The kinder, gentler IMF on African fiscal policy

Andy Berg writes to tell me about a new IMF policy note on fiscal policy responses to the current crisis in Sub-Saharan Africa and the big news is that the IMF now thinks there is a role for increasing fiscal deficits even in some of the word's poorest countries.  As Andy puts it,

About 2/3 of the countries in Sub-Saharan Africa now have low-to-moderate risk of debt distress, the way we calculate it. There may be some scope for some fiscal stimulus in many of these countries. Part of the case for not adjusting too sharply is that scaling down investment projects can be quite disruptive; to do it well puts a lot of demands on fiscal institutions. We note the contrast with "scaling up" of public investments, which is institutionally much more demanding.

In countries with fiscal space, the IMF recommends ramping up spending on Infrastructure and social safety nets (and not cuts in taxes, which the paper says would be inequitable).  

The IMF hasn't totally given up on fiscal prudence of course.  The paper warns that in resource-based economies, where the shock is concentrated in one or two sectors, the fiscal stimulus is unlikely to put capital and labor back to work since inter-sectoral mobility will be limited.  It also asks that any fiscal stimulus be reversible to prevent debt problems down the line. 

Makes a lot of sense to me. 

Comments

[Economics Student]

I don't know what has happened with the IMF, its as if they've been invaded by NeoKeynsians. They advocated Japan should run a fiscal stimulus as high as 5% of G.D.P if necessary, and Japan has some of the highest debt to G.D.P ratios in the entire world. Though I would consider them fairly well disciplined. Though the IMF did state as soon as recovery has taken hold run Japan should enact policies to cut its government debt.

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i think it's better to save than to spend a lot of money.It would be really hard for South Africa to gain their economy if they keep on spending because their debt will get higher and higher.

[James Sama]

The Fund's new Blog, iMFdirect,http://blog-imfdirect.imf.org/, has some good stuff on this, including "Practicing Safe Borrowing in Low-income Countries," http://blog-imfdirect.imf.org/2009/09/04/borrowing-in-low-income-countries/

and
"Creating Breathing Room in Low-income Countries,"
http://blog-imfdirect.imf.org/2009/09/03/creating-breathing-room/

Worth taking a look.
James

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