Fiscal positions in many emerging market and developing economies have weakened considerably since the global financial crisis. This will constrain the room for policy makers in these economies to utilize fiscal policy when the next shock hits.
In this talk, Franziska Ohnsorge, Manager within the Development Prospects Group, will address the following questions. First, what is fiscal space? Second, how has fiscal space evolved in emerging market and developing economies? Third, what are the implications of diminishing fiscal space?
Four distinct dimensions of fiscal space will be analyzed—debt sustainability, debt composition, potential contingent liabilities, and market perception of fiscal space. Emerging market and developing economies built fiscal space in the run-up to the Great Recession of 2008-09, which was then used for stimulus. Since then, fiscal space has shrunk and remains narrow as these economies have taken advantage of historically low interest rates. Franziska will show how a lack of fiscal space can undermine the effectiveness of fiscal policy by reducing fiscal multipliers.