An assessment of fiscal space for COVID-19 response and recovery in Asia-Pacific developing countries

The COVID-19 pandemic which started in China has resulted in the worst setback in global development in recent decades, with 1.1 million confirmed deaths as of mid-October and some 150 million people expected to fall back into extreme poverty. In the face of such unprecedented crisis, governments around the world have deployed trillions of dollars in emergency health response and relief measures for households and firms. Fiscal policy is also expected to play a central role in the recovery phase, in stimulating the economy and "building forward better." However, it is unclear whether developing countries have the fiscal policy space to sustain necessary countercyclical measures and invest in priority areas such as health, social protection, digital infrastructure, and climate action. This policy brief provides a preliminary assessment of fiscal space in Asia-Pacific developing countries in the wake of COVID-19. It starts by assessing the size and composition of fiscal packages announced in response to the crisis. There are three main findings. First, countries which entered the crisis with limited fiscal space relied on smaller fiscal support packages, at the risk of delaying the recovery. Second, COVID-19 will considerably increase government debt burden over the medium-term, potentially limiting resources for development purposes. Third, for the poorest and most vulnerable countries, international support measures to date are helpful but inadequate; more is needed. In response, three policy suggestions are highlighted. First, countries should avoid premature fiscal consolidation and safeguard development expenditures to build forward better. Second, countries need to expand their fiscal space through revenue reforms, capital market development, and effective public debt management. Third, international support for the poorest and most vulnerable countries should include targeted debt relief.