Washington - Policymakers face the dilemma of how best to respond to the challenges of slackening global activity and continued financial volatility as many countries remain vulnerable to unexpected shocks, the International Monetary Fund (IMF) said Wednesday.
Although debt ratios are expected to begin stabilising by 2015 in the large majority of countries, the risk of a setback is high, constraining policy options, it said in the Fiscal Monitor report released ahead of this week's World Bank-IMF spring meetings.
In emerging economies fiscal adjustment will slow considerably this year. Again, in the context of somewhat weaker growth, this slowing is appropriate, also in light of the stronger fiscal position of these economies with respect to advanced economies, the IMF said.
Overall, fiscal risks remain elevated, although there are signs that in some key respects they are less acute than six months ago.
Nevertheless, debt ratios in many advanced economies are at historic levels and rising, borrowing requirements remain very large, financial markets continue to be in a state of alert, and downside risks to the global economy predominate.
In this uncertain environment, the challenge for fiscal policy is to find the right balance between exploiting short-term space to support the fragile recovery and rebuilding longer-term space by advancing fiscal consolidation, the report said.
In India, a 0.50 percentage point improvement in the cyclically adjusted balance is expected in 2012, with a focus on containing non-priority expenditure while boosting spending on public investment and health, the IMF said.
This tightening is appropriate as the deficit-in headline and cyclically adjusted terms-and the debt ratio are likely to remain well above the emerging market average this year and next, it said.
In almost all emerging markets (especially India and Kenya), strong growth and low interest rates will continue to contribute to the decline in debt ratios, with the interest rate-growth differential negative in many cases (-5 percent on average in 2012-13).
In some emerging and developing economies, including India, the total value of government stakes in listed companies exceeds 10 percent of GDP, mainly in the petroleum and natural resources, the fiscal monitor report said.
Several emerging economies also face relatively sizable long-term adjustment needs, because of too-modest adjustment plans (India, Malaysia) or high initial debt levels (Hungary).