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Purpose This paper aims to assess to what extent the COVID-19 shock is expected to create a debt crisis in emerging markets and developing economies (EMDEs) through two main questions: what are the main determinants of EMDEs external vulnerability? How vulnerable are EMDEs to the current COVID-19 shock compared to the global financial crisis (GFC)? Design/methodology/approach In addition to a descriptive analysis of the determinants of EMDEs external vulnerability, this paper designs two sub-indices of overindebtedness and financial fragility that capture EMDEs’ distinct characteristics. The two sub-indices together illustrate the overall external vulnerability to the current shock. Findings EMDEs are more vulnerable compared to the GFC era. Current debt threats arise mainly from debt architecture and the domination of volatile debt forms – primarily foreign currency-denominated bonds. Excessive fear of debt-deflation spirals after the GFC prompted EMDEs to expand their growth trajectories through a pattern of cheap private lending, loose measures and unmonitored fiscal expansion. Research limitations/implications Conclusive post-crisis data are still unavailable. Practical implications EMDEs need to balance between temporary accommodative measures and a post-shock policy mix that prevent a deflation spiral without worsening indebtedness and financial fragility. Moreover, financial prudence in face of growing credit demand is crucial, particularly in light of the monetary expansion and injected liquidity. Originality/value The indices offer a framework for examining external vulnerability in EMDEs based on theoretical and historical revisions, IMF benchmarks and EMDEs specific debt characteristics. The indices components can be offered for empirical examination in separate future research once conclusive data become available.

This paper examines the relationship between fiscal and external balances in MENA oil versus non-oil countries in the context of the twin deficits hypothesis (TDH) using Panel Vector Autoregression- Generalized Methods of Moments PVAR GMM estimation, Granger Causality and IRFs. The essence of this analysis is to assess the vulnerability of fiscal and external balances to oil price dynamics and regional geopolitics in the region. