WASHINGTON -- Normalization of monetary policy will be gradual, well communicated and not a source of turmoil, Vitor Gaspar, director of fiscal affairs at the International Monetary Fund, told Nikkei in an interview.
Edited excerpts from the interview follow.
Q: The Federal Reserve will soon start tapering its asset purchases and may raise interest rates next year. While countries around the world accumulate debt, what is the risk of monetary tightening?
A: Under our baseline, this recovery in economic activity and the return of economic activity back to the pre-COVID-19 path will happen gradually over time. The current inflation pressures will prove transitory. Monetary policy will eventually normalize, but that is something that will be well anticipated and well communicated under the baseline.
Since we will have a situation where there will be a gradual and well-understood adjustment, risks of disturbances will not materialize under the baseline, and bond markets and financial markets in general will benefit from price stability.
Now, we do recognize that under COVID-19 uncertainty is still elevated.
Q: The IMF's Fiscal Monitor -- a multilateral surveillance of fiscal developments -- has noted that most of the $16.8 trillion in fiscal measures announced to fight the pandemic will expire this year. What are your views on the so-called fiscal cliff slowing down the global economy?
A: The figure of $16.8 trillion is the total of discretionary pandemic measures announced since March 2020. Some of these measures have already expired while some of these measures span multiple years.
If you look at the fiscal deficit in advanced economies, you have quite a sharp increase in the primary deficit relative to pre-COVID-19 projections in 2020. The deficit persists at a lower level in 2021, and then it goes back to levels very close to the pre-COVID-19 projected levels by 2024. Fiscal policy is going along with what is happening to economic activity and employment.
If you now look around the world, what you do see is that public debt increased quite substantially in 2020, reaching almost 99% of GDP. In our baseline, debt to GDP is expected to decline by 1 % of GDP in 2021 and 2022, and then stabilize at about 97% of GDP.
Vitor Gaspar, director of fiscal affairs at the International Monetary Fund. (Photo courtesy of the IMF) Q: How should emerging markets and low-income countries respond to the risks of high-level debt and tightening financial conditions?
A: In almost all cases, they will be required to make a substantial increase in their ability to collect revenue. They will also need to investment in tax capacity so that they have a national financial fiscal framework to sustain their development goals. That is crucial.
The recent general allocation of SDR [special drawing rights] contributes to improve liquidity conditions all around the world. Its beneficial effects can be exponentiated through voluntary rechanneling from higher income economies to low-income developing countries.
Q: Japan's new prime minister, Fumio Kishida, has said that he aims to create a "virtuous cycle of growth and distribution." What kind of fiscal policy do you think is necessary for Japan?
A: Japan was one of the first countries in the world to experience the demographic transition associated with the fall in the labor force and a fall in total population. So, the expression "virtuous cycle of growth and distribution" seems very appropriate, to me, to the Japanese situation.
In Japan, as all around the world, the first priority is the control of the pandemic. Prime Minister Kishida's indication of a new package of fiscal support by the end of this year seems appropriate.
At the same time, it's very important to keep in mind long-term priorities as well. Regaining growth, supporting productivity, should go hand-in-hand with addressing inequality, and our understanding is that is what is intended in Prime Minister Kishida's agenda.
Our understanding is that the objective of having a primary balance by 2025 holds, and that could be compatible with a credible medium-term fiscal framework that is advocated in the Fiscal Monitor.