IMF urges policymakers to keep tight fiscal stance to help fight inflation

Washington, Oct 13

The International Monetary Fund (IMF) has urged policymakers to prioritise protecting the vulnerable through targeted support, while keeping a tight fiscal stance to help fight inflation.

"Governments confront difficult trade-offs amid sharp increases in food and energy prices," Xinhua news agency quoted Vitor Gaspar, director of the IMF's fiscal affairs department, as saying in a statement on Wednesday.

Policymakers must protect low-income families from large real income losses and ensure their access to food and energy, the blog noted.

"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," the statement continued.

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, the median fiscal cost of which is estimated to account for 0.6 per cent of national gross domestic product.

Limiting price increases through price controls, subsidies, or tax cuts would be "costly" to budgets and "ultimately ineffective", Gaspar argued.

"Facing high debt levels and rising borrowing costs, policymakers should prioritize targeted support through social safety nets to the most vulnerable people."

The statement 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.

"A tightening fiscal stance sends a powerful signal that policymakers are aligned in their fight against inflation."

Despite the economic slowdown, inflation pressures are proving broader and more persistent than anticipated, according to the IMF's latest World Economic Outlook report released on Tuesday.

Global inflation is now expected to peak at 9.5 per cent this year before decelerating to 4.1 per cent by 2024, the report said.