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Other countries are not in a privileged state like the UAE, as most emerging markets (EM) are likely to run budget deficits in 2020 and face restrictions to cut spending amid the pandemic, amplifying the importance. from revenue generation, the report said, adding that emerging markets tax revenues will remain below pre-crisis levels amid a slow and stagnant global recovery.
On average, emerging market governments will lose 2.1 percentage point (pps) of GDP revenue in 2020, above the 1.0 pp loss in advanced economies (EA), he said. “Government revenues in emerging markets are more vulnerable to this crisis because they tend to be more reliant on international trade taxes (eight percent of total revenues on average in 2018 in emerging markets, compared to less than one percent in EA), which has collapsed this year, ”the report said.
Within emerging markets, oil exporters will experience the largest drop in revenue this year given the significant drop in both demand and oil prices and their heavy dependence on revenue from the sector. “According to our forecasts, Kuwait (A1 stable) and Azerbaijan (Ba2 stable) will see the biggest drops in revenue versus GDP of 18.0 pps and 12.5 pps respectively this year,” he said.
Income generation is key
The pandemic has underscored the importance of revenue generation for emerging market governments, said Lucie Villa, Moody’s vice president, senior credit officer and author of the report. “For emerging markets, any drop in revenue is particularly important for solvency because government spending needs (social, infrastructure, and debt financing) are often more urgent than for EAs and have a generally more revenue base. narrow”.
With the support of development finance institutions, governments in emerging markets will seek to implement or resume tax collection measures. However, only a few governments have managed to raise revenue much faster than GDP growth in the past 10 years, according to the report.
Sovereigns with a pre-existing and established focus on raising taxes from low levels like Costa Rica, or past episodes of effective fiscal policy changes like Georgia and Montenegro, will likely do better. Sovereigns already struggling to increase their tax collection before the pandemic, such as Tanzania and Ethiopia, Sri Lanka, Pakistan and Bangladesh, will face additional obstacles, according to Moody’s.
Spending pressures facing governments around the world are unlikely to ease anytime soon, particularly as this crisis has emphasized the social role that governments play in areas such as healthcare and labor markets, according to the report. .
For emerging markets, these spending pressures are generally compounded by a number of other factors, such as higher interest burdens, infrastructure deficiencies, a weaker and broader public sector, higher subsidies, lower incomes, and more precarious employment. . As a result, the bulk of the burden of any fiscal consolidation is likely to fall on the revenue side, he added.
(Written by Syed Atique Naqvi; edited by Seban Scaria)
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