In the initial crisis phase of the Covid-19 pandemic, as countries used lockdowns to suppress the spread of the virus, fiscal support measures were introduced to help businesses and households keep their heads above water. As certain countries begin to control the spread of Covid-19 and lift lockdowns, some are likely to consider using fiscal stimulus to restore output lost due to the pandemic.

It will not be possible or desirable for all countries to deploy fiscal stimulus. Those lower-income countries that do so will need to think carefully about how to design effective policies. This could include focusing stimulus on sectors that contribute to longer-term objectives, such as developing new domestic industries, supporting a green economic recovery, and reducing poverty, rather than simply aiming to boost short-term demand.

This paper explores the challenges and constraints around such stimulus measures in lower-income countries, and in the context of a global pandemic, and puts forward tax, transfer and other government spending options that offer potential for success.

Iain Steel and Tom Harris