The International Monetary Fund (IMF) on Thursday said fiscal balances in several key economies among the G20, most notably Brazil, China and India turned out “weaker than projected” in November last, even as fiscal consolidation in emerging economies is likely to continue this year.
In its Fiscal Monitor Update, released in Washington, the Fund said the average fiscal deficit in 2011 is likely to decline by about 0.75 per cent of GDP, enough to keep the average gross general government debt ratio constant. Even as this prognosis is roughly unchanged from the November Monitor, the Fund voiced concern over variation across countries which have increased considerably.
While some countries with commodity exports such as Russia and Saudi Arabia (oil) are likely to perform better than initially expected due to sizeable revenue windfalls, fiscal deficits in key emerging economies such as China and Brazil are expected to be higher than in the last estimate, due to the carryover of spending committed in the second half of 2010 or the non-recurrence of certain receipts from last year such as in India from the auction of spectrum.
It specifically cautioned emerging economies that large capital inflows and correspondingly easy credit conditions risk discouraging the accumulation of sufficient fiscal buffers.
On the fiscal side, it said, persistently loose credit conditions and the emergence of asset market exuberance are known to goad pro-cyclical increases in public expenditure, as booming tax revenues and lower interest payments foster transitory fiscal space.
Hence, it underlined the emerging market economies the need to rebuild fiscal buffers more rapidly to address overheating concerns, create scope to respond to any growth slowdown or avoid relapsing into pro-cylical polices that would undermine credibility. It particularly suggested to them to ‘resist spending pressures and save revenue over performance in full”.
Reviewing the fiscal performance in 2010, it said overall the average deficit of advanced economies fell compared with 2009 by about one percentage point. But excluding the impact of growth and financial sector support, the cyclically adjusted balance widened slightly.
As a result, it said advanced economy gross general government debt continued to rise rapidly in 2010, topping 96 per cent of GDP.
Although the average headline deficit in emerging economies in 2010 is projected at about 4 per cent of GDP, 0.75 percentage points lower than in 2009, there were some significant deviations at the country level, the Fund noted.
In the case of India, the general government cyclically adjusted balance which was 10.9 per cent of GDP in 2009 was estimated at 10.3 per cent in 2010 and is projected to be 9.7 per cent in 2011 and to 8.9 per cent in 2012. India's gross general government debt which topped 77.8 per cent of GDP in 2009 was estimated at 75.7 per cent in 2010 and is projected at 75.2 per cent in 2011 and to 74.8 per cent by 2012.