Courage under Fire: Policy Responses in Emerging Market and Developing Economies to the COVID-19 Pandemic

IMF Blog, June 3, 2020

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Canonical URL: Courage under Fire: Policy Responses in Emerging Market and Developing Economies to the COVID-19 Pandemic

Publication date: June 3, 2020.
Authors: Martin Mühleisen, Vladimir Klyuev, Sarah Sanya.
Core message: The COVID-19 crisis prompted an unprecedented policy response in emerging market and developing economies (EMDE), with large-scale measures to bolster health services and support households, firms, and financial markets despite limited policy space in many countries.
Economic shock characterization: Economic activity in EMDEs has decelerated at a pace unseen in at least 50 years, accompanied by sharp declines in trade and capital flows and an unprecedented decline in oil and other commodity prices; a spate of sovereign downgrades has occurred.

Fiscal policy has been at the forefront of the EMDE response with massive health spending needs and larger resources devoted to supporting the broad economy.
Policy instruments used:
- Loans, guarantees, and tax breaks to corporations and SMEs.
- Higher unemployment benefits and subsidies on utility prices for vulnerable households.
Financing of measures:
- Borrowing.
- Drawing down buffers.
- Reprioritizing within existing budgets.
- Multilateral support.
Key numeric comparisons:
- Total discretionary fiscal response in emerging market economies: 2.8 percent of GDP in extra spending and tax reductions.
- Total discretionary fiscal response in low-income economies: 1.4 percent of GDP in extra spending and tax reductions.
- Comparable measure in advanced economies: 8.6 percent of GDP.

About half of all low-income countries were considered in debt distress or at a high risk of debt distress before the crisis, as assessed by the IMF’s Debt Sustainability Framework.
These constraints limited the magnitude of fiscal responses in many EMDEs.

Central banks in EMDEs cushioned the shock through policy rate cuts and liquidity injections.
Unlike earlier episodes of capital outflow pressure, most emerging market economies lowered policy rates (most of them by 50 basis points or more) rather than raising them.
Some EMDEs implemented unconventional monetary policy measures, including purchases of government and corporate bonds.
Regulatory easing included loosening restrictions on liquidity and loan classification to enable banks to support households and firms.
Select macroprudential measures were relaxed in some countries (for example, China and Colombia) to support credit supply to hardest-hit individuals and sectors.

Currencies of EMDEs with flexible exchange rates depreciated in response to outflow pressures and heightened risk aversion—over 25 percent in a few cases.
Many economies intervened in foreign exchange markets and drew down international reserves to offset pressures.
A few countries eased existing capital controls on inflows; measures to curb capital outflows were very limited.

Digital technology was used to:
- Deliver relief to households and small and medium-sized enterprises (examples cited: Bolivia, Indonesia).
- Encourage cashless payments to limit disease spread.
- Ensure affordable access to digital and financial services (examples cited: Colombia, Kenya).
- Provide subsidies to small-scale farmers through digital platforms (example cited: Zambia).
Digital solutions helped target relief to the vulnerable and enhanced the effectiveness of traditional macro policies.

Governments took steps to ensure food security and access to medical supplies amid disrupted global supply chains, mostly on a temporary basis.
Measures included price controls, regulations against price gouging, easing import controls, and in several cases restrictions on exports of food and pharmaceuticals.

The global financial safety net was activated and strengthened:
- The U.S. Federal Reserve established new swap lines with central banks in several major advanced and emerging economies.
- The G-20-led debt moratorium initiative provided relief.
- The IMF provided emergency assistance to more than 60 countries.
- The IMF established a new Short-term Liquidity Line as part of its COVID-19 response to augment its lending toolkit.
- Massive liquidity provision by major advanced economy central banks also alleviated pressures on EMDEs.
Regional Development Banks provided support for private sector enterprises, trade finance, and access to medical supplies.
Examples of bilateral assistance: Albania dispatched a team of doctors to Italy; Vietnam donated medical supplies to neighboring countries and advanced economies.
EMDEs also extended assistance to each other and other countries in need.

The IMF Policy Tracker analysis shows an extraordinary EMDE policy response characterized by innovation and international cooperation.
EMDEs face severe impacts from the COVID-19 shock and attendant market reactions, but policy measures—fiscal, monetary, regulatory, digital, and international—have been mobilized to mitigate the crisis.
Peer learning and continued data collection and sharing are emphasized as ways countries can benefit from each other; the IMF commits to collecting and sharing best practices and incorporating this data into its analysis to assist its membership.

IMF blog post: "Courage under Fire: Policy Responses in Emerging Market and Developing Economies to the COVID-19 Pandemic", June 3, 2020.