THE World
Bank does not favour fresh fiscal stimulus to arrest the global economic
slow-down.
In its report captioned ‘Global Economic Prospects - Managing growth in a volatile
world’ released on 12 June, the Bank has suggested that developing countries
should strengthen prudential frameworks and “avoid further stimulus.”
The authorities in developing countries should instead rebuild fiscal and monetary-policy
space so that they can respond forcefully should a second global (or forceful
domestic) crisis emerge, the report says.
The World Bank has concluded the outlook remains fragile for the global economy.
“Financial market uncertainty and fiscal consolidation associated with the
high deficits and debt levels of high-income countries are likely to be recurring
sources of volatility for several years to come,” it notes.
As put by the report, the developing country fiscal deficits are on average
2.5 percent of GDP higher than in 2007, and current account deficits 2.8 percent
of GDP higher. And short-term debt exceeds 50 percent of currency reserves
in 11 developing countries.
Given current government deficit and debt levels, it will take years of concerted
political and economic effort before debt to GDP levels of the United States,
Japan and many Euro Area countries are brought down and on a path to stabilize
at 60 percent of GDP.
As for developing countries, it suggests that several countries notably Jordan,
India and Pakistan would have to reduce their structural primary deficits by
5 or more percent of GDP if they are to reduce debt to 40 percent of GDP by
2020 (or prevent debt-to-GDP ratios from rising further).
As put by the report, “A more neutral and less reactive policy stance will
help (the world) if a crisis is averted.”
Even in the absence of a full-blown crisis, elevated fiscal deficits and debts
in high-income countries (including the United States and Japan), and the very
loose monetary policies being pursued in the high-income world, suggests that
for the next several years the external environment for developing economies
is likely to remain characterized by volatile capital flows and volatile business
sentiment.
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