Is the Fund recommending fiscal stimulus for advanced countries, but fiscal tightening for countries that borrow from the Fund?
A. Not necessarily; the appropriate fiscal policy depends on the country’s circumstances. Like private companies, governments may run into financial problems and be unable to borrow or become insolvent. If debt levels are high, for instance, they face high interest rates and/or lack access to financing. Countries that request financial assistance from the IMF are often in this situation and need to undertake actions to regain their feet financially. Lower deficits ultimately enable them to access new financing and persuade investors that their debt is sustainable. This, in turn, lowers interest rates and stimulates the economy. In cases where reduced government spending is needed, the Fund takes into account the economic situation on the ground and adapts its policy recommendations accordingly. For instance, the November 2008 Fund-supported program of Iceland postpones fiscal adjustment, allowing for a high fiscal deficit in 2009 to avoid exacerbating the ongoing collapse of economic a
