Understanding the “great financing divide”

“TODAY, the world is confronted with three global problems that require global action: the great vaccine divide, climate change, and the great financing divide”…says the International Monetary Fund in its flagship October “Fiscal Monitor” report. 

Of much interest on the issues raised by the IMF is the “great financing divide”, given the huge fiscal outlays and stimulus spending by almost all countries in the fight on the Covid-19 pandemic.

 The great financing divide, according to the IMF, refers to financial constraints facing vulnerable people and countries. It has to do not only with fiscal policies and economic prospects around the world but also to debt developments. 

Preliminary estimates from the Global Debt Database shows that debt issued by governments, non-financial corporations and households in 2020 reached US$226 trillion, an increase of US$27 trillion from prior year.

 Both the level and the increase in debt are unprecedented. High and growing levels of public and private debt are associated with risks to financial stability and public finances which indeed require public watch. This increase in public debt was fully justified by the need to respond to Covid-19 and its economic, social and financial consequences. Developing countries however are coming under pressure because of this rising debt. 

According to the IMF’s Fiscal Monitor, global government debt increased to 98.6% of gross domestic product in 2020 from 83.6% in 2019 and is projected to remain above 96% till 2026. While deep recession, and stimulus spending were one side of the coin during 2020 that saw the Covid-19 pandemic unfolding.

On the other side, intellectual property rights related to the Covid-19 vaccine increased the gap between rich and poor countries in terms of pace of economic recovery.

Moreover, the lack of debt moratorium or relief from creditor countries, and weak multilateral support, all meant increasing fiscal deficits and, in turn, a difficult public debt situation overall globally; especially burdensome for developing countries, given their narrow tax base traditionally, and difficult balance of payments situation in general.

The Fiscal Monitor report highlights that general government fiscal overall balance, fiscal deficit globally, which was hovering between 3% and 3.6% of global GDP during 2016-2019, virtually tripled to 10.2% in 2020; where the projection for 2021 stood at 7.9%.

While the advanced countries with deep pockets could better manage their deficits, it has become a serious challenge for developing countries. In this regard, the report pointed out that the fiscal deficit for low-income developing economies, such as Zimbabwe,  stood at 5.2% of their GDP in 2020, while being projected to be 5.4% in 2021, a high level of fiscal deficit. 

An impact of “oil nationalism”, where oil-producing countries — overall, drastically cut oil supply for many months now — could be seen in the likely impact of their quick recovery in terms of fiscal deficit situation on the back of increasing oil revenues, whereby as per the current Fiscal Monitor report the fiscal deficit of oil-producing countries decreased from 7.5% in 2020, to a projected 4.2% in 2021.

Hence, while the oil-producing countries are nowhere near the same level of economic stress as faced by net oil-importing countries like Zimbabwe, especially in terms of pressures in managing the balance of payments situation, still they overly concerned themselves with managing their own public finances, and not finding something of middle ground, and supporting countries with little foreign exchange cushion, especially at a time when there were significant Covid-19 vaccine-related import payment needs.

Zimbabwe however has a different picture when compared to the globe and its peers. The country managed to strike a fiscal surplus on the back of austerity measures implemented by the government. However, most of the measures were centred on reducing the government wage bill growth despite the country having high inflation.

Civil servants’ salaries have been eroded, resulting in high pressure from both the worker representative organisations and civil society for salary adjustment. This indeed will further inflation and turn the fiscal position into deficit. Such fiscal deficits over the years are going to mount further pressure in terms of traditionally high debt repayment needs.

Given the very modest economic growth rate projected for 2021, after being negative in 2020 and 2019, tax numbers are likely to remain subdued, while it may make little sense to target the informal sector after the pandemic-induced recession had immensely hit employment levels there.

In the absence of huge support from multilateral institutions and developed countries, developing countries like Zimbabwe would have little to contribute to global economic recovery, as the same WEO report highlights in terms of divergent growth scenario and the rising recovery gap between rich advanced countries and the developing ones. Such support is also important to better enable developing countries to make necessary health sector investments during the pandemic, and for following an effective vaccine purchase strategy.

Moreover, the IMF has come up with an important suggestion, in the shape of countries applying a temporary wealth tax on the rich, and those that have performed very well during the pandemic in terms of earnings, so as to create an important source for generating finances which can then be channelled towards meeting pandemic-related needs.

The IMF in its Fiscal Monitor report suggested this tax as follows: “Advanced economies can increase progressivity of income taxation and increase reliance on inheritance/gift taxes and property taxation. Covid-19 recovery contributions and “excess” corporate profit taxes could be considered. Wealth tax can also be considered if the previous measures are not enough. Emerging market and developing economies should focus on strengthening tax capacity to finance more social spending.’

While the IMF suggests such a wealth tax in advanced countries, it makes sense that such a tax could also be planned for those individuals in very high income brackets in developing countries. Zimbabwe should also envisage levying such a tax on the wealthy, for the duration of enhanced pandemic-related stimulus needs.

Government should indeed consider levying higher taxes on the income or wealth of the rich to help pay for the enormous cost of tackling the Covid-19 pandemic as inequality has widened in the year since the virus first hit the global economy. There is a case for the better off being asked to pay more on a temporary basis to meet crisis-related financial costs.

High earners and companies that prospered in the coronavirus crisis should pay additional tax to show solidarity with those who were hardest hit by the pandemic. A temporary tax would help to reduce social inequalities that have been exacerbated by the economic and health crisis.

It would also reassure those worst affected that the fight against Covid-19 is a collective endeavour within societies. It would strengthen social cohesion even if there was not a pressing need to repair the public finances.

 For instance, in Zimbabwe, players in the tourism sector were hit hard whilst those in pharmaceuticals prospered during the pandemic. A financial plan that ensures fairness and collective responsibility is therefore necessary.  

*About the writer: Kaduwo is a researcher and economist. He writes in his personal capacity. Contact [email protected] whatsapp +263773376128