Governments, particularly in developing countries such as Egypt, can take steps to protect their citizens from the impact of the ongoing coronavirus (COVID-19) pandemic, says Paolo Mauro, Deputy Director of the Fiscal Affairs Department at the International Monetary Fund (IMF).
In an interview with Daily News Egypt, Mauro outlines those steps and how governments can use systems currently in place to minimise the economic damage.
What are the fiscal policies that have been put in place to mitigate the impact of the coronavirus, especially in countries like Egypt?
Fiscal policy is the key to saving lives and protecting people from the damage inflicted by the COVID-19 pandemic.
Governments should finance additional health/medical resources, as much as needed. Policymakers should offer emergency lifelines through timely, temporary, and targeted fiscal measures to protect people from losing jobs and incomes, and viable companies from bankruptcies.
These actions would limit permanent scarring of economies. Relief is especially needed for the most vulnerable and liquidity constrained individuals and businesses, such as daily workers and SMEs, particularly in the worst affected sectors. Authorities in developing countries could use measures such as expanded unemployment benefits, cash transfers for low income households or irregular workers, and tax relief for small firms. The challenge is often greater in emerging markets and developing economies that have more difficulty in accessing finance and, in some cases, face sharp drops in revenues from commodity market or tourism.
Global coordination can help achieve a universally low-cost vaccine and medicine, and support developing countries – especially those with limited health capacity – through aid, medical resources, and concessional emergency financing.
Which is more effective as an economic policy, business subsidies and tax relief for companies to preserve employment or direct cash transfers to households?
Right now, the objective is to save lives and livelihoods, not to stimulate demand.
As in other developing economies with less developed social safety nets, the effectiveness of fiscal support can be enhanced by linking additional transfers to existing programmes. For example, additional transfers through the Takaful and Karama benefit programmes in Egypt seem appropriate to protect people’s livelihoods.
On the revenue side, deferrals of taxes and social security contributions are common tools among countries, to help maintain the cash flow for people and firms in difficult times. Profit-based tax advantages such as tax holidays should be avoided because they are not linked to the expenditure effort and would disproportionately reward businesses with the greatest profits.
All fiscal measures should be properly assessed and disclosed. Fiscal risks should be monitored to ensure transparency, good governance, and accountability.
Another objective is to promote a swift recovery once the pandemic is under control. Support should be timely, targeted, temporary, and transparent. The choice of policies and tools will depend on the country circumstances as they should use what is readily available given the urgency. Most countries will use a mix of support to households and firms.
Support to households should be targeted to ensure access to basic goods and services. Actions include tax deferrals, cash transfers, extended unemployment benefits, and social assistance. These measures truly are emergency lifelines aimed at families that have lost jobs or sources of income.
In countries with large informal sectors, support to individuals through the social protection system should play a prominent role. If a social cash transfer system already exists, one option is to increase transfer amounts and ease eligibility criteria. If no cash transfer system exists and administrative capacity is weak, an alternative is to subsidise utility (or other basic spending items) bills. In some cases, fintech might also help. If mobile payments are well-developed, the government might use this existing infrastructure for cash transfers.
For firms, the objective is to avoid permanent scarring. Fiscal policies can help preserve employment and wages while maintaining capacity that will be crucial for recovery. That includes avoiding unnecessary bankruptcies leading to job losses and liquidation of assets. Assistance to firms can help preserve — indeed can be made conditional on preserving —jobs.
It is important for all these policy tools to embed clear phasing-out mechanisms at the outset, to ensure that they facilitate rather than impede the eventual recovery.
How can central banks balance enormous fiscal efforts with preventing interest on government debt to soar and getting debt-to-GDP ratio unchecked?
In emerging markets and developing countries, ensuring that inflation expectations are anchored is particularly important, not only because higher prices reduce purchasing power, but also because higher inflation puts pressure on the exchange rate. The increase in public debt is likely to be one-off due to the temporary nature of the pandemic shock. Even so, the large cost of these fiscal measures should be embedded in a medium-term fiscal framework, and measures such as public guarantees should be transparently managed and recorded.
Monetary authorities will face a balancing act in that context. Reducing interest rates would support the economy and the fiscal effort, but this would have implications for the exchange rate, with associated effects on the burden of foreign currency debt. Selling foreign exchange to maintain orderly market conditions can on occasion help navigate that trade-off, but central banks will need to use caution to preserve scarce foreign exchange reserves.
What should developing countries, Egypt in particular, do to help their economies recover in the post-pandemic period?
The actions governments take now will determine the speed and strength of their recovery in the post-pandemic period. Policies that support households and firms in order to preserve the complex web of relationships in the economy (for example, between firms and workers, firms and banks), and the incomes of families during the pandemic, will facilitate the subsequent recovery as the pandemic recedes. As such, during this emergency, policymakers should do whatever it takes, although they should also keep the receipts. This means fully accommodating spending on health and emergency services and providing lifelines to hard-hit households and businesses. It also means deploying any measures in a temporary, transparent, and efficient way to minimise fiscal risks.
In Egypt, the government has announced a fiscal package amounting to 2% of GDP. This includes additional allocations to the health sector, an expansion of cash transfers for vulnerable households, and targeted support for workers and firms in the most severely hit sectors, such as tourism. To provide liquidity support, the authorities have also extended deadlines for income tax payments and announced a temporary real estate tax exemption. These are steps in the right direction.
Turning to developing economies more generally, where possible, the temporary deterioration of the fiscal deficits should be financed from concessional sources. In this regard, international support will be key to raise much needed health and budget financing.
Once the health crisis has waned, there will be a need for developing economies to put their fiscal position back on a sustainable path. The composition of fiscal consolidation should rely primarily on improving the tax capacity and efficiency of current spending to minimise the effects on growth, while safeguarding and expanding much needed investments in people and infrastructure to meet the Sustainable Development Goals.