Global outlook c h a p t e r 1

EMDE fiscal policy
Fiscal support packages have been large in many 
EMDEs, with discretionary measures, such as 
increased expenditures or foregone revenues, 
constituting a substantial share of the support. 
The amount of support, however, has varied by 
region, reflecting the availability and use of policy 
space (figure 1.22.A). In general, EMDEs 
provided less fiscal support than advanced 
economies, in part reflecting revenue constraints 
in industrial-commodity exporters due to the 
decline in commodity prices and in LICs due to 
low revenue mobilization (figure 1.22.B). Fiscal 
support measures have been financed through 
debt issuance; the drawdown of buffers such as 
sovereign wealth and development funds; 
reallocation of existing spending; and external 
support, with 44 EMDEs benefiting from the 
G20 Debt Service Suspension Initiative. The fiscal 
response, combined with output contractions, is 
expected to trigger a nearly 10 percentage point 
rise in government debt in the median EMDE by 
2022, to a record high of about 62 percent of 
GDP, with particularly sharp increases in South 
Asia (SAR) and MENA (box 1.1). Overall, the rise 
in debt is broad-based, with more than 80 percent 
of EMDEs projected to have higher debt-to-GDP 
ratios in 2022 relative to 2019. 
Given the size of the COVID-19 shock and the 
lack of fiscal space, some EMDEs may need to rely 
on new or continued external support and debt 
relief to enable them to assist vulnerable 
households and viable firms (Truman 2020). The 
existing framework for debt relief is unlikely to fill 
the sizable financing gaps of many EMDEs, which 
may warrant more permanent solutions (OECD 
2020a; Stubbs et al. 2020). Additionally, many 
EMDEs will not be able to maintain the level of 
expenditures needed to support the recovery, 
which could force some countries into premature 
fiscal tightening (figure 1.22.C). Particularly 
vulnerable countries include those where debt was 
already on a rising trajectory or where a large share 
of fiscal revenues is absorbed by debt-servicing 
costs (figure 1.22.D; UNCTAD 2020). The 
situation is worse in LICs, where nearly half were 
either in debt stress, or at high risk of it, prior to 
the pandemic (Mühleisen, Klyuev, and Sanya 
2020).

---

C H A P T E R 1 
G L O B A L E C O N O M I C P R O S P E C T S | J A N U A R Y 2 0 2 1 
50 
The expected deterioration in fiscal positions has 
made achieving fiscal sustainability more 
challenging. Providing a clear exit strategy for 
unwinding 
substantial 
support—alongside 
strengthening fiscal frameworks and debt 
transparency and efficiency—would help bolster 
credibility and keep borrowing costs contained. It 
would also put governments in a better position to 
address fiscal risks such as the realization of 
contingent liabilities, particularly those that arise 
from state-owned enterprises.
The trade-off between strengthening fiscal 
positions and continuing to provide support can 
be made more palatable through improvements on 
the part of both revenues and expenditures. On 
the revenue side, ensuring that the tax structure 
and statutory rates are efficient could help 
mobilize domestic revenues and soften the drag 
from fiscal consolidation. On the expenditure side, 
improving public investment efficiency, as well as 
the quality of public procurement, can ensure that 
expenditures yield high growth dividends and 
offset the impact of consolidation (Bosio, Grujicic, 
and Iavorskyi 2020). Strengthening governance, 
for instance, could halve the expenditure losses 
incurred by public infrastructure inefficiencies 
(figure 1.22.E; IMF 2020h). Additionally, ex-
penditures could be prioritized toward measures 
that bolster inclusive and sustainable growth and 
also help ensure fiscal sustainability, such as 
investment in human capital or priority sectors, 
including green technology. That said, roughly 
half of the fiscal support directed toward energy 
initiatives in the G20 last year were committed to 
fossil fuels (figure 1.22.F).