Explore our work by: Country


Government considerations for economic response to COVID-19 in low income countries

The COVID-19 pandemic is creating a range of challenges for governments across the world, some of which are only just starting to become clear. How can governments, especially those of low-income countries, best respond? 

Covid-19 Economic Consequence

Beyond the health emergency, questions on how governments can best continue to deliver essential services to their citizens and protect the most vulnerable sections of society are raised. There are broader implications for governments: what will the impact be on tax collections, the size of this years’ fiscal deficit, foreign currency availability, and the ability to raise and service the government borrowing needed to weather the storm?

Countries are already swinging into action with wage subsidies, tax expenditures and direct transfers to those in need. Government responses need to consider what level of intervention is feasible given available resources, existing administrative capacities, and the risks from emergency schemes that could create huge exposure to financial irregularity and fraud [1].

A broad list of government actions include:

Economic impact assessments – Establishing broad lower and upper bound estimates for 2020 and 2021 GDP so to attempt to estimate likely demand- and supply-side shocks affecting economic growth. This can begin with a desk-based assessment – looking at the latest GDP data and survey data, and attempting to model scenarios of economic impact of COVID-19 – this work would be largely assumptions-driven – i.e. length of curfew, proportion of different sectors furloughed, current account composition, etc. Estimates would be compared to the baseline forecast, for example published with the last budget. With a little more time and resources these estimates can be refined through analysis of high-frequency data, for example electricity consumption and VAT returns, as the data becomes available. Other options include analysing Google mobility data or granular satellite imagery to measure night-time luminosity – an emerging measure of economic activity Statistical agencies could, in partnership with telecommunications firms, deploy SMS/voice survey tools to implement survey instruments across the country while minimising the risk to their enumerators.

Macro-fiscal and revenue projections – Linked to the economic assessments and cost estimates of COVID-19 response policies, fiscal projections will need to be updated to allow governments to understand the fiscal impact of the crisis and the cost of the policy response options under consideration, as well as to inform any supplementary budgets being developed. Costs are likely to include the realisation of calls on state guaranteed loans and bailouts for state-owned enterprises. The impact on borrowing requirements will need to be assessed, and judgements made on the feasibility of being able to raise the financing needed to cover potentially much larger deficits in the coming years. The annual budget will need to be revised to shift resources toward new priorities. Reprioritisation and reallocation should be done both transparently and within the existing legal framework. As most Governments have or are adopting medium-term fiscal and expenditure frameworks, these projections would need to consider alternative scenarios, including rapid containment of the virus, slower containment of the virus, and the possibility of multiple peaks over the next 1-2 years.

Social safety net and poverty alleviation measures – Initial thinking on appropriate responses to the sizeable economic downtown has been on “support” rather than “stimulus” [2]– cash transfers to vulnerable groups, through ATM cards or mobile money applications, are likely to provide more targeted assistance than across-the-board tax cuts or an increase in government investment spending. However, the potential for fraud and mismanagement can be higher in times of emergency spending and being able to identify and reach those in need can be challenging even in the best of times. Successful administration of such schemes requires finding the balance between controls and efficiency and recognising that relaxing ex-ante controls means strengthening ex-post scrutiny. Measuring the impact of assistance schemes is also important – simple and easily monitorable indicators beyond ‘how much was disbursed’ should be developed so to track the results of policy actions.

Support to businesses – Whilst several OECD countries are offering grants and loans to both large and small businesses to help them furlough rather than lay off staff, such policies may be both unaffordable and carry high risk for lower income economies. Increasing lending by public banks to business may raise rates of non-performing loans – such policies require a clear rationale for intervention and high levels of transparency and oversight. Temporary easing of tax obligations can help businesses cope with financial stress, but these measures should be accompanied with improved communication and enforcement measures should continue to prevent disproportionate revenue losses. For countries with significant ODA receipts, these measures must be coordinated with multi-lateral and bi-lateral partners as they will necessarily result in less domestic revenue mobilization and could, in turn, increase the cost of borrowing in the medium-term given lower tax-to-GDP ratios.

Recovery and beyond – Governments should plan for recovery to be slower than hoped – especially for economies reliant on the export of commodities and services, which could see a prolonged downturn as travel is curtailed and uncertainty weighs on global investment levels. The impacts of higher debt levels and instability in financial markets will be difficult to predict, and governments should be cautious in establishing open-ended support mechanisms that will prove unpopular to unwind. Large scale business failures risk turning a temporary hiatus of economic activity into a prolonged downward spiral. Governments need to prepare for such eventualities, strengthening communications with citizens and setting expectations about the form and longevity of their policy responses, removing at least some of the uncertainties faced by households and businesses.

Cataclysm has historically been the primary driver of structural transformation, as both governments and societies are forced into reconsidering governance mechanisms. Given the proliferation of technology, including social media and mobile money solutions, the COVID-19 pandemic is a unique opportunity to leverage these new solutions. Whilst measures will inevitably be designed and formulated with expert assistance, it is critical that those most affected – citizens – are engaged in participatory processes throughout the formulation and implementation of remedial actions, and the innovative use of technology offers the safest means to achieve this at scale.

John Grinyer, Economist and Public Financial Management Advisor

Jalpa Patel, Director of Governance

Suren Tripathi, Macro-economic and Fiscal Advisor

[1]The Fiscal Affairs Department of the IMF have published an excellent set of Special Series notes on Covid-19 related fiscal and PFM topics: https://www.imf.org/en/Publications/SPROLLs/covid19-special-notes

[2]See for example Institute for Fiscal Studies, “The tax policy response to coronavirus should aim at providing targeted support not broad-based stimulus, at least for now” 27 March https://www.ifs.org.uk/publications/14777

Our Work

Explore our work to transform lives by making economies stronger, societies more stable, and governments more effective.