RECOVERY PLAN

Invest in public to boost economy by 2.7% - IMF

Says public investment is critical to rebooting economic activity and creating millions of jobs in the post-pandemic era

In Summary

•Investments will help the global economy to recover from the deepest recession. 

•It however warned that for some countries, borrowing to invest will be difficult because financing conditions are tight. 

Economy
Economy

Countries investung one per cent of Gross Domestic Product (GDP) in the public will boost overall economic growth by 2.7 per cent in two years, the International Monetary Fund has said. 

The lender, in its 2020 Fiscal Monitor Report released Monday said public investment is critical to rebooting economic activity, creating millions of jobs in the post-pandemic era and helping the global economy to recover from the deepest recession. 

"It will increase employment by 1.2 per cent over the same time, potentially generating between two and eight jobs for every $1 million spent on traditional infrastructure,’’ IMF said.

 

It added that at least five to 14 jobs will be created for the same amount spent on research and development, green electricity and efficient buildings. 

The report that captured 72 advanced and emerging economies including Kenya added that one per cent increase in public spending help to crowd in further private investment, which could jump by more than 10 per cent over the two-year period. 

The study however says that this is only possible if investments are of high quality and if existing debt burdens do not hinder the private sector’s response to the stimulus being offered. 

"Maintaining the quality of investment projects is essential. We find, for example, that the cost of an individual project can increase by as much as 10 to 15 per cent just because it is undertaken in a period when investment is particularly high ,” IMF’s deputy director Vitor Gaspar said.

The lender asked governments to start reviewing and restarting promising projects that were delayed because of the crisis, speeding up projects in the pipeline to bring them to fruition within the next two years, and planning for new projects aligned with the post crisis priorities. 

It however warned that for some countries, borrowing to invest will be difficult because financing conditions are tight. 

Even so, a gradual scaling-up of public investment financed by borrowing could pay off, as long as risks associated with the refinancing and interest rates do not increase too much and governments choose investment projects wisely. 

 
 

"Countries may also need to reallocate spending or raise additional revenue for priority investments,’’ the lender said.

It is however wary of this strategy as a way of stimulating economic growth, saying that fast increases in public investment also carry the risk of facilitating corruption. It calls for strict governance.

"Likewise, improving the governance of project selection and management is crucial, because there is scope to improve the efficiency of infrastructure by one third on average ,’’ the report says.

The Covid-19 crisis has plunged the global economy into the deepest recession since the 1930s. 

The World Bank expects global output to shrink 5.2 per cent this year, while the IMF sees it contracting 4.9 per cent.

The lender is expected to release new global economic outlook that will capture the overall effect of the pandemic so far.