The coronavirus crisis is a crisis like no other, and for emerging market and developing economies (EMDE), it has triggered a policy response like no other, both in scope and magnitude.
Despite their diversity, and in some cases, strained resources, this large group of countries—consisting of emerging markets and low-income countries—have bolstered the provision of health services and extended unprecedented support to households, firms, and financial markets. While limited policy space has kept the response at a smaller magnitude than in advanced economies, some even managed to help other countries.
A whole new world
Economic activity in EMDEs has decelerated at a pace unseen in at least 50 years as the impact of the COVID-19 pandemic ravages the global economy. Several countries are experiencing a sharp decline in trade and capital flows, and the impact of an unprecedented decline in oil and other commodity prices. A spate of sovereign downgrades has occurred.
The IMF’s Policy Tracker summarizes key policy responses to the COVID-19 pandemic, and within these responses, there are some common threads.
Fiscal policy to save lives and protect livelihoods
Fiscal policy has been at the forefront of the EMDE response. Within EMDEs, the health crisis is necessitating massive health spending, though this increase has been dwarfed by the resources needed to support the broad economy. Countries have provided loans, guarantees, and tax breaks to corporations and SMEs, and extended support to vulnerable households with higher unemployment benefits and subsidies on utility prices.
Financing for these new measures emerged from a variety of sources, including borrowing, drawing down buffers, reprioritizing within existing budgets, and multilateral support.
Some economies entered this crisis in a vulnerable state with already sluggish growth, high debt levels and limited fiscal space to support the health sector and the flagging economy. About half of all low-income countries were considered in debt distress or at a high risk of debt distress even before the crisis, as assessed by the IMF’s Debt Sustainability Framework. Partly reflecting these constraints, the total discretionary fiscal response to the shock has been lower (although still sizeable) in both emerging market and low-income economies at 2.8 and 1.4 percent of GDP respectively in extra spending and tax reductions, compared with 8.6 percent of GDP in advanced economies.
Monetary and financial sector support—an anchor for stability
EMDE central banks cushioned the impact of the shock on credit conditions through policy rate cuts and liquidity injections. Unlike previous episodes of capital outflow pressures—including the early stage of the Global…