TThree years following the start of the COVID-19 pandemic, fiscal policy is returning to normal, the IMF points out in its “Moniteur des Finances Publiques” published on Wednesday.

The global economy has recovered rapidly, the document points out, noting that the economic and social fabric has so far withstood disruptions in energy supply chains.

But this series of shocks has undermined the progress made in reducing poverty, probably pushing back the global goal of eradicating extreme poverty beyond 2030, notes the same source.

Lack of fiscal space and high borrowing costs in developing countries have further hampered efforts to achieve other Sustainable Development Goals, even as progress was already difficult before the pandemic.

Food prices in national currencies remain high in several countries, partly due to exchange rate depreciations. Beyond the immediate need to protect the poorest households, long-term challenges, including the climate agenda and aging populations, have also become more pressing issues.

Public finances have experienced significant fluctuations, under the effect of unprecedented shocks and measures taken by the authorities, underlines the IMF.

After a historic surge in public debt to nearly 100% of GDP in 2020, due to the economic contraction and the substantial aid granted by the States, budget deficits have decreased with the end of exceptional support measures.

Due to strong nominal GDP growth over the period 2021–22, global debt has seen its biggest drop in 70 years. At the end of 2022, it stood at around 92% of GDP, around 8 percentage points above the level at the end of 2019.

Primary deficits are shrinking rapidly and approaching pre-pandemic levels in many countries, while overall deficits are shrinking somewhat less due to increased interest payments.

These significant reductions in debts and deficits stem in large part from atypical growth and inflation dynamics, the document indicates.

In 2022, most countries recorded windfall revenues amounting to 3.1% of GDP on average for advanced countries and 2.5% in emerging and developing countries, with windfall revenues particularly large for oil exporting countries.

In terms of public finances, the short-term outlook remains unclear, says the same source.

It is crucial that fiscal and monetary policies are perfectly aligned to ensure price stability and financial stability while responding to the uncertainties of the current economic environment and rapidly changing financial conditions, advises the IMF.

In 2023, overall fiscal deficits are expected to increase slightly to 5% of GDP on average, as countries face higher interest burdens and pressures to increase public spending, including wages and pensions, to catch up with previously recorded inflation.

The IMF says that implementing a tighter fiscal policy, while providing targeted support to the most vulnerable categories, should support monetary authorities’ initiatives to bring inflation back to target levels, which would allow central banks to raise interest rates less sharply.

Principles of good governance, backed by sound insolvency and bankruptcy procedures, must be applied in the decision-making process to protect public funds, the document adds.