March 11, 2020 / 4:10 PM / 20 days ago

IMF says Spain needs fiscal flexibility in 2020 as coronavirus bites

MADRID (Reuters) - Spain should be allowed to hold off on structural deficit cuts this year as it adopts one-off measures to support the health sector and the economy amid a growing coronavirus epidemic, an International Monetary Fund mission said on Wednesday.

But the Fund’s mission to Spain warned in a report that with the economic outlook now highly uncertain and in order to maintain a neutral fiscal stance, any additional spending “should be sustainably financed by new revenue measures or changes in the composition of spending”.

The IMF said Spain’s fiscal stance could be “broadly neutral” this year and the country should commit to future deficit cuts in the medium-term.

The government has promised to do “whatever is necessary” to overcome the coronavirus crisis. It is expected to unveil a package of measures on Thursday guaranteeing medicines and providing loans to businesses.

With 2,128 infections and 47 confirmed deaths from the virus, Spain is among the EU countries worst-hit by the epidemic after Italy.

The IMF agreed that Spain needs to guarantee resources for healthcare and to protect workers and companies affected by potential disruptions in the supply chain.

The IMF has also suspended Spain’s economic outlook review until April due to the “fluid” situation, mission chief Andrea Schaechter told a conference call.

“In the past we had advised Spain to lower its high public debt for annual adjustment. But now with coronavirus there is need for more flexibility,” she said, adding that it was too early to talk about the headline budget deficit.

The European Commission had earlier voiced concern that Spain could fail to cut its structural deficit by the required 0.65% this year, but on Tuesday the bloc’s national leaders decided the EU will do “everything necessary”, including state aid for companies and an investment fund worth 25 billion euros to combat the economic fallout of the coronavirus.

The government last month cut its economic growth projection to 1.6% for 2020 from a previous 1.8% forecast and raised the deficit goal to 1.8% of gross domestic product, which is below last year’s estimated 2%, but higher than previous forecasts agreed with Brussels.

The Spanish economy - the euro zone’s fourth largest - has consistently outperformed much of Europe since it emerged from a five-year slump in 2013.

“Over the medium term, reducing public debt and the fiscal deficit remains critical, particularly given rising social spending pressure,” the IMF mission said.

Reporting by Belen Carreno and Andrei Khalip; Editing by Ingrid Melander

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