Nepal’s low debt-to-GDP ratio provides room for policy action

The International Monetary Fund (IMF) and the World Bank Group have recently concluded their 2020 spring meetings, held in virtual format and mostly focused on the coronavirus pandemic’s impact. The global bodies urged countries to protect poor and vulnerable groups, and minimize economic and social impacts through fiscal, monetary, and financing measures. The IMF also announced debt relief for 25 countries including Nepal. Pushpa Raj Acharya of The Annapurna Express had a virtual conversation with Catherine Pattillo, the IMF’s Assistant Director to the Fiscal Affairs Department. She is also the chief of the Fiscal Policy and Surveillance Division.

The IMF has been tracking fiscal policies of various countries adapted in response to Covid-19. Which measures can countries adopt?

The objective of fiscal policy in responding to the Covid-19 pandemic is to save lives and livelihoods. Countries need to provide resources to health systems, provide emergency lifelines to households to meet basic needs, and to firms to preserve employment and wages. They need to maintain capacity that will be crucial for recovery. Protecting people from losing jobs and incomes, and viable companies from bankruptcy, will help prevent this pandemic from imposing long-lasting damage to the economy. These are not a conventional fiscal “stimulus” but rather vital emergency lifelines. 

Effective fiscal measures are those that deploy limited resources efficiently, and in a targeted, temporary, and transparent way. The April 2020 Fiscal Monitor surveys these measures. But let me provide a few examples here. 

Existing social safety nets were expanded and coverage was improved not only in advanced economies such as Germany and the US, but also in Indonesia and Senegal. Not all countries have strong social safety nets. Countries should use what is available. There are good examples everywhere. India and Kenya have used unique identification systems and digital technologies to provide cash transfers. In Bangladesh, the focus has been on in-kind provision of food and medicine.

Temporary wage subsidies, transfers to workers and firms, and paid sick and family leave are important instruments as well. They support those who are unwell and provide them incentives to self-isolate, stay at home, and take care of children. Several countries like Denmark, Korea, and Singapore have expanded these benefits.
 
Tax payment deferrals, tax filing extensions, and loans and loan guarantees provide liquidity support to cash-strapped businesses, especially in hard-hit sectors such as transport, tourism, and hospitality. The same applies to SMEs and micro businesses. These measures have been put to good use in China, Korea, Thailand, the UK, and Vietnam.

Low-income countries like Nepal have less fiscal space. How can they use their resources to expedite economic recovery after Covid-19?
 
The first priority is to save lives by fully accommodating additional health and emergency services. Countries with less fiscal space can reprioritize spending toward the health sector while safeguarding other priority social spending and vital public services. 

Second, governments need to provide temporary and targeted emergency lifelines to protect livelihoods. Direct cash transfers or in-kind provision of food and medicines are possible options. As the pandemic abates and the shutdowns end, fiscal policy can facilitate the recovery in order to achieve sustainable and inclusive growth, subject to financing constraints.

Low-income developing economies typically have less room in the budget to respond. Global efforts should support countries with less capacity, including through aid, medical resources, and concessional emergency financing. The IMF is responding rapidly to a record number of requests for financing. We have recently doubled the access limits of the IMF’s emergency financing facilities, provided through the Rapid Financing Instrument and Rapid Credit Facility. The latter is specifically for low-income developing countries.

Nepal’s relatively low debt-to-GDP ratio provides some room for policy action. In this context, the authorities should continue to actively seek additional budget financing from our development partners to support their Covid-19 response efforts. The IMF has already provided an up-front grant to pay off upcoming debt service to the Fund. We are processing the request for financing under the Rapid Credit Facility. 

What sort of fiscal stimulus would you like to recommend to Nepal?

Covid-19 is severely impacting growth in Nepal, mainly through a decline in remittances from countries in the Persian Gulf, India, and Malaysia. There has also been a contraction in tourism as well as a drop in domestic activities because of the nationwide lockdown. 

