(PHOTO: IMF PHOTO) To stave off risks to recovery, countries should focus support on firms that can survive and prepare to restructure or liquidate those that cannot, the IMF’s Ceyla Pazarbasioglu and Rhoda Weeks-Brown said in a new blog on Wednesday. Companies entered the COVID-19 crisis with record debts they racked up after the global financial crisis when interest rates were low. Now that central banks are raising rates to check inflation, firms’ debt servicing costs will increase. –Corporate Vulnerabilities: Corporate debt stood at $83 trillion, or 98 percent of the world’s gross domestic product, at the end of 2020. Corporate vulnerabilities will be exposed as governments scale back the fiscal support that they extended to stricken firms at the height of the crisis, the authors said. A new IMF staff paper takes stock of corporate vulnerabilities and assesses countries’ preparedness to handle large-scale restructuring. It proposes principles to guide the design of policy support for firms that can recover and to facilitate the restructuring of those that cannot. 📺 Watch José Garrido, Senior Counsel, Financial and Fiscal Law Unit of the IMF’s Legal Department, discuss the findings of the paper at an event on Thursday hosted by the Peterson Institute of International Economics. (PHOTO: SORBETTO/ISTOCK BY GETTY IMAGES) In exceptional times, monetary finance may provide helpful policy support but there are risks, the IMF’s Itai Agur, Damien Capelle, Giovanni Dell’Ariccia, and Damiano Sandri said in a blog on Tuesday. Proponents of monetary finance argue that it has a stronger effect on aggregate demand than a debt-financed fiscal stimulus. Because there is no increase in public debt, monetary finance does not need to be paid for with future tax hikes, making consumers more likely to spend. –Serious Risks: But even advocates of monetary finance will point out that there are very serious risks. The primary concern is that it may pave the way to fiscal dominance whereby monetary policy decisions are made subordinate to the fiscal needs of the government. The resulting loss of confidence in the central bank could lead to hyperinflation, as happened for example in the well-known case of Zimbabwe in 2007-08. In a recent staff paper, the authors review the arguments for and against monetary finance and provide some suggestive empirical evidence about the effects on inflation. (PHOTO: IMF PHOTO/JEFF MOORE) Thanks to a rapid vaccination campaign and highly accommodative policies, the United Kingdom’s economic recovery has proceeded faster than expected and the near-term growth outlook remains strong, says the IMF European Department’s UK Team in a new Country Focus article. However, the authors say that inflationary pressures are strong, too, and monetary policy will need to tighten steadily to anchor inflation expectations and bring inflation back to target. “Careful communication to counter expectations of a long cycle of rate hikes and high borrowing costs would help reduce the drag on growth in 2023. Fiscal policy could support this tightening cycle if planned consolidation was brought forward slightly.” –Structural Challenges: Despite the recovery, the pandemic and Brexit have magnified structural challenges and will leave some scars. The government has made significant progress in spelling out a comprehensive Plan for Growth, but structural issues such as regional inequality will require additional investment in transport infrastructure and digital connectivity. Read the Article IV report, and the Financial System Stability Assessment, which says that governance of financial globalization in one of the largest and most complex financial centers in the world will become a bigger challenge post-Brexit. (PHOTO: IMF) Our upcoming issue of Finance & Development, “Rethinking Fiscal: Public Finance and Fairness in a Changed World,” leads with an overview by Vitor Gaspar and a trio of perspectives on debt from Olivier Blanchard, Ceyla Pazarbasioglu and Carmen Reinhart, and Brazil’s Arminio Fraga. We also feature a piece by LSE’s Ricardo Reis on debt in the context of rising inflation; an article by Felipe Larrain on Chile’s experience with fiscal institutions; an essay on the social state by Berkeley’s Emmanuel Saez, and an op-ed on the costs of tax injustice by Alex Cobham of the Tax Justice Network. Also in this issue, Georgetown’s Ken Opalo writes on the need for African countries to democratize management of public finances; Yamini Aiyar of India’s Center for Policy Research writes on the education pandemic taking place in parallel to the COVID crisis; and Cina Lawson—Togo’s minister of digital economy and transformation—discusses how technology is driving her country’s development. Want to get a print copy delivered to your home or office? Click here to subscribe. | 
