IMF: Recession recovery better with strong balance sheets

21 Aug 19

Strong public sector balance sheets make governments more resilient against recessions, a working paper from the International Monetary Fund has suggested.

Evaluations of government finances have traditionally focused on debt as a proportion of gross domestic product but there is a growing acceptance of using balance sheets as a more complete measure.

Looking at what a government owns, rather than simply what it owes, will give a better idea of how well it can weather recessions and recover from economic downturns, the IMF has said.

Economist Seyed Yousefi, author of the working paper, suggested countries with stronger balance sheets have “greater fiscal space” to increase public sector spending during a recession, and therefore return to growth more quickly.

Yousefi wrote: “These findings have important policy implications.

“While it is essential to assess a country’s gross public debt stance, the fiscal policy debate could be enriched by looking at a country’s entire public sector balance sheet, including the asset side.

“This would allow policy makers to assess how public wealth could be best used to meet a country’s long-term economic goals.”

Yousefi looked in depth at Kazakhstan, where the government used the strength of its balance sheet to fiscally stimulate the economy in the aftermath of the 2014 oil price shock.

The central Asian country had created a sovereign wealth fund from part of its oil receipts, and it was less vulnerable for doing so.

When the shock hit, Kazakhstan’s currency dropped in value, growth slowed and the government’s fiscal balance went from +5% of GDP in 2013 to -6% in 2015.

But the effects were offset as the sovereign wealth fund holdings were held in various currencies (that had not devalued), which provided a ‘natural hedge’ in the balance sheet as the Kazakhstani tenge depreciated in value.

The government used this ‘space’ to undertake a fiscal stimulus package of 10% of GDP between 2014 and 2017, largely financed by resources in the fund.

By 2018, Kazakhstan’s fiscal balance had returned to a surplus of an estimated 2% of GDP.

Manj Walia, international finance expert and supporter of using public sector balance sheets, said: “The IMF looking at balance sheets is a good thing, so they’re not just looking at debt to gross domestic product.

“They’re looking beyond debt to a measure that can show long-term sustainability.

“What gets measured gets managed, and the current model can lead to all sorts of problems like short-termism.”

She said Yousefi’s findings “make sense”, because governments can deploy their assets during recessions.

Although, she pointed out the IMF had not included pension liabilities in their idea of balance sheets, which she warned did not provide a totally accurate picture of a country’s financial resilience, because of the “massive numbers” involved.

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