Source: IMF

• The COVID-19 pandemic has posed a severe challenge to public finances. The contraction in output and ensuing fall in revenues, along with emergency lifelines, boosted government deficits and debts beyond levels recorded during the global financial crisis (Table 1). Global fiscal support reached nearly $14 trillion, comprising $7.8 trillion in additional spending or forgone revenue and $6 trillion in equity injections, loans, and guarantees—an additional $2.2 trillion compared with the October 2020 Fiscal Monitor. The scale and form of such support varied depending on the impact of shocks, access to low-cost borrowing, and precrisis fiscal conditions. As a result, global public debt approached 98 percent of GDP.
• Most countries are projected to experience lower fiscal deficits in 2021 as revenues rise and expenditures decline automatically with the recovery and temporary pandemic-related measures expire. However, without additional fiscal support beyond that included in 2021 budgetary plans, projected fiscal contractions this year could slow the recovery, whose pace and extent remain uncertain. Reflecting elevated debt levels, exchange rate risks, and concerns about rating downgrades and adverse market reactions if large deficits persist, many emerging market and developing economies are expected to tighten fiscal policy in 2021 (Figure 1). Under the current projections, countries with elevated public debt and financing constraints will implement larger fiscal adjustments over the medium term.
• Policy options in response to the pandemic have been more limited in low-income developing countries, owing to financing constraints and less developed welfare programs. Notwithstanding shorter lockdown periods and less severe economic contractions, spending needs are sizable both to respond to the pandemic and to meet the United Nations Sustainable Development Goals. However, revenue shortfalls from output drops and a concurrent fall in commodity prices, combined with debt vulnerabilities, have forced many low-income developing countries to limit the size of fiscal support (Figure 2.A). The pandemic thus risks leaving a lasting impact, including higher poverty and malnutrition.
• Public debt jumped up as a result of the crisis and will keep vulnerabilities elevated. Balancing shortterm demand support for the recovery with medium-term sustainability is critical. Credible medium-term fiscal frameworks and calibrated consolidation strategies need to be developed, especially in high-debt countries, supported by pro-growth and inclusive measures. Early announcement of such packages could create near-term space for maneuver. A key element of such strategies will be tax reforms to promote inclusive growth. Governments will also need to monitor and manage fiscal risks (for example contingent liabilities from off-budget emergency measures), which, if realized, would further add to public debt.