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Public finance and development: top things to read on fiscal responses to Covid-19

Written by Mark Miller

International Monetary Fund Fiscal Monitor press briefing, April 2020. Photo: Cliff Owen IMF, CC BY-NC-ND 2.0

The regular follower of these round-ups will have noticed that I have been taking a break in recent months, but the wave of ‘corona content’ has drawn me back in. There is a lot of material in this round-up, so before people get buried, I will start with a plug for an ODI paper on financing the response to the crisis that covers many of the issues below.

Tailoring fiscal response packages to the coronavirus crisis

Economists seem to agree that the coronavirus (Covid-19) crisis calls for different kinds of macroeconomic responses relative to past recessions. Even as restrictions are slowly being lifted, governments are deliberately opting to ‘artificially freeze’ certain kinds of economic activity as a way to protect people’s health.

Standard fiscal policy responses aimed at ‘stimulating the economy' (e.g. broad-based tax cuts) do not make sense while social distancing measures remain in place. For the time being, policy responses should continue to focus on safeguarding financial health. The International Monetary Fund’s (IMF) latest fiscal monitor provides useful guidance on framing fiscal policy responses.

This IMF tracker is also a very useful tool for comparing fiscal policy responses across countries. Experience from the UK shows that there can be a big difference between announcing polices and actually getting cash into firms and people’s hands. In this respect, not all support is equal.

International finance and the ‘space’ to respond to the crisis

Political leaders around the world have been vowing to ‘do whatever it takes’ to protect their economies. In emerging markets and developing economies, this is not necessarily an option, as a large proportion of government and corporate debt tend to be denominated in foreign currencies. Finance ministers cannot depend on their central banks to step in and help refinance any debt obligations, but instead are more reliant upon the willingness (or current unwillingness) of international investors to lend to governments and their corporate sectors.

A widely championed proposal to increase the issuance of the IMF’s Special Drawing Rights would have bolstered the foreign exchange reserves of central banks around the world and helped to ride out these difficulties. Unfortunately, the US and Indian governments appear to have opposed these efforts. This is leaving governments with little option but to turn to the IMF’s direct credit facilities.

G20 finance ministers did agree upon a six-month freeze on debt service payments by certain creditors. It is difficult to ascertain which countries will most benefit from this standstill, partly because of the opacity of Chinese lending. However, an analysis of freezing debt service payments to the IMF shows that its benefits are not evenly allocated. Mechanisms have also been put forward as to how a standstill among private creditors could work, but it remains unclear if they will join.

Falling revenues and the role of the tax system

Revenues will be hit in all countries as a result of reduced economic activity, but oil exporters look especially vulnerable. This ODI-IFS briefing note gives a nice summary of how both tax officials and tax systems can help to shield firms and individuals as part of the Covid-19 response. It suggests some targeted measures (e.g. waiving mobile money fees) that could be particularly appropriate to lower-income settings. On the whole, however, the narrow tax base means that the tax system is a pretty blunt instrument to cushion the impacts of the crisis.

Addressing strains on the health system

Governments are ramping-up spending in the health sector to meet costs associated with providing care for Covid-19 patients. In lower-income settings, investing in essential supplies and personal protective equipment will have greater health benefits than expanding the capacity of intensive care units would.

However, there are understandably concerns that shifting resources to respond to Covid-19 will increase vulnerability to non-Covid-19 related illnesses. During the 2014–2015 Ebola outbreak in West Africa, it is estimated that deaths caused by failing to treat other infectious diseases were at a similar level to, or exceeded, the 11,000 deaths directly resulting from Ebola.

Therefore, a fiscal response to the pandemic requires shielding a country’s overall health system, rather than just caring for Covid-19 patients. Investing in community-based healthcare should be described as a ‘no regret’ policy, irrespective of the severity of outbreak. But spending to protect health may not necessarily be undertaken solely by the health ministry. For instance, improvements in sanitation or cash transfers could help reduce the spread of the virus.

Protecting households and businesses

Any kind of social distancing is only likely to ‘stick’ if households still have an income to sustain themselves. Governments around the world (151 countries as of 23 April) are therefore putting in place social protection programmes to cushion the impacts of the crisis. In many European countries, governments are acting as a ‘buyer of last resort’ (PDF) by paying employers to retain workers. Such an approach benefits both individuals and the productivity of firms, as they do not need to employ a new workforce once containment measures are lifted.

This approach to social protection is more limited in reach in lower- and middle-income countries because of structural differences in their economies. However, simplistic comparisons of the sizes of ‘formal’ and ‘informal’ economies offer very little practical guidance for actually designing policies. This briefing note gives a good sense of the ‘patchwork’ of existing solutions that governments typically have in place that could be ramped-up.

I have seen fewer materials on supporting the private sector, but this VoxEU blog helps to unpack the rationale for governments to provide targeted financing to keep firms afloat. This ODI brief (PDF), described in the Africa report, shows what a coordinated response to support Africa’s garment sector would look like.

Pragmatism versus purity in public financial management

A lot has also been written about the role that public financial management (PFM) systems can play in supporting the Covid-19 response. It has been suggested that PFM systems ‘need to be responsive and flexible, while ensuring value for money and minimising fraud and corruption’. Procurement should be ‘fast, smart and open’. Governments should ‘do whatever it takes, but keep the receipts’.

It is difficult to argue with these principles, but in a time of crisis it can be difficult to balance the need for urgent action with ‘accountability, transparency and integrity’. Many countries do not have the type of institutional framework in place that lends itself well to acting with speed, while following (often labyrinthine) rules. The reality is that there are trade-offs: fast procurement is not always the same as ‘smart’ procurement. Do governments bypass rules to move fast, or should proper processes always win the day? The capacity to follow existing spending procedures is also likely to be more strained than ever as civil servants adjust to working from home.

However, these materials do highlight some common areas of action that can help guide governments.

  1. Having a clearly stated Covid-19 response policy now will save a lot of pain later for analysing how spending (or other tax or financing measures) have been used. This will also make it easier to meet the monitoring frameworks (PDF) that will be put in place by international financial institutions.
  2. Governments should move to fund and execute this response policy quickly.
  3. A paper trail should be kept of how the money is being spent (setting up some kind of dedicated Covid-19 spending programme would probably be helpful in that regard).

Keeping things in perspective

Finally, if readers want a feel for what designing a response to Covid-19 looks like in practice, then take a moment to look at the crisis through the eyes of Ghana’s finance minister, Ken Ofori-Atta (subscription required). It makes for a sobering, but excellent read.