Abstract

The COVID-19 pandemic has been unlike any other crisis that we have experienced in that it hit all economies in the world at the same time, compromising the risk-sharing ability of nations. At the onset of the pandemic, the World Bank (WB) and the International Monetary Fund (IMF) jointly pledged 1.16 trillion U.S. dollars to help emerging economies deal with COVID-19. Would this amount have been enough to preserve financial stability in a worst case scenario, and what were the fiscal implications of the pandemic? In this article we aim to answer these questions by documenting the size of the fiscal measures implemented by different countries, the aid they received from the IMF and the WB to finance those fiscal measures, and the resulting changes in gross debt, debt composition and maturity, and fiscal deficits. We find that given the amount of debt that was maturing in Asia and Latin America in 2020 and 2021, if there had been a rollover crisis due to lack of demand for their newly issued debt, then what was pledged by the WB and IMF at the onset of the pandemic would not have been enough to preserve financial stability. However, there was no rollover crisis, and although fiscal deficits got considerably worse in 2020, they improved in 2021, albeit leaving gross debt at higher levels than those observed before the pandemic.

Praew Grittayaphong is a senior research associate and Paulina Restrepo-Echavarria is a senior economist at the Federal Bank of St. Louis.

INTRODUCTION

The COVID-19 pandemic has been unlike any other crisis that we have experienced in that it hit all economies in the world at the same time. Usually, when a recession hits, it is specific to a particular country or to a set of countries that have correlated business cycles. Under these circumstances, in a world with financial integration, the impact of recessions on consumption and financial stability need not be that severe as there can be risk sharing between those countries or regions affected by the recession and those that are not. However, because COVID-19 was a global phenomenon, generating an economic collapse worldwide, this risk-sharing ability to navigate crises seemed much more elusive. Governments around the world had to react as fast as possible by putting together fiscal programs to rescue their nations. So, in the face of a worldwide economic crisis, who can lend financial aid to those countries with less resources and more liquidity constraints such that the world's financial stability is preserved?

The default answer to this question is the International Monetary Fund (IMF) and theWorld Bank (WB), who act as lenders of last resort. But they usually act as lenders of last resort when crises occur in certain regions. However, at the onset of the COVID-19 pandemic, many countries financially suffered due to necessary increases in fiscal deficits, increased public sector borrowing requirements, and greater debt vulnerability. The IMF and the WB stepped in and jointly pledged 1.16 trillion U.S. dollars (USD) to help emerging economies deal with COVID-19. Is this lending capacity provided by these two multilateral organizations enough to preserve the world's financial stability?

In this article we present an overview of the available data to get a sense of the answer to this question as well as the resulting effects on fiscal deficits. We start by documenting the size of the rescue programs that were implemented in the different countries by degree of development and the financing means. We find that developed countries were able to put together programs of around 24 percent of gross domestic product (GDP), while emerging countries put together programs that were only around 8.4 percent of GDP.We then look into the aids that were made available by the IMF and the WB to specific emerging markets, the fraction of the programs that were put together by each individual country to save their economy that was financed with new issuances of debt, and the resulting effects on debt composition and structure. Finally, given the fiscal implications of changes in debt levels, we document the changes in both primary and total deficits during the pandemic years, calculate the aggregate liquidity needs of a set of emerging markets (debt maturing in 2020 and 2021), and compare the resulting total number with the 1.16 trillion that was pledged by the IMF and the WB.

We find that countries in Asia and Latin America received financial assistance from the IMF and the WB at varying degrees. Most assistance was provided in terms of loans to address different types of balance of payments needs. However, some counties—like Nepal—also received grants. Asian countries, on average, experienced higher increases in gross debt as a percentage of 2019 GDP when compared to Latin American countries from 2019 to 2020. On average, gross debt (percentage of GDP) increased by around 7.5 percentage points in Asia and 2.1 percentage points in Latin America. We also find that, on average, countries in Asia had lower proportions of U.S. dollar-denominated debt when compared to Latin American countries. Moreover, the percentage of government debt (as a share of GDP) maturing in 2020 and 2021 was lower in Asia (after removing China) than in Latin America. In addition, both primary and total deficits in most emerging countries increased in 2020 but generally improved in 2021, showing fiscal discipline.

If we consider only rollover needs, Asia and Latin America needed 1,433.3 billion USD to roll over their debt in 2020 (including China) and 1,678.1 billion USD in 2021. This amounts to more than 3 trillion USD. This means that if there were no other refinancing means, the 1.16 trillion USD pledged by the IMF and the WB would not have been enough to maintain financial stability in these regions. However, it is crucial to note that the amount of international aid could have increased in the case of a rollover crisis.

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