# Estimating the cost of a pandemic grant for the world’s poorest economies

The cost of support measures for vulnerable economies is manageable, says Steve Kamin, but political leadership may be lacking

The Covid-19 pandemic has created a multitude of grave challenges for the emerging market and developing economies, which typically have weak public health systems, poor and financially vulnerable populations, inadequate social safety nets, high exposure to global trade and commodity prices, and precarious access to international capital markets.

This latter vulnerability was especially evident in March, when mounting worries about the pandemic roiled global financial markets and triggered a sharp reversal of capital flows to emerging markets and developing economies. In consequence, many observers have highlighted the need to bolster the international financial institutions’ lending capacity in the event of a future “sudden stop” in capital flows.

But even if global credit conditions remain quiescent, many of the world’s poorest economies will not be able to take advantage of that in order to help blunt the impact of the pandemic. As a consequence of low incomes, structural problems, and earlier heavy borrowing, their governments face critical solvency problems and cannot afford to spend, borrow and ratchet up their debt levels in the way that advanced-economy governments are currently doing.

Just a few numbers from the June update of the IMF’s World Economic Outlook (WEO) suffice to tell this story: in the advanced economies, the overall fiscal deficit is projected to widen from an average of 3.3% of GDP in 2019 to 16.6% in 2020, a swing of 13.3 percentage points; conversely, the emerging market economies are projected to experience a widening of only 5.7 percentage points of GDP, while the low-income developing economies experience a swing of a mere two percentage points of GDP.

To be sure, the IMF projects a greater deterioration in economic growth in the advanced economies (9.7 percentage points) than in the low-income developing economies (6.2 percentage points), but that difference hardly seems enough to explain the huge disparity in projected fiscal outcomes.

Clearly, what many of the world’s poorest economies require is not more lending, which would push their debt to unsustainable levels, but greater assistance in the form of outright grants. Such grants would be in the donor economies’ own interest, too. With slack capacity on account of the recession, they can provide resources to the recipient economies without sacrificing their own consumption. And assistance to the world’s poorest countries will help them get Covid-19 under control, a prerequisite for the global suppression of this disease.

How much would it cost to provide meaningful fiscal support to the world’s poorest economies? Tables A and B below provide a rough sense of the magnitudes that might be involved. The analysis assumes that the fiscal expansion currently projected by the IMF is financeable through borrowing, but any additional stimulus will require grant aid. It also assumes that the cost of these grants is spread across the advanced economies in proportion to their GDP; in practice, donors might include some of the wealthier emerging market economies as well.

In option 1, advanced-economy governments provide grants to the lowest-income economies – those targeted to benefit from the G20 Debt Service Suspension Initiative (DSSI)2 – equal to half of the projected shortfall of their deficit expansion relative to the average of the advanced economies. Thus, with the deficits of these economies projected to widen by only about 3.5 percentage points of GDP compared with 13.3 percentage points for the advanced economies, option 1 would provide grants equal to about five percentage points of GDP.

Despite the tremendous help this would represent for the world’s poorest economies, the cost to the advanced economies would be manageable: $392 billion, amounting to 0.8 percent of the advanced economies’ GDP. For the US, that cost would be$156 billion.

Of course, there are many low middle-income countries, as the World Bank defines them, such as India, that are not much more able than the DSSI recipients to cope with the fiscal burden of the pandemic, and it might be reasonable to provide them with some modicum of aid as well.

Accordingly, option 2 adds to the assistance accorded the DSSI recipients by providing the low middle-income countries with a quarter of their projected shortfall in deficit, widening relative to that of the advanced economies. This option would be about twice as expensive, amounting to 1.5% of advanced-economy GDP, or $768 billion. The bill to the US would come out to$306 billion.

###### Leadership at the international level will also be critical, especially by what remains the West’s most powerful and influential country, the US

Finally, option 3 is based on the past foreign development aid of the members of the OECD’s Development Assistance Committee (DAC). In 2019, most of the members contributed 0.3 percent of GDP, or less, to foreign development aid, well below the DAC recommendation of 0.7% of gross national income (GNI) and even further below the 1% mark achieved by the Scandinavian members of the DAC. If the Scandinavian countries can do this in normal times, the rest of the DAC should be able to do it in times of extraordinary urgency.

If these countries were to each contribute that amount as part of pandemic relief, it would sum to \$358 billion, nearly enough to finance option 1 – half of the DSSI’s shortfall in deficit expansion relative to the advanced economies – or to provide all DSSI recipients and low middle-income countries with 1.5% of their GDP.

The purpose of these calculations is not to propose a particular scheme for a pandemic grant package for the world’s poorest economies, but rather to provide a back-of-the-envelope estimate of how much such a package might cost the advanced economies. Our estimates suggest such costs would be manageable.

But undertaking to provide them would require courageous political leadership to muster domestic support in the donor countries. Leadership at the international level will also be critical, especially by what remains the West’s most powerful and influential country, the US.

It is a little-known fact, outside of the wonkiest political circles, that the US holds the presidency of the G7 process this year. This would have been an excellent opportunity to help organise the world’s richest economies’ response to the humanitarian and economic catastrophe.

We can only hope that in the year to come, the leadership of the US and the world’s other rich countries will recognise that need.

Notes

1. This note is based on a longer American Enterprise Institute Working Paper, “A Pandemic Grant Package for the World’s Poorest Economies: Not as Costly as You Might Think, But Too Costly to Happen Anytime Soon,” by Steve Kamin and Ben Clements. Clements was formerly assistant director in the African Department, International Monetary Fund.
2. See the G20 Communique of April 15 for a description of the standstill proposal, which principally covers countries poor enough to qualify for concessional lending from the World Bank.

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