IMF proposes new macroeconomic framework for developing countries

By Ashika Rajan, Trainee Reporter
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The International Monetary Fund (IMF) is proposing a new macroeconomic framework for developing countries that will allow them to assess policy options and meet sustainable development goals (SDGs) amid the pandemic’s economic setbacks.

The IMF said that “reforms to enhance spending efficiency are critical in an environment of scarce resources. There is significant scope to increase the impact of investment on growth by enhancing public investment management.”

The new tool examines low-income countries’ growth and financing policies and evaluates their macroeconomic consistency.

The system focuses on investments in social development and physical capital in health, education, highways, energy, and water, and sanitation, critical areas for long-term, balanced growth that account for the largest outlays in most government budgets.

The pandemic and the ensuing lockdown sent the global economy into its worst slump since the 1930s. According to the United Nations (UN), its effect on the world’s poor has been particularly serious, with an estimated 100 million people falling into extreme poverty by 2020. The UN warns that poverty in some areas could reach levels not seen in 30 years.

While the global economy is expected to rebound strongly this year, with a growth rate of 6 percent, the recovery is uneven and less pronounced in developed countries. With sharply reduced economic development, lost livelihoods, and children unable to attend school, these countries’ spending priorities have changed, derailing progress on the SDGs.

The IMF has applied its framework to Cambodia, Nigeria, Pakistan, and Rwanda. To meet their SDGs by 2030, these countries will need additional annual funding of over 14 percent of their gross domestic product or 2.5 percentage points a year above pre-pandemic levels.

Senior IMF officials pointed out that “such domestic reforms can generate enough resources to fill up to half of our case study countries’ SDG spending needs. But even with such comprehensive domestic reforms, the SDGs will be significantly delayed by a decade or more according to our estimates, without further action.”

If the pandemic causes permanent economic scarring, the setback in achieving the SDGs will be far greater.

“We estimate that the long-lasting damage to an economy’s human capital … could increase the development financing needs by an additional 1.7 percentage points of Gross Domestic Product( GDP) per year,” the officials added.

According to the IMF blog post, “it will not be easy though as they will have to continue attending to the matter at hand of managing the pandemic and at the same pursue a highly ambitious reform agenda.”

Since the outbreak of the pandemic, the Washington-based fund has given emergency funding totaling $110 billion to 86 countries, including 52 low-income beneficiaries, stating that the emphasis should be on promoting growth to raise sufficient capital for long-term development.

Low-income countries would need to improve their tax collection ability to pay for basic public services. In the 20 years leading up to the pandemic, Cambodia increased its tax revenue from less than ten percent of GDP to about 25 percent, according to the IMF.

Improving budget efficiency and strengthening the institutional framework to encourage private investment will also benefit these countries.

Even with radical reforms, these countries would need “decisive and extraordinary support” from the international community, including private and official donors, as well as international financial institutions, to develop sustainable economies.

Many low-income developing countries will achieve their development goals by 2030 if official development assistance is steadily raised from the current 0.3 percent to the UN’s target of 0.7 percent of gross national income.

“This is why it is critical for the international community to step up,” IMF officials added.

Related: Delay in vaccine distribution poses major risk to global economy: IMF Chief Economist