There are five policy pillars for overcoming coronavirus in developing countries. These revolve around internationaly coordinated liquidity provision, swap lines, debt restructuring, adequate exits plans and disaster relief.
Following the coronavirus outbreak, the policy response within high income countries and China has been unprecedented in scale and scope. Policies that were deemed impossible, a few weeks ago, have since been widely adopted.
In contrast, comprehensive discussion has not yet fully taken-off around how developing countries should deal with the crisis. This is partly due to the fact that the virus outbreak in these countries occurred at a later date.
Nevertheless, several mechanisms through which the coronavirus impacts developing countries have been highlighted.
The first mechanism is fiscal. The social distancing measures implemented by governments are taking a toll on fiscal revenues. This mostly due to the negative effects of lockdowns and curfews on economic activity. The falling fiscal revenues are especially problematic for developing countries governments. This because these tend to have less fiscal space, weaker welfare schemes and weaker health care systems. As a result governments have limited ability to avert a high human and financial toll.
The second mechanism is international trade. Demand for developing country exports will decrease as a result of the economic slowdown in China and several high-income countries. On top of this there is an ongoing decrease in commodity prices. The United Nations predicts that, as a group, developing countries would lose about $800 billion in terms of export revenue in 2020.
The third mechanism is financial. Following the crisis investors are fleeing to saver ‘lead currencies’, like the US dollar. These capital outflows are causing large devaluations of developing countries their respective currencies. This in turn is making it more difficult for governments to roll over or service their sizable amounts of foreign currency denominated debt. This comes against the backdrop of a barrage of repayments on this debt due in 2020 and 2021. In addition, to looming liquidity shortages there are also solvability challenges. Since 2012 developing country governments have been experiencing rising debt service costs. Developing country total debt stock reached a record level of a 193% of their combined GDP in 2018, which is almost twice its level in 2008. There is also a large amount of private debt.
If not properly addressed the economic challenges outlined above risk aggravating the health crisis. For example, when a developing country’s currency devaluates, as argued above, the difficulty of obtaining certain key medical supplies tends to increase. This due to the fact that these countries tend to be net importers of such goods.
The optimal policy response to the coronavirus will be different for each country. However, there are five policy pillars for overcoming coronavirus in developing countries.
First, there should be a coordinated global response to the liquidity shortages that developing countries face. The European Union, International Monetary Fund and the World Bank pledged funds to aid developing countries. However, current international financing schemes tend to be complex and conditional on fiscal consolidation. These financing schemes must be adjusted to reflect the peculiarities of the current crisis. For example, a much more expansive design of the IMF’s Special Drawing Rights could enable a timelier response to liquidity needs. This by giving the IMF more discretionary power in allocating resources to developing countries. In addition to this, other existing finance schemes which enable the redeployment of funds/projects based on contingency plans should be leveraged.
Second, there should be an increase in the number of currency swap lines that the Federal Bank of America has with other countries. Currently only a few developing countries have such lines were as most developed nations already have such swap lines. These financial instruments allow countries to cope more efficiently with currency devaluation that result from the fall in export earnings and the ongoing capital flight.
Third, there should be an internationally coordinated effort to provide debt relief to developing countries. In the short run, there should be a debt standstill. In the long run structured debt relief. Admittedly, this would be complex and time consuming because most developing countries have fractured creditors landscape. Nevertheless, debt relief remains a crucial part of moving forward.
Fourth, policy makers must formulate a long term strategy on fighting the coronavirus. In doing so also designing a careful exit strategy with respect to the unsustainable lockdowns, while still respecting the constraints developing countries face. Another option is to redesign lockdowns to be more efficient given the developing country context.
Fifth, it has been widely recognized that this is a unique shock. The economic down turn is not caused by a structural problem, it is the result of a natural disaster. As a result, we should provide economic support that is more akin to disaster relief and less akin to economic stimulus. The difference between both lies in the fact that policy makers should now focus on protecting jobs and firms from effects of the crisis.
A comprehensive discussion around how developing countries should respond to the coronavirus is only just taking-off. An eventual policy response should recognize developing countries their weak fiscal capacity, ongoing capital outflows and high amounts of debt. Ultimately, the response should ultimately be tailored to individual countries. Nevertheless, such policies need to be based on the 5 policy pillars mentioned earlier.
Elward Valstein is a financial economic policy advisor. He has worked for among others the Dutch Government, local and international NGO’s. The views and opinions expressed here are his own and do not necessarily reflect those of his clients or employers.