is to target the vulnerable, and it can do it in a way which is compatible with maintaining an appropriate macroeconomic policy mix," he said.

In its new Fiscal Monitor released Wednesday, the IMF argued that policymakers must protect low-income families from large real income losses and ensure their access to food and energy, but they must also reduce vulnerabilities from large public debts and, in response to high inflation, maintain a tight fiscal stance so that fiscal policy does not work at cross-purposes with monetary policy.

Higher prices threaten people's standard of living everywhere, prompting governments to introduce a variety of fiscal measures, including price subsidies, tax cuts, and cash transfers. Limiting price increases through price controls, subsidies, or tax cuts would be "costly" to budgets and "ultimately ineffective," the report noted.

"One example that one may consider is to imagine that you introduce a domestic price cap or a price smoothing mechanism, but the shock proves very persistent. Eventually you will have to remove the price cap and let the price adjust," Gaspar said.

"And although the price cap may have repressed inflation for a temporary period, it then increases the persistence of inflation when finally you have to let the price go up," he continued.

"They're not ineffective, they're ultimately ineffective. So they don't work in the long run," Gaspar told Xinhua.

The Fiscal Monitor noted that in a time of high inflation, policies to address high food and energy prices should not add to aggregate demand, noting that demand pressures force central banks to raise interest rates even higher, making it more expensive to service government debt.

Global public debt is projected to remain elevated at 91 percent of GDP in 2022, after receding from a historic high in 2020, and remains about 7.5 percentage points higher than pre-pandemic levels, according to IMF data.

Low-income countries are particularly vulnerable, with nearly 60 percent of the poorest economies in debt distress or at high risk of it, the multilateral organization noted.

"For low income countries, in particularly in the area of food, but more broadly, they're facing very painful and urgent (policy) trade-offs," Gaspar said, noting that the international community should take collective action to support the poorer countries.

Debt risks, however, are not limited to low-income countries, said the IMF official. "There're quite a number of emerging economies that have bond yield spread in territory that is also considered as signaling debt distress or high risk of debt distress," he said. "That is also something that should concern the international community."

Gaspar noted that in 2022, many central banks started tightening, as inflation remains elevated, and fiscal policy was tightening as well, as policymakers withdraw fiscal support measures introduced because of the pandemic.

"This consistent macroeconomic policy mix between monetary policy and fiscal policy is very appropriate given the situation that we're in," Gaspar said.

It also helps the credibility of the disinflation process and reduces the costs associated with that disinflation process, he added.

Different from most other countries, China is loosening slightly both on the fiscal and monetary side, with slowing growth and muted inflation, the IMF official noted.

"Our view is that that is appropriate given the challenges that China is facing in the short run," Gaspar said. "And we believe that China has the policy space to do it."

The ongoing correction of prices in the real estate sector is very important, he said, noting that that has to be managed from the viewpoint of financial stability, but also is relevant for public finances, given the dependence of subnational governments on land sales.

The most pressing challenge for China, he said, is the transition to an alternative growth and development model that "will be less dependent on the rest of the world, more reliant on domestic potential."