World Monetary Fund: What Does 2021 Hold for Us?

International institutions involved in economic and financial affairs are monitoring and interpreting the negative effects on the global economy as a result of the Covid-19 pandemic. The following lines provide a glimpse of the IMF's projections of the progress of the global economy in 2021.

  • Publisher – STRATEGIECS
  • Release Date – Feb 14, 2021

Recent attention has been focused on following up on the latest statements and publications prepared by international organizations, coalitions and even think tank interested in economic affairs. This is normally the case given the realities imposed by the Covid-19 pandemic at all social, political and even cultural levels, which are all triggered by economic instability, and the hazy trajectory of economic indicators and data.

Accordingly, the statements and reports issued by the economic stakeholders are of great importance under the current circumstances, for they help to reach a statistical and theoretical understanding of the economic reality and draw some possible solutions to speed up the crisis recovery. In this article, we will talk about the most prominent of the recent reports issued by the International Monetary Fund (IMF), which are highly significant not only to their accuracy and reliability, but also to the role played by the IMF at the global level in terms of financing and monitoring the performance of various financial policies in countries around the world. 

What do the reports tell us?

In its January 25, 2021 World Economic Outlook Report, the IMF noted that in 2020 the global economy shrank by -3.5%, and that it would not be able to fill these negative gaps that occurred until after the end of 2022. This is if existing rescue policies in many countries remain or are built on, which are better in developed countries than in developing countries, rendering the chances of recovery in the latter more difficult. The report shows that the post-Covid-19 economic recovery will be different both in quantity and quality between developed and developing countries, given the timing and magnitude of each country's response to the effects of the pandemic, and the background of the economic indicators on which responses have taken place.

The report draws attention to the fact that the mutations that have occurred - and still occurring - on the coronavirus will slow growth in early 2021, particularly if the numbers of infections and deaths continue to rise, necessitating a return of lockdowns either in whole or in part. However, this is not to negate the positive effects of news circulating about the effectiveness of vaccines against the virus.

The report recommends that states continue to support the health sector, allocate funds for the purchase of vaccines and ensure their distribution, without abandoning the policy of supporting economic and individual institutions by controlling fiscal policy and maintaining as many facilitations as possible to ensure that there are no waves of bankruptcy. In addition, it called for the rehabilitation of employees laid off during the pandemic and returning them to the most affected sectors after the gradual opening.

For the poorest countries and the most affected by the spread of the pandemic while heavily indebted, the IMF calls for assistance from the international community through grants, financial assistance and concessional loans, without excluding debt rescheduling.

The release of the report was accompanied by the IMF's release of two other reports, Global Financial Stability Report Update and Fiscal Monitor Update. The first noted that the financial support policies adopted by many developed and developing countries had alleviated the pressures on liquidity but did not guarantee that the pressures (and concerns) on solvency and the repayment capacity for segments and sectors severely affected by the pandemic would be reduced. In other words, the continuation of the "facilitation policy" period imposed by the delayed recovery from the health crisis and its economic and social spillover would cause weak fiscal policy, thereby creating a negative macroeconomic reversal.

The first report, Financial Stability Update, implies a warning when talking about the recovery of financial markets in the last quarter of 2020, as that has not been accompanied by the return of the production process in various areas to the pre-pandemic level, the matter which indicates the separation of financial markets from the course of the economy on the ground. This could lead to a crisis if investors decide to assess growth prospects largely linked to official economic stimulus policies, thus risking price corrections in the markets. Such a move would do great harm to the concerned domestic and international economy as it would accompany the high indebtedness of institutions and individuals.

The report concluded by noting that stimulus policies face a contradiction between continuing to provide support to reach some form of sustainable growth, and addressing the financial reality weaknesses resulting from increased private sector indebtedness and the increased risks due to fears of default as well as the overvaluation of many different assets in financial markets.

In the second report, Fiscal Monitor Update, in addition to emphasizing the highlights of the above, states were sorted into groups. The fiscal deficit in three quarters of the developed country's economies is expected to be reduced, due to the expiry of   the official support provided in parallel with the tightening of stimulus policies, as unemployment benefits and the direct financial support to individuals will be reduced in return for higher tax revenues. The public debt of these countries will rise in a limited way in 2021 until it stabilizes in the medium term, but this does not mean that the debt ratios have increased significantly compared to the pre-pandemic situation.

The same applies - to some extent - to emerging markets and middle-income economies. Current spending associated with pandemic conditions should gradually decline. With regard to public debt, the report predicts that it will continue with China on top, whose public debt will reach 69% of GDP, 83% in India and 92% in Brazil. These are all higher than the normal rate, the matter which necessitates a reliable “medium-term budget framework to improve reliability”, which is based on public revenues and changes in public finances, the report said.

As for low-income countries, the report states that there are serious concerns about the public debt file in the near term, due to limited revenues that can be collected and the growing difficulties in reaching the foreign market. This situation calls for a review of indebtedness in cooperation with the parties concerned with the aim of taking actions such as temporary suspension or rescheduling or both.

This brevity of the expectations contained in the IMF's reports is not sufficient to looking ahead to the next phase. Rather, there should be extended research in the reports of other international institutions such as the World Bank, the United Nations Conference on Trade and Development, as well as the decisions of economic conferences such as Davos, Shanghai, ASEAN, etc., besides comparing the conclusions and recommendations of these reports, in order to judge the nature of events in the near and medium term.

Finally, it should be noted that this year's forecasts are largely based on economic recovery resulting from a hopeful decline in the health crisis after the release of vaccines. But this very variable is uncertain, and therefore the forward-looking structure principally underlying the expectation will be affected, not to mention that these reports usually exclude sudden military action in a particular region of the world and its impact on the global economy in general.





Policy Analysis Team