The International Monetary Fund (IMF) has taken note of Qatar’s targeted measures aimed at supporting the private sector in view of the Covid-19 crisis and said governments in the region should consider providing temporary fiscal support to affected households and businesses.
In a recent analysis, Jihad Azour, director (Middle East and Central Asia Department) at the IMF, said Qatar and certain other countries in the region “have announced large financial packages to support the private sector.”
These packages, he noted, include “targeted measures to defer taxes and government fees, defer loan payments, and increase concessional financing for small and medium-sized enterprises.”
Other countries, particularly the region’s oil importers, have more limited policy space, he said. Lower revenues resulting from lower imports — on top of additional pandemic mitigation spending — are expected to widen fiscal deficits in these economies.
And while well-targeted health spending should not be sacrificed, very high debt in many of these oil-importing countries means that they will lack the resources to respond adequately to the broader economic slowdown.
As such, these countries should try to strike a balance between easing credit conditions and avoiding vulnerability to capital outflows, and, where possible, allow the exchange rate to cushion some of the shocks. Sizeable financing needs are likely to arise in some countries, he said.
The immediate policy priority for the region is to protect the population from the coronavirus, Azour said. Efforts should focus on mitigation and containment measures to protect public health.
Governments should spare no expense to ensure that health systems and social safety nets are adequately prepared to meet the needs of their populations, even in countries where budgets are already squeezed.
Governments in the Caucasus and Central Asia, for example, are increasing health spending and considering broader measures to support to the vulnerable and shore up demand. In Iran, where the coronavirus outbreak has been particularly severe, the government is ramping up health spending, the IMF said.
Beyond that overarching imperative, economic policy responses should be directed at preventing the pandemic—a temporary health crisis—from developing into a protracted economic recession with lasting welfare losses to the society through increased unemployment and bankruptcies.
However, Azour noted “the uncertainty about the nature and duration of the shocks has complicated” the policy response. Where policy space is available, he said governments can achieve this goal using a mix of timely and targeted policies on hard-hit sectors and populations, including temporary tax relief and cash transfers.
Temporary fiscal support should consist of measures that provide well-targeted support to affected households and businesses. This support should aim to help workers and firms weather the significant, but hopefully temporary, stop in economic activity that the health measures being implemented to control the spread of the coronavirus will entail.
This support will have to take account of the fiscal space that is available, and where policy space is limited be accommodated by reprioritising revenue and spending objectives within existing fiscal envelopes.
Where liquidity shortages are a major concern, central banks should stand ready to provide ample liquidity to banks, particularly those lending to small and medium-sized enterprises, while regulators could support prudent restructuring of distressed loans without compromising loan classification and provisioning rules, Azour said.
When the immediate crisis from the coronavirus has begun to dissipate, consideration could be given to more conventional fiscal measures to support the economy, such as restarting infrastructure spending, although fiscal space has been significantly eroded over the last decade, he suggested.
“Given the nature of the current slowdown, trying to stimulate the economy at this time is unlikely to be successful and would risk eliminating the limited fiscal space that is still available,” Azour noted.
“In addition to the economic disruptions from Covid-19, the region’s oil exporters are affected by lower commodity prices. Lower export receipts will weaken external positions and reduce revenue, putting pressures on government budgets and spilling over to the rest of the economy.
“Oil importers, on the other hand, will likely be affected by second-round effects, including lower remittance inflows and weaker demand for goods and services from the rest of the region,” Azour said.