Previously, we suggested policies that government officials could adopt in response. For instance, we suggested that governments facing liquidity crises could borrow from institutional investors or even the central bank. Those with large sovereign wealth funds could consider spending some of their savings. And we suggested restructuring debt in the few countries where price and production shocks are already causing insolvencies.
Gold-, iron ore- and uranium-dependent countries—such as Burkina Faso, the Kyrgyz Republic, Mali, Niger and Tanzania—are experiencing weaker-than-expected growth due to the global crisis, but less of a relative drop in fiscal revenues than most other resource-dependent countries. That is because prices of these commodity prices either rose as a result of pandemic containment measures or, in the case of iron ore, recovered quickly. But governments dependent on commodities like oil, gas, copper, zinc and cobalt have suffered.
Many governments facing liquidity challenges have borrowed. Some loans have been low- or even near zero-interest, meaning that the crisis will not cause large amount of taxpayer money to flow to bond investors or foreign governments. Peru and Chile, which have managed public finances relatively well over the last decade, have qualified for cheap loans from private investors at interest rates as low as 1.6 percent since the crisis started. Both are also drawing on a no-conditionality multi-billion dollar line of credit from the International Monetary Fund at about 0.1 percent interest. This line of credit is only available for governments that have adequate “fiscal space,” meaning they saved or paid down debt during the boom years. It has paid to be prudent over the last decade.
These and others are paying premiums just to refinance existing debt. Sovereign spreads have increased by 0.7-2.0 percent in Angola, Gabon and Nigeria since January. For some, increased debt servicing costs could soon spiral out of control, requiring painful debt restructuring, leading to cuts to social services and public investments. So far, among resource-dependent countries, only Ecuador has officially defaulted this year, though several other countries, like the Kyrgyz Republic, have restructured their Chinese loans. Gabon, Mozambique, Republic of Congo, Suriname and Zambia are on the verge.
The IMF and the G-20 have provided some relief. Bolivia, Cameroon, Ecuador, Ghana, Kyrgyz Republic, Mongolia, Myanmar, Nigeria, Papua New Guinea and Tunisia are among those that have accessed the IMF’s emergency liquidity facilities with minimal or no conditions, albeit for relatively meagre sums. The G-20 has proposed an eight-month suspension of repayment on loans from bilateral and commercial creditors extended to mostly African countries, totalling up to USD 19.6 billion in debt relief this year. Private sector creditors have not yet participated, though they still might.
Emerging economies are not the only ones facing tough times. Decades of mismanagement means that Alberta, an oil-rich Canadian province, will indebt itself to the tune of USD 15 billion this year, more than the value of its sovereign wealth fund, established in 1976.
Fiscal responses to the crisis in selected resource-dependent countries
Main mineral exports
National government fiscal resource dependence (2018 or most recent; lower estimate)
These fears are largely unfounded. Inflation is largely a function of inflation expectations. If the central bank purchases government debt denominated in the local currency as a temporary emergency measure, but commits to responsible and predictable monetary policy once the crisis is over (as the central banks of Ghana and Myanmar have done), expectations will not substantially change. In many countries, exceptionally high unemployment will put downward pressure on wages even when the lockdowns are relaxed. In such places the probability of deflation is higher than the probability of inflation, at least in the short-to-medium term. Some prices could rise temporarily, like those for some foods, but this will be due to frictions in specific markets, not debt monetization.
Some low- or middle-income resource-rich country governments have limited access to international financial markets. Their traditional bilateral aid donors are facing their own crises. Multilateral donors’ internal rules hinder them from providing appropriate levels of financial support. In such places, central bank financing could be the best remaining option in the short term. That said, maintaining high levels of central bank deficit financing post-crisis could lead to inflation or exchange rate depreciation over the longer run. Debt monetization is a more viable policy response principally in countries with credible central banks operating floating exchange rates.
Some governments—even some that have the fiscal space to maintain current spending levels for years—have used the coronavirus crisis to raise taxes or cut subsidies. Saudi Arabia just tripled its new value-added tax from 5 to 15 percent. Algeria and Tunisia may follow suit with tax increases of their own. Nigeria, Libya, Tunisia and Venezuela have already reduced fuel subsidies since the start of the pandemic, while authorities in Dubai (UAE) and Sudan are making similar plans. Kuwait, Myanmar and Oman are each cutting budgets by 10 percent this year, despite having the fiscal space to maintain or even increase spending.