IDB urges transparency mechanism for subsidies to vulnerable groups

Apr 23, 2020 News

As the novel coronavirus (COVID-19) continues to have ripple effects on the economies of many nations, it is expected that governments such as Guyana would consider some form of subsidy to vulnerable groups, since they would lose their income while under lockdown.
But while this may be a good initiative, the bank, based on its past experience, believes that it is key for these subsidy programmes to be designed as temporary, with separate accounts from other structural transfer programmes. It also stressed that these programmes must include sunset clauses, while noting that transparency in the administration of this policy is essential.
It further noted that if the shoulders of the government are big enough during this trying time, other possible measures could include tax relief policies for regions, people, and firms more fiercely struck by the shock. It also noted that the deferral of labour taxes and social security contributions should also be considered.
In all the foregoing cases, the financial institution said it is key that these measures be implemented as deferrals rather than permanent subsidies, so as not to jeopardize fiscal sustainability.
Furthermore, the IDB was keen to note that making policies as sustainable as possible is key, if governments want to have a strong recovery once the coronavirus crisis is over. The bank said that the more sustainable they emerge, the better their chances are of obtaining financing for growth later on.
In addition to this, the banks said that if governments have enough fiscal space, they should help sustain proper functioning of credit markets. In this regard, the bank noted that several firms are finding it difficult to refinance even short-term loans, as such; there is a risk of massive layoffs if liquidity issues turn into solvency issues for otherwise sound firms.
The IDB said that governments can step in either directly through bond purchase programmes or indirectly by backing asset purchase programmes implemented by central banks. It said, too, that governments can also provide working capital through loans or partial financing of wages to prevent massive layoffs.
Thus far, the bank said it has taken note of the fact that several countries in the Latin America and Caribbean region have taken certain measures such as transfers to households, credit lines to firms, salary compensation to workers whose firms have seen declines in revenue, and reductions or deferrals of labour taxes and other social security contributions.
Time will tell whether these measures will have worked as liquidity support—with a lower burden on sustainability—or as subsidies—with substantially more pressure on already strained fiscal accounts, the IDB said.

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