IMF underscores vital role of public investment in post-pandemic world

By Rahul Vaimal, Associate Editor
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According to the International Monetary Fund (IMF), public investment is vital for restarting economic growth, helping the global economy rebound from the worst recession in more than nine decades and generating millions of jobs in the post-pandemic period.  

During a period of high uncertainty, raising public investment by 1 percent of the gross domestic product would raise total GDP by 2.7 percent over a two-year period, the IMF said in its 2020 Fiscal Monitor Report published today.

According to the report, which cited a study of 72 advanced and emerging market economies, 1% rise in public expenditure would also lead to the ‘crowd in’ of additional private investment, which could leap by more than 10% over the two-year span if high-quality investments are made and if current public and private debt burdens do not impede the private sector’s response to the stimulus offered, it added.

Depressed private investment due to “acute uncertainty” about the pandemic’s future and economic outlook underscores the need to deploy “high-quality public investment in priority ventures,” IMF officials said in a blog.

“Low interest rates globally also signal that the time is right to invest. Savings are plenty, the private sector is in waiting mode and many people are unemployed and able to take up jobs created through public investment,” the blog highlighted.

COVID-19 Impact

The World Bank expects global output to shrink by 5.2 percent, while the IMF expects it to fall by 4.9 per cent as the world struggles with the deepest recession since the 1930s.

Health and education systems across the world have been devastated by the pandemic, prompting governments to prioritize spending on saving lives and combating the virus. In some nations, governments have shifted financial resources away from some programs in the public sector to concentrate on battling the immediate aftermath of the health crisis.

Even before COVID-19, public investment-to-GDP ratios were already decreasing in most economies and expenditures on infrastructure had not kept up with needs.

In 72 out of 109 emerging markets and low-income developing nations, public investment will be lower this year than in 2019. Public spending for these nations is expected to fall by an average of 1% of GDP, the IMF said, citing data from the upcoming World Economic Outlook for October 2020, which is scheduled to be published later this month.

In some emerging market economies, where interest rates are low, the IMF has suggested that scaling up public investment may generate substantial economic activity and absorb excess private savings without raising borrowing costs excessively.

However, the picture is different in other low-income economies with high levels of debt, particularly those borrowing in foreign currencies.

“In these countries, policymakers will need to safeguard public investment, to the extent compatible with saving lives and livelihoods, and enhance its efficiency,” the IMF report said.

Public investment is also important, beyond its macroeconomic consequences, to fuel long-term economic growth and progress towards the Sustainable Development Goals (SDGs) of the United Nations.

In order to achieve the SDGs for roads, electricity, water and sanitation, the additional expenditure required each year until 2030 was estimated at between 2.7% and 9.8% of GDP respectively in emerging markets and low-income developed countries, the report said.

The SDGs or Global Goals are a set of 17 interconnected objectives intended to be a “blueprint for creating a better and more sustainable future for everyone”

“In the long term, public investment in infrastructure can help reduce inequality by fostering structural transformation, which also facilitates regional convergence between rural and urban areas in low-income economies. Priorities include developing well-resourced and better-prepared healthcare systems, expanding digital infrastructure and addressing climate change and environmental protection,” IMF said.