As in other countries, the immediate priority is to deal with the human and economic impact of the Covid-19 pandemic. It is important to increase health spending, strengthen social assistance, ensure adequate liquidity to the banking system, and support access to credit. The authorities are already taking these steps. 
Once the pandemic fades, it will be critical to implement a policy agenda that promotes inclusive growth while preserving financial sector and external stability as well as fiscal sustainability. A cornerstone of the agenda will be to strengthen the investment climate in Nepal. This includes implementing structural reforms that encourage high-quality public- and private-sector investment projects, in particular FDI.

The IMF has provided debt relief to 25 countries including Nepal. Do you recommend other donors do the same? 

Low-income developing countries are likely to be hit the hardest by the pandemic. Containment measures represent great disruption to economic activity and people’s lives. It will require significant emergency lifelines. Most countries, however, have very limited resources to respond. Thus, it is necessary for the international community to mobilize financial means—for example, in the form of grants and concessional loans—but also health workers, medical equipment, and supplies. 

The debt service relief provided by the IMF to 25 countries through the Catastrophe Containment and Relief Trust (or CCRT), by freeing up resources that would have otherwise been used to service debt, will help the poorest of our members to use any available resources towards vital medical needs and other emergency relief efforts. Nepal was among the group of countries to obtain this debt relief.

And on April 15, the G20 endorsed the earlier call by IMF Managing Director Georgieva and World Bank President David Malpass that bilateral creditors temporarily suspend debt service obligations for the poorest countries. More, however, is needed. A parallel initiative by private creditors would be welcomed. As IMF Fiscal Affairs Director Vitor Gaspar has said, a health emergency is a call for unity and solidarity both within and among countries.

Do you think fiscal policy should further reinforce healthcare?

Ensuring all necessary health resources are available to save lives should be the number one priority. This requires fully accommodating additional spending on health and emergency services, irrespective of fiscal space or debt positions. Governments should plan carefully to allocate increased health spending to areas that are most effective at managing any virus outbreak and identify activities that are necessary to monitor, contain, and mitigate the health impact. And as noted above, the international community should robustly support countries with limited health capacity.

How can a country harness its demographic dividend for development before its old-age population starts outgrowing working-age population? 

Nepal is currently benefiting from a demographic dividend. Its working-age population is expected to continue growing strongly through about 2025. To better harness the demographic dividend, the private sector must play a larger role in driving economic activity, and creating quality jobs. To provide a supporting environment for private investment, and to attract foreign direct investment, reforms are needed to address important gaps in the size and quality of the infrastructure network as well as streamline regulations and bureaucratic processes.

What sort of adjustments in fiscal policy is required after the corona crisis is over?

The Covid-19 pandemic underscores the need to adopt, over time, broader enhancements to tax and expenditure policies that reduce vulnerabilities and boost medium-term growth. Improving social insurance schemes and safety nets can help protect people in the face of this pandemic and future adverse shocks. Investing for the future—health care systems, education, and infrastructure—remains an important priority so that countries can make progress toward their Sustainable Development Goals. Putting these plans in a comprehensive medium-term fiscal framework is important. Once economies recover, we need to ensure progress on ensuring debt sustainability. 

How will the IMF support countries in the next phase, if the crisis prolongs?

To address ongoing needs of the countries, the IMF has $1 trillion in lending capacity. As noted above, emergency financing, other concessional financing, and debt relief for the poorest countries will substantially help them respond to this crisis.

The IMF’s policy advice and capacity development support to countries is also responding rapidly and adapting to evolving realities. We are producing a series of notes on different fiscal policy and management measures to respond to the Covid-19 crises, which you can see on the IMF website. Our Fiscal Monitor has included granular details on the types of fiscal measures selected countries are taking. We are developing new initiatives to deliver country-specific, granular “virtual” capacity development support on revenue (tax policy and administration) and spending (public financial management and expenditure policy) challenges that countries are facing during this crisis.