Responding to COVID-19: Fiscal Rules and Fiscal Risk

Thursday, July 2

Presenters
Mr. Paulo Medas, Deputy Division Chief of the Fiscal Policy and Surveillance Division at IMF’s Fiscal Affairs Department
Mr. Jason Harris, Deputy Division Chief of the Public Financial Management Division at IMF’s Fiscal Affairs Department


On July 2, the JVI hosted the second webinar of a series focusing on the recent IMF special series on fiscal policies to respond to the COVID-19 challenges. Governments are facing mounting challenges at a time where the sharp global economic contraction and worsening macroeconomic and financial conditions are increasing existing fiscal risks.

How should governments address limited fiscal space in a rule-based fiscal framework, and how can the credibility of the fiscal framework and long-term fiscal discipline be ensured? What is the effect of the COVID-19 pandemic fiscal policy responses on fiscal risks? How can a risk-based approach to fiscal policy be implemented? And what longer-term lessons can be drawn from the current crisis for the way PFM systems operate?

Paulo Medas, Deputy Division Chief of the Fiscal Policy and Surveillance Division at IMF’s Fiscal Affairs Department, and Jason Harris, Deputy Division Chief of the Public Financial Management Division at IMF’s Fiscal Affairs Department, were addressing these challenging questions and giving policy advice based on the recommendations provided in the IMF special notes on

“Fiscal Rules, Escape Clauses, and Large Shocks” (English / Russian)

“Managing Fiscal Risks Under Fiscal Stress” (English / Russian)

Paulo Medas was elaborating on the design and use of escape clauses allowing temporary deviation from the rules in the face of large fiscal and economic shocks like the current pandemic. Procedures for returning to rule compliance were highlighted as an important element of a well-designed escape clause. This, however, calls for a careful balance between ensuring a timely return to the rule and avoiding economic disruptions. Transparency and a well-crafted communication strategy are crucial to preserve the credibility of the rule-based framework that is temporarily applied in a more flexible way.

Jason Harris was concentrating on the management of ever-increasing fiscal risks in the face of the largest fiscal shock since WWII. The recommended approach calls for a thorough evaluation of crisis response policies with regard to their rationale, ultimate cost, risk mitigation options and mechanisms to monitor risk exposure. The general IMF 4-step fiscal risk toolkit was also referred to as a useful framework to efficiently address the fiscal risks heightened by the current crisis. Additional emphasis was put on the need to strengthen institutional capacities including high-frequency monitoring, regular updates on policy costs, higher flexibility of spending, and close tracking of debt market developments.

The polls conducted during the webinar pointed towards the inability to accurately forecast economic developments as the biggest challenge for policymakers in the current highly uncertain environment. The recommended approach in these circumstances was to develop scenario-based forecasting to be prepared for various outcomes and ready to respond to them.

The presentations were followed by a dynamic Q&A session where the panelists addressed the questions on fiscal response to the pandemic in resource-rich countries, on the recommended time horizon for returning back to fiscal rules as well as on potential changes to rule-based fiscal frameworks in post-COVID era.

The webinar was opened by Thomas Richardson, JVI Director, and Carolina Renteria, Chief of the Public Financial Management Division at IMF’s Fiscal Affairs Department.

Moderation was provided by Barbara Dutzler and Tatiana Evdokimova (both JVI).


Barbara Dutzler, Senior Economist, JVI



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