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Policy Brief
COVID-19 has caused serious damage throughout the entire world. As of mid-2021, the global fiscal cost of COVID-19—excluding the most important consequences, such as human lives, mental health effects, restrictions of human freedom, and other non-pecuniary components, have amounted to at least $16.5 trillion, about 18% of world GDP (Dinh 2021). Financial support has varied across countries depending on income level, political willingness, and the extent of the pandemic in each economy. As a result, fiscal deficits in both developed and developing countries have risen. For the former, the increase in the fiscal deficit comes from both rising expenditures and declining revenues. For the latter, the fiscal deficit increase heavily reflects the collapse in fiscal revenue.
However, the saga does not end here. In the coming 12–18 months, developing countries will continue to deal with the pandemic. They will be required to find resources to control the disease. In addition, governments are expected to continue to provide social protection— especially in terms of cash transfers for vulnerable populations—in order to protect the labor supply. These needs will pose massive challenges for countries under tight financial constraints, especially those at risk of debt distress. Thus, we will explore the implications of this necessary spending on the macrostability of selected developing countries.
