Challenges for Public Financial Management During the Covid-19 Pandemic: Caveats for Developing Countries

Can K., Aktaş E. E.

in: Shadow impact of COVID-19 on economies: A greater depression?, Meltem İnce Yenilmez and Ufuk Bingöl, Editor, Peter Lang Publishing, Inc., Berlin, pp.23-45, 2021

  • Publication Type: Book Chapter / Chapter Research Book
  • Publication Date: 2021
  • Publisher: Peter Lang Publishing, Inc.
  • City: Berlin
  • Page Numbers: pp.23-45
  • Editors: Meltem İnce Yenilmez and Ufuk Bingöl, Editor


COVID-19 has transformed into an economic pandemic rather than a contagious viral disease in only a few months and now it is an enormous impediment to economic activities around the world and no country is an exception when it comes to facing its adverse effects. However, unlike advanced and industrialized countries, developing and emerging economies are more prone to fiscal turmoil since their already shallow fiscal provisions are mostly far below the level which is required to cover the immediate fiscal needs arising due to COVID-19. Since they are mostly caught off-guard by the pandemic, there is no time for them to set up a well-designed budget system that is sturdy enough to meet unforeseen fiscal requirements of unexpected global events such as pandemics. For this reason, in this paper, we offer some caveats which can be considered for facilitating the transition from existing unpleasant conditions to recovery. The governments can choose different means of responding to overcome the current fiscal challenges, but their associated risks and costs should be estimated and forecasted rigorously. Failing to calculate the trade-off between alternative policies might result in even harsher fiscal conditions since this failure might bring about a mismatch between desired outcomes and the efficiency of the policies. Complementary budget and/or external funding are among the funding options to be used under such extraordinary circumstances. However, mostly a great deal of jurisdiction and bureaucracy are involved in the processes of these types of financing, but it is worthwhile for those countries to temporarily reduce those impediments to recover from the dire situation. Rationing regarding the allocation of existing scarce resources as swiftly as possible facilitates the determination of the number of financing needs which is crucial for the policymakers to reduce uncertainty. In order to execute this rationing properly, a large-scale information sharing, and coordination mechanism comprised of central and local government as well as non-governmental institutions are needed. Such a mechanism reduces the time required for decision making Caveats for Developing Countries 41 and facilitates the surveillance of fiscal management. Maintaining liquidity in fiscal balances is also quite an issue when it comes to the appearance of immediate unexpected expenditures. The operational capability of the government under harsh conditions imposed by the pandemic relies to large extent on the availability of liquidity whenever needed. Normally government cash management is carried out by means of liquidity forecast but under current gloomy conditions, it is extremely challenging to do so. This issue might be overcome, at least partially, by using higher frequency data (such as daily or weekly) to run forecasts. In this manner, the forecasts will be based on the recent behavior of the fiscal indicators at the expense of shortened forecast horizons. In order to obtain the required data, the aforementioned collaboration among institutions is key. Also, instead of relying on a single forecast scenario, the governments need to generate forecasts of worst and best scenarios along with their likelihood of occurrence within confidence intervals and fan charts. By so doing, they might reduce the overall risk they encounter due to the recent pandemic. Besides, foreign exchange reserves in the developing countries are mostly not abundant and those countries mostly suffer from a large amount of foreign currency-denominated debt. Therefore, exchange rate fluctuations and immediate borrowing needs might ruin their debt management. For this reason, they need to carry out accurate estimations and forecasts to efficiently allocate their existing reserves to avoid excessive borrowing from abroad which is seemingly difficult under current global economic conditions. Some developing countries may apply for fiscal support or monetary easing in addition to emergency interest rate cuts while the more vulnerable ones will rely on IMF support. The fact that financial accounts are generally helpful in developing European countries and that most of the Gulf countries have significant National Wealth Funds will also ease the hands of governments in these countries in terms of financial support. Major economies in these regions announced serious stimulus packages. However, this will increase the budget deficits and public debt burdens. Debt levels of countries with relatively more fragile economies such as Turkey, Romania have already increased and financing of additional expenditure for these countries has become more expensive. Countries in distress can apply to the IMF and the World Bank, which announces their readiness to help countries harmed by COVID-19. On the monetary policy side, the effect of the current depreciation in the local currencies of many developing countries on inflation is also important. It can be assumed that inflationary pressures will increase as the decrease in oil prices gives way to an increase. In developing European countries, on the other hand, inflationary pressure may not occur, as policy interest rates are already low and 42 Can & Aktaş real interest rates are already negative in many places. Central banks of some developing countries to cut interest rates and announce monetary easing measures will reduce the possibility of pressure. These measures will be supportive for economies in the short term. However, some countries will experience stronger increases in inflation than elsewhere.