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MF to Revise Growth Forecast Upwards with Global Economy Out of Depths of Crisis  

JOHANNESBURG – The International Monetary Fund (IMF) yesterday said that it was planning to  revise its global economic growth forecast for 2020 upwards as the impact of the Covid-19 had become  less than initially feared. IMF managing director Kristalina Georgieva said the global economy had  rebounded from the depths of the crisis, though the calamity was far from over. 

Georgieva said the picture was now less dire from a severe global gross domestic product (GDP)  contraction the IMF had previously projected. “All countries are now facing what I would call 'The Long  Ascent', a difficult climb that will be long, uneven, and uncertain. And prone to setbacks,” Georgieva  said. “We now estimate that developments in the second and third quarters were somewhat better than  expected, allowing for a small upward revision to our global forecast for 2020.” 
Global economic activity took an unprecedented fall in the second quarter when nearly 85 percent of  the world-imposed lockdowns to contain the spread of the pandemic. The IMF said global growth was  projected at -4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook  forecast. The IMF yesterday said recovery would be partial and uneven in 2021. 

It said South Africa had already seen an uptick in activity and was expected to rebound slightly in the  third quarter after the easing of restrictions following a devastating second quarter contraction. Georgieva said emerging markets and low-income countries would continue to face a precarious  situation as they were highly dependent on external financing. “The Covid-19 pandemic has had a more  negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be  more gradual than previously forecast,” she said. 

The IMF said countries should avoid premature withdrawal of policy support such as tax deferrals and  wage subsidies, deal with debt as forward-leaning fiscal policy would be critical for the recovery to take  hold. NKC African Economics Irmgard Erasmus said there was evidence of a brittle counter cyclical  fiscal policy framework due to a structurally thin revenue base and resistance to implement front-loaded  fiscal adjustment across the Sub-Saharan Africa country spectrum

Questions 

1 The article stated that: ‘The IMF said countries should avoid premature withdrawal of policy  support such as tax deferrals and wage subsidies, deal with debt as forward-leaning fiscal  policy would be critical for the recovery to take hold.’ 
Use the Keynesian model theorem to explain why fiscal policy is of critical importance for  countering the negative effect of the pandemic and the lockdown on the global economy?

2 What is another term for ‘counter cyclical fiscal policy framework’ in the article? 

3 Use the AD/AS model framework to illustrate and explain the effect the government’s fiscal  support would have on the South African economy during the state of recession (during the  middle of lockdown).

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