The COVID-19 pandemic is still accelerating in many countries and uncertainty is unusually high. Decisive government actions are necessary to ensure swift and extensive vaccine roll-outs, protect the most vulnerable households and otherwise viable firms, and foster a durable and inclusive recovery.
Many countries have continued to support people and firms amid the resurgence of infections and renewed restrictions while calibrating their responses to the evolving economic situation. The January 2021 Fiscal Monitor Update provides an overview of such efforts and outlines what more governments can do to achieve a greener, fairer, and more durable recovery.
The global fiscal support reached nearly 14 trillion dollars at the end – December 2020, up by about 2.2 trillion dollars since October 2020. It comprises 7.8 trillion dollars in additional spending or – to a lesser extent – measures to forgo revenues and 6 trillion dollars in guarantees, loans, and equity injections. This support has varied across countries depending on the impact of the pandemic-related shocks and governments’ ability to borrow. In advanced economies, fiscal actions cover several years exceeding 4% of GDP in 2021 and beyond. In contrast, support in emerging markets and developing countries was front-loaded, with a large share of measures expiring. Together with an economic contraction that has resulted in lower revenues, such support has led to a rise in public debt and deficits.
Early in the pandemic, many expected that poorer countries would be hit much harder than rich countries. In a May 2020 poll of the Initiative on Global Markets’ Economic Experts Panel, a majority agreed that the “economic damage from the virus and lockdowns will ultimately fall disproportionately hard or low – and middle – income countries”. And policymakers held a similar view, with International Monetary Fund (IMF) Managing Director Kristalina Georgieva noting last April that, “just as the health crisis hits vulnerable people hardest, the economic crisis hits vulnerable countries hardest.”
Average public debt worldwide approached 98% of GDP at the end of 2020, compared with 84% projected pre-pandemic for the same date.
Advanced economies recorded the largest increases in fiscal deficits and debt, reflecting both higher spending and declines in revenue. In emerging markets, the rice in deficits stemmed largely from depressed tax receipts due to the economic recession. In low-income countries, the fiscal policy response has been more limited, owing to financing constraints and less developed welfare programs. The pandemic thus risks leaving a lasting impact, including higher poverty and malnutrition, in these countries. Global cooperation on producing and widely distributing treatments and vaccines to all countries at low cost is crucial. Vaccination is a global public good that saves lives and will eventually save taxpayers’ money in all countries. The sooner the global pandemic ends, the quicker economies can return to normal and people will need less government support.
Given the unusually high uncertainty policies should respond flexibly to the changing economic and pandemic conditions, as needed and appropriately differentiated. Most countries will need to do more with less, considering the increasingly tight budget constraints. This means focusing on the hardest-hit and most vulnerable, including the poor, woman, and informal workers, and firms that are likely to remain viable after the crisis or one systemically important to the economy.
The assumption was that low and middle-income countries would suffer from a lack of public-health capacity and fiscal resources. But the data tell a different story. By end of January 2021, there were 1,323 deaths per million people in the United States and 1,496 deaths per million in the United Kingdom compared to 712 in South Africa, the hardest-hit country in Africa, 111 in India, 107 in Indonesia, 14 in Angola, and seven in Nigeria. Meanwhile, many of the upper middle – income countries in Latin America have exhibited mortality patterns similar to those documented in Europe and the US. Preliminary evidence suggests that many low-income countries may have benefited from demographic factors (younger populations; lower obesity rates, etc) and trained immunity in which the innate immune system reprograms itself against a disease. But even more surprising in our opinion is the unanticipated “advantage” that poorer countries have demonstrated on the economic front.
Global inequality has declined as a result of the pandemic – at least in the short run. During the past year, income per capita fell by more in richer countries than it did in poorer countries, resulting in an unexpected “convergence” between rich and poor. More deaths per million mean not just lost lives but also greater income losses.
Reduced inequality is usually a welcome development, at least in settings characterized by vast disparities in living standards across countries at different stages of development. And yet, the COVID-19 experience serves as a somber reminder that the “how” matters as much as the “what”. In this case, global inequality declined not because poorer countries became richer but because richer countries became poor. This form of convergence has in our opinion disturbing policy implications. While low and lower-middle-income countries have fared well in relative terms, their outlook is increasingly bleak in absolute terms. Many now face rising debt, slower growth, declining revenue from commodity exports and tourism, and diminishing remittances.
Moreover, we have yet to see the long-term consequences of a lost year of income and investment in human capital. Millions of children and especially girls have missed a year of school, just as millions of women have been deprived of maternal health care and millions of more people have been plunged back into poverty. Making matters worse, the nature of this unexpected convergence implies that advanced economies will have lit – the appetite to channel resources toward poorer countries, whether in the form of direct aid, openness to international trade and investment, or debt forgiveness. Preoccupied with rising inequality at home, high-income countries will in our opinion continue to turn inward, prioritizing their own citizens’ needs over those of the global poor.
Therefore many low-income countries will face challenges even after doing their part. They will need additional assistance in various forms, including through grants, concessional financing, the extension of the Debt Service Suspension Initiative, or, in some cases, debt restructuring. Quick operationalization of the Common Framework for Debt Treatments and expansion of the eligibility of debtor countries will in our opinion be essential as we are looking at a “lost decade” for such countries.
Fiscal policy should enable a green, digital, and inclusive transformation of the economy in the post-Covid environment. Priorities in our opinion include:
- Investing in health systems (including vaccinations), education, and infrastructure. A coordinated green public investment push by economies with fiscal space can foster global growth. Projects – ideally with the participation of the private sector – should aim at mitigating climate change and facilitating digitization;
- Helping people go back to work and move between jobs, if needed, through hiring subsidies, enhanced training, and job search programs.
- Strengthening social protection systems to help counter inequality and poverty;
- Rethinking tax systems to promote greater fairness and provide incentives to protect the environment; and
- Cutting wasteful spending, strengthening the transparency of spending initiatives, and improving governance practices to reap the full benefits of fiscal support.
Policymakers in our opinion will have to strike a balance between providing more short-term support to ensure a solid recovery and keeping debt at a manageable level over the longer term. Developing credible multiyear frameworks for revenue and spending – including how to strengthen fiscal positions over the medium term – will be vital, especially where debt is high and financing is tight.
The US and Europe’s retreat from the developing world will create an opening for others, not least China, which has already returned to growth. If accessing lucrative Western markets becomes untenable as a result of rising protectionist sentiment, China-centric alternative initiatives such as the recently signed Regional Comprehensive Economic Partnership may become increasingly attractive to developing and emerging economies.
On a more positive note, low-interest rates in the US and Europe may lead to a “hunt for yield”, driving capital flows into developing countries. Governments and companies in the developing world sold a record of more than 115 billion dollars of international bonds in the first month of 2021, surpassing the previous monthly high of 112.78 billion sets last January, according to Bond Radar data stretching back to 2003.
But these economies will need robust institutions and thoughtful policy to ensure that capital inflows foster widely shared growth and poverty reduction, rather than merely enriching a small upper class.
In short and overall, governments need to win the vaccination race, respond flexibly to the changing economic conditions and set the stage for a greener, fairer, and more durable recovery.