How to tackle the inflation spiral 

News: Recently, The World Economic Outlook, published by the IMF in April, expects global growth to be slower than the forecast made in January, with inflation on the rise. 

The global macroeconomic situation is showing signs of macro instability. The global debt has increased sharply during the pandemic, inflation is on the rise, and macroeconomic uncertainties have increased due to the ongoing war between Russia and Ukraine. 

What are the causes? 

Inflation has been caused due to war; and fiscal and monetary expansion that happened during the pandemic. This was witnessed in both the G20 emerging markets and developing countries like Brazil, Turkey, India and Indonesia.

As per the IMF’s Fiscal Affairs Department, there has been revenue foregone and additional expenditure during Covid.  

The problem of rising debt and inflation is going to compound macro challenges for the low-income developing countries.  

Globally, the total support comprising revenue foregone, expenditure stimulus and liquidity support was estimated to be $17,000 billion. Out of this, the government guarantees were one-fourth of the total. In case of default, it can weaken the fiscal balance sheet in the medium term for items that are below the line at the moment. 

There has been an increase in money supply during the last two years to support governments to deal with Covid..  

There has been an increase in money supply due to the government operation and the central bank’s support to the government during Covid. In the year 2020, this support increased to 9%. In addition, the growth of the US central bank’s support to the government had increased immediately after the global financial crisis in 2010.  

According to the IMF international debt statistics for 2022, both domestic and external debt stock increased sharply during the pandemic. The external debt stock to the export ratio, export to debt service ratio and the share of public sector external debt in total external debt has shown increase for low-and middle-income countries during this period.  

Way Forward 

The central banks in many countries including India have raised interest rates for inflation management.  

Reduction of debt takes time, but management of inflation can’t wait.  

The global economy needs coordinated policy for monetary tightening and fiscal sustainability. 

There is a need to start fiscal normalisation without creating adverse distributional consequences. For this, every country needs to chart out a fiscal normalisation plan which are sequenced in a proper manner to bring back global economy on track,  

There is a need to enhances fiscal resources for the government for public investment in the social and economic sector 

The government should also create a framework for sector-specific differentiated responses for a full recovery. 

There is a need for a quick and efficient resolution of the challenges arising due to the elevated debt levels of low-income countries.  

There should be greater international cooperation to ensure more resource flow to the poorer regions of the World. This will lead to an equitable, fair and sustained recovery during post-Covid.  

Source: The post is based on an article “How to tackle the inflation spiral” published in the Indian Express on 18th May 2022.