The COVID-19 pandemic continues to advance around the world, leaving behind regrettable social and economic losses. In view of the virus’ surprising ability to spread and its lethality, the main containment measures have been social isolation and the paralyzation of non-essential sectors, in an attempt to curb down the exponential contagion curve.

The uncertainty amid the current circumstances has neutralized global responses to the epidemic. However, to the extent that its characteristics are progressively known, it has been possible to improve diagnostic tools, build scenarios for measuring the economic impact and structure mechanisms to return to work.

Although it is true that the collective quarantine measures have been the right decision, in the face of the economic paralysis there emerges the dilemma of saving lives from the coronavirus or protecting people from poverty and hunger. For this reason, it is a priority task to rethink action strategies to face the crisis, while strengthening health care, social protection and productive activity at the same time.

According to the IMF’s most recent forecast, the global economy is estimated to fall to -3% in 2020, but growth will recover in 2021 with a rebound of 5.8%. In addition to the damage caused by the crisis, the world will have to reinvent itself in the wake of changes in consumption and production patterns, and deal with prevailing skepticism in markets.

In the case of Latin America and the Caribbean, the effects of the pandemic along with falling commodity prices and reduced flow of remittances create a more complicated and challenging scenario. The IMF figures point to a severe drop of -5.2% in 2020 and a smaller recovery of 3.4% in 2021, giving rise to a new “lost decade” due to the stagnant GDP per capita.

Despite this bleak scenario, the evolution of the crisis will be subject to the decisions made and the speed with which action is taken. In view that dealing with a catastrophe of the proportions described above requires comprehensive measures as regards health, safety and the economy, this article offers only a few notions for approaching it from the perspective of fiscal policy.

This crisis has been caused by a shock in supply as a result of the measures to close workplaces. However, in the face of the prolonged isolation and the rupture of payment circuits, there has been simultaneously a shock in the aggregate demand that could lead to a structural drop in magnitudes never seen before.

In this connection, policy decisions should build support to lift production and demand, with an emphasis on ensuring the income and consumption of the most vulnerable sectors who most strongly suffer the ravages of the pandemic.

In order to incentivize the business sector, understanding its main needs and aspirations is a central element that could guide actions. At present, they are focused on surviving with as little damage as possible by taking advantage of government supports, finding more liquidity to cover payrolls, and maximizing remote-working capabilities.

With this information in mind, and taking into account that resources are scarce, the authorities should prioritize their interventions. Here are some strategic areas with fiscal actions to mitigate the crisis:

1. Strengthen the health system: The main fiscal measure is to increase the health sector’s payment rolls to strengthen the health care system and thus reduce the waiting time to reactivate the economy. In order to do this, an option is to reallocate public spending items from non-priority areas.
2. Ensure access to goods and services for the most vulnerable sectors: This would mitigate a sharp contraction in demand that may cause a long-term recession. Decisions should seek to strengthen conditional transfer programmes, the creation of programmes to support informal workers and the extension of assistance to new sectors that have been reclassified as vulnerable segments affected by the crisis (such as the elderly, unemployed youth and self-employed persons).
3. Encourage businesses to maintain employments: Unemployment is an enemy that must be avoided at all costs because its consequences are often persistent. The structuring of private credits conditioned by public guarantee schemes and the postponement of corporate tax payments could provide resources to avoid layoffs.
4. Strategically reactivate the productive apparatus: In this crisis, some sectors have been able to maintain their dynamism while others have greatly slowed down. For this reason, credit incentives, subsidies, and public procurement programmes should initially be directed at sectors that can be kept going (such as information and communication technologies or health industries) and push capacities to build strong supply chains.
5. Request International Cooperation: This adds up budgetary and reserve resources to diversify risks.

Difficult times require exceptional measures, and implementing such actions is a major challenge. Moreover, in Latin American and Caribbean countries public finances are in vulnerable positions. In the face of this, public bodies are forced to increase their efficiency in order to deal with the emergency without compromising social stability, fiscal sustainability and seeking to implement the lessons learned in past crises.

Eduardo Piña is a Economist and Specialist in Studies and Proposals of the Permanent Secretariat of SELA