Source: International Monetary Fund
Fiscal Challenges from the Pandemic
The coronavirus disease (COVID-19) pandemic has required a substantial fiscal response from all countries, resulting in the largest synchronous fiscal easing in oil importers and a significant one in oil exporters. Nonetheless, the size of fiscal measures is slightly below that of other emerging market and developing economies, reflecting already-strong health and welfare systems in some economies and limited fiscal space in others. While the emergency measures have been critically important, these, along with significant declines in revenues, will increase financing needs for the region. Higher debt and deficits will erode fiscal space, leaving the region vulnerable to a resurgence of the virus and, for some countries, resulting in unsustainable debt dynamics. These adverse impacts are somewhat mitigated by lower borrowing costs, reflecting the large monetary easing in major advanced economies and increased official financing. Nevertheless, even with ambitious baseline fiscal adjustments, albeit not unprecedented, countries are not expected to revert to their pre-pandemic debt levels. In response to the increased fiscal vulnerabilities, governments should mitigate fiscal risks by developing medium-term fiscal frameworks, adopting fiscal rules, and strengthening debt management. At the same time, they must seek to expand fiscal space by, for example, enhancing tax compliance, increasing the progressivity of tax systems, and raising expenditure efficiency, including through improving governance and gradually eliminating fuel subsidies. Meanwhile, policymakers must also seek to support an inclusive recovery by enhancing social safety nets and prioritizing spending on health, education, and job retraining.