Drawing further apart: Widening gaps in the global recovery

This assessment is, however, subject to significant uncertainty given the uncharted nature of this recovery. More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation. Further, inflation is expected to remain elevated into 2022 in some emerging market and developing economies, related in part to continued food price pressures and currency depreciations—creating yet another divide.

While more widespread vaccine access could improve the outlook, risks on balance are tilted to the downside. The emergence of highly infectious virus variants could derail the recovery and wipe out $4.5 trillion cumulatively from global GDP by 2025. Financial conditions could also tighten abruptly amid stretched asset valuations, if there is a sudden reassessment of the monetary policy outlook, especially in the United States. It is also possible that stimulus spending in the United States could prove weaker than expected. A worsening pandemic and tightening financial conditions would inflict a double hit on emerging market and developing economies and severely set back their recoveries.

Policies to arrest divergences and improve prospects

Multilateral action is needed to ensure rapid, worldwide access to vaccines, diagnostics and therapeutics. This would save countless lives, prevent new variants from emerging, and add trillions of dollars to global economic growth. IMF staff’s recent proposal to end the pandemic, endorsed by the World Health Organization, World Bank and World Trade Organization, sets a goal of vaccinating at least 40% of the population in every country by the end of 2021 and at least 60% by mid-2022, alongside ensuring adequate diagnostics and therapeutics at a price of $50 billion.

To achieve these targets, at least 1 billion vaccine doses should be shared in 2021 by countries with surplus vaccines, and vaccine manufacturers should prioritise deliveries to low- and lower-middle income countries. It is important to remove trade restrictions on vaccine inputs and finished vaccines and make additional investment in regional vaccine capacity to ensure sufficient production. It is essential to also make available upfront grant financing of around $25 billion for diagnostics, therapeutics and vaccine preparedness for low-income developing countries.

A related priority is to ensure that financially constrained economies maintain access to international liquidity. Major central banks should clearly communicate their outlook for monetary policy and ensure that inflation fears do not trigger rapid tightening of financial conditions. A general allocation of Special Drawing Rights (SDR) equivalent to $650 billion ($250 billion to emerging market and developing economies), as proposed by the IMF, should be completed quickly so as to provide liquidity buffers for countries and help them address their essential spending needs. The impact can be further magnified if rich nations voluntarily channel their SDRs to emerging market and developing economies. Finally, greater action is needed to ensure that the G20 Common Framework successfully delivers on debt restructuring for countries where debt is already unsustainable.

The other major shared challenge is to reduce carbon emissions and slow the rise in global temperatures to avoid catastrophic health and economic outcomes. A multipronged strategy with carbon pricing as its centrepiece will be needed. Revenue from carbon pricing mechanisms should be used to fund compensatory transfers to those hurt by the energy transition. In parallel, a green infrastructure push and subsidies for research into green technologies are needed to hasten the move to lower carbon dependence. So far, only 18% of recovery spending has been on low-carbon activities.

National level policies needed to reinforce multilateral efforts for securing the recovery

Policy efforts at the national level should continue to be tailored to the stage of the pandemic:

• First, to escape the acute crisis by prioritising health spending, including for vaccinations and targeted support for affected households and firms;
• Next, to secure the recovery with more emphasis on broader fiscal and monetary support, depending on available space, including remedial measures to reverse the loss in education, and supporting the reallocation of labour and capital to growing sectors through targeted hiring subsidies and efficient bankruptcy resolution mechanisms; and
• Finally, to invest in the future, by advancing long-term goals of boosting productive capacity, accelerating the transition to lower carbon dependence, harnessing the benefits of digitalisation and ensuring the gains are equitably shared.

Fiscal actions should be nested within a credible medium-term fiscal framework to ensure debt remains sustainable. For many countries this will involve improving tax capacity, increasing tax progressivity and eliminating wasteful expenditures. Low-income developing countries will also need strong international support.

Central banks should avoid prematurely tightening policies when faced with transitory inflation pressures but should be prepared to move quickly if inflation expectations show signs of de-anchoring. Emerging markets should also prepare for possibly tighter external financial conditions by lengthening debt maturities where possible and limiting the build-up of unhedged foreign currency debt.

The recovery is not assured until the pandemic is beaten back globally. Concerted, well-directed policy actions at the multilateral and national levels can make the difference between a future where all economies experience durable recoveries or one where divergences intensify, the poor get poorer, and social unrest and geopolitical tensions grow.