Figure 9. The effect of the COVID-19 pandemic on fiscal and gross domestic product forecasts

Fiscal consolidation and retrenchment threaten to limit public spending on SDG recovery in countries where it is most critical. While advanced economies are well placed to reduce the fiscal deficits and public debt incurred during the pandemic through economic recovery, many emerging markets and developing countries are faced with the prospect of achieving deficit reductions through fiscal retrenchment. That is the opposite of what is needed from an SDG financing perspective. There is already evidence of planning for fiscal retrenchment. The average fiscal deficit in emerging markets is projected at 6.6 percent of GDP in 2021, 3 percentage points lower than 2020. Around half of the adjustment is projected to occur through spending cuts, with real primary spending falling in many countries. While the overall fiscal deficit in low-income countries is projected to remain unchanged, at around 5 percent of GDP, this reflects the limited role of fiscal policy in responding to the pandemic. Over the period to 2025, the average deficit is projected to return to pre-pandemic level as countries implement consolidation measures to rein in debt. Government revenues in low-income countries are projected to be 2 percent of GDP lower than anticipated in 2019, shrinking the financing envelope for investment in the SDGs.

External public debt is limiting room for fiscal manoeuvre. Many developing countries entered 2020 in a vulnerable position, with public external debt at elevated levels. The modest fiscal support provided in the face of revenue losses and economic slowdown exacerbated debt sustainability concerns. Excluding China, ratios of external debt to gross national income (GNI) increased from 37 percent to 42 percent between 2019 and 2020. The external debt stock of countries eligible for the Debt Service Suspension Initiative rose by 12 percent in 2020, leaving over half with debt-to-GDP ratios in excess of 60 percent. These indicators highlight vulnerability to future increases in borrowing costs.

FIGURE 9. The effect of the COVID-19 pandemic on fiscal and gross domestic product forecasts (Deviation from pre-pandemic projections as a percentage of 2019 GDP, simple average)

1. Advanced Economies 2. Emerging Market Economies 3. Low-Income Developing Countries

4 3 2 1 0 -1 -2 -3 -4 15 10 5 0 -5 -10 -15 4 3 2 1 0 -1 -2 -3 -4 15 10 5 0 -5 -10 -15

4 3 2 1 0 -1 -2 -3 -4 2019 20 21 22 23 24 2019 20 21 22 23 24 2019 20 21 22 23 24 15 10 5 0 -5 -10 -15

Source: IMF Fiscal Monitor, October 2021 Primary expenditure Revenue Interest expense GDP (right scale)

Unsustainable debt represents a major threat to recovery of progress towards the SDGs because it is shrinking the fiscal space available to government. The combination of higher interest rates and lower government revenues has progressively strained the capacity of low-income developing countries to service debts and finance their recovery. In contrast to advanced economies, debt servicing is