In its most recent edition of Global Economic Prospects, the World Bank has flagged the rebuilding of fiscal buffers as a sustainable solution for current economic concerns bordering around weaker export prospects, an impending rise in global interest rates, and fragile financial market sentiments. In the opinion of the multilateral institution, this would support their economic activities in the event of a growth slowdown.
“In the foreseeable future, these countries may need to employ fiscal stimulus measures to support growth. But many developing countries have less fiscal space now than they did prior to 2008, having used fiscal stimulus during the global financial crisis. And in recent years, private debt levels have risen substantially in some developing countries. The so-called fiscal multiplier effect is weaker now for many developing countries; they need to rebuild budgets in the medium-term, at a pace determined to country-specific conditions,” it read.
Need to improve fiscal status
A number of notable insights were contained in the report. Its analysis suggests that, in countries where debt and deficits had widened from pre-crisis levels, each fiscal dollar spent would support activities that contribute to consumption and boost national income by roughly a third less than in the run-up to the global financial crisis. Surprisingly, the lower oil prices actually offer a number of oil-importing countries a chance to improve fiscal positions more quickly than might have been possible before mid-2014.
With oil prices likely to remain low for some time, Kaushik Basu, Senior Vice President and Chief Economist at the World Bank, believes that oil-importing countries should lower or even eliminate fuel subsidies and rebuild the fiscal space needed to carry out future stimulus efforts. Overall, the need for additional fiscal buffers is now more pronounced because of the prevailing environment of uncertain growth prospects, limited policy options, and likely tighter global financial conditions.
“On the policy front, both the size and the quality of fiscal deficits matter, as do spending decisions. Emerging market economies would do well to invest in infrastructure and support social schemes vital to poverty reduction. Such policies can raise future productivity and reduce the fiscal deficit in the long run. This year’s Global Economic Prospects now goes beyond prediction and deepens our understanding of our global economic predicament.”
Additionally, the report documents how properly constructed and credible institutional mechanisms such as fiscal rules, stabilization funds, and medium-term expenditure frameworks are instrumental in fostering growth and restoring depleted fiscal buffers.
By Emmanuel Iruebo
