IMF urges tighter fiscal policy to help tame inflation

The International Monetary Fund (IMF) on Wednesday urged fiscal policymakers to adopt tighter fiscal policies to help central banks fight inflation.

"Amid high inflation, tightening financing conditions, and elevated debt, policymakers should prioritize keeping fiscal policy consistent with central bank policies to promote price and financial stability," the IMF said in a blog as it released its latest Fiscal Monitor.

The report argued that many countries will need a tight fiscal stance to support the ongoing disinflation process -- especially if high inflation proves more persistent.

"Tighter fiscal policy would allow central banks to increase interest rates by less than they otherwise would, which would help contain borrowing costs for governments and keep financial vulnerabilities in check," said the blog, authored by IMF economist Francesca Caselli and her colleagues.

Meanwhile, the IMF noted that tighter fiscal policies require "better targeted safety nets to protect the most vulnerable households," including addressing food insecurity, while containing overall spending growth.

According to the newly released Fiscal Monitor, following 2020's historic surge in public debt to nearly 100 percent of gross domestic product (GDP) because of economic contraction and massive government support, fiscal deficits have since declined.

In the last two years, global debt posted the steepest decline in decades and stood at 92 percent of GDP at the end of last year, which is still about 8 percentage points above pre-pandemic projections.

"Reducing debt vulnerabilities and rebuilding fiscal buffers over time is an overriding priority," the blog noted. In low-income developing economies, higher borrowing costs are also weighing on public finances, with 39 countries already in or near debt distress.

The IMF called on policymakers to step up efforts to develop "credible risk-based fiscal frameworks" that reduce debt vulnerabilities over time and build up the necessary room to handle future shocks.

Noting that low-income countries face "particularly severe challenges," the IMF said international cooperation is "crucial" to helping these countries resolve unsustainable debt burdens in an orderly and timely manner.