## 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](https://www.imf.org/en/blogs/articles/2020/06/03/blog-courage-under-fire)

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## Bibliographic details
- Authors: Martin Mhleisen, Vladimir Klyuev
- Published: June 3, 2020

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### Context and key message
- 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: save lives and protect livelihoods
- 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.

### Pre-existing vulnerabilities and debt constraints
- 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.

### Monetary and financial sector support
- 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.

### Exchange rates, buffers, and capital flow measures
- 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.

### Digitization and targeted relief
- 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.

### Managing supply disruptions and market interventions
- 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.

### International solidarity and the global financial safety net
- 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.

### Conclusions and implications
- 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.*

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## References

- [Martin Mühleisen](https://blogs.imf.org/bloggers/martin-muhleisen/)
- [Vladimir Klyuev](https://blogs.imf.org/bloggers/vladimir-klyuev/)
- [Sarah Sanya](https://blogs.imf.org/bloggers/sarah-sanya/)
- [عربي](https://www.imf.org/ar/News/Articles/2020/06/05/blog-courage-under-fire)
- [Français,](https://www.imf.org/fr/News/Articles/2020/06/05/blog-courage-under-fire)
- [日本語](https://www.imf.org/ja/News/Articles/2020/06/05/blog-courage-under-fire)
- [Português](https://www.imf.org/pt/News/Articles/2020/06/05/blog-courage-under-fire)
- [Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [Short-term Liquidity Line](https://www.imf.org/en/About/Factsheets/Sheets/2020/04/17/short-term-liquidity-line)

_Source: https://www.imf.org/en/blogs/articles/2020/06/03/blog-courage-under-fire_