Many countries in developing Asia have been left with large negative fiscal balances due to the impact of coronavirus disease (COVID-19), Asian Development Bank (ADB) data show. A fiscal imbalance occurs when a government spends more money than it takes in through tax and other revenues. The pandemic landed a back-to-back blow on many economies in the region in 2020; a huge drop in government income as industry and commerce slowed, combined with significant hikes in official expenditure to deal with the health, economic and social fallout from the virus.
In Basic Statistics 2021, an ADB publication presenting relevant social and economic data, government finance figures for 2020 show that many countries in the region had double digit fiscal imbalances by the end of the year.
The countries that fared worst tended to be those where the economy is largely reliant on a single product, service or export commodity, making them particularly vulnerable to the impact of the pandemic. The Maldives had a fiscal balance of -27.5% of Gross Domestic Product (GDP) in 2020, according to the data, compared with -6.6% in 2019 and -5.3% the year before. The large increase in its fiscal imbalance was due largely to this small country’s dependence on foreign tourism, which remained limited for most of 2020 as international travel bans and national lockdowns became the norm in wealthy countries.
The economic shock to the Maldives was confirmed by a GDP contraction of -32% for 2020, according to the data. Although the country launched a concerted vaccination campaign that weighed heavily on government expenditure, COVID-19 cases began increasing again across the Maldives in the second quarter of 2021. On a more positive note, the Asian Development Outlook (ADO) 2021 forecasts growth returning to the Maldives in 2021 at 13.1%, assuming international travel resumes and the virus can be controlled through vaccination.
Many countries run fiscal imbalances, sometimes referred to as the current account deficit. The gap between income and spending is subsequently closed by government borrowing, increasing the national debt. An increase in the fiscal deficit can sometimes boost a sluggish economy by giving more money to people who can then buy and invest more. Long-term deficits, however, can be detrimental for economic growth and stability.
The data also show that the pandemic badly affected Brunei Darussalam. The country ran a high fiscal deficit in 2020 at -17.1%, a steep increase from the previous year when it stood at just -5.6%. The deficit is mainly the result of a marked decline in fossil fuel prices (a key export sector), combined with a jump in government expenditure to try and contain the effects of the virus. Mitigation measures included partially funding salaries and deferring loan payments to help keep small and medium enterprises afloat. The pandemic stunted GDP growth in Brunei Darussalam slowing it from 3.9% in 2019 to 1.2% in 2020, according to ADO 2021. A recovery is anticipate though, with growth forecast to tick back up to 2.5% in 2021 and 3.0% in 2022.
Although Sri Lanka was relatively successful in containing the pandemic with growth recovering in the second half of 2020, its annual deficit jumped -11.9% from a more moderate -8.2% the previous year. The country’s tourist industry was badly hit, but this was compensated for to a degree by the IT and business process outsourcing sectors that did not suffer so markedly. ADO 2021 noted that the Sri Lankan government’s economic response to COVID-19 in 2020 relied mainly on monetary easing and credit creation.
In some cases, the large fiscal deficit in low-income Asian economies can be explained by the cost of financing correspondingly large vaccination or social support programs. Data from Basic Statistics 2021 tell us that the Pacific nation of Palau ended 2020 with a national deficit of -11.2%, substantially higher than what it was the previous year at 0.3%, according to ADO 2021. But the government spent significant sums on COVID-19 vaccines, having administered 74.3 doses per 100 people by April 2021, the highest vaccination rate in Asia at the time.
“The data illustrate clearly that in Asia, where an economy vulnerable to the pandemic has had to increase government expenditure markedly to deal with its effects, the results have been extremely detrimental to national budget deficits. This raises issues of long-term debt sustainability which may have serious implications for achieving the Sustainable Development Goals,” said ADB’s Chief Economist, Yasuyuki Sawada.
This sharp contraction in fiscal revenue brought about by the pandemic means that governments in the region will no longer be able to rely solely on public money when funding economic and social recovery, ADO 2021 argues. They will need to use much more private capital and develop creative ways of raising finance, such as green and social bonds. Recovering from the pandemic presents an opportunity to realign economic growth, making it greener and more oriented to the needs of people. This includes clean energy and transport, along with social investment in health, education and employment.
Even as the COVID-19 crisis has reduced revenues from tax and other sources in Asian economies, some governments in the region are investing to ensure sustainable recoveries after the pandemic. Examples include the Green New Deal in the Republic of Korea, green components in Japan’s economic stimulus packages, and Thailand’s issuance of sovereign sustainable bonds.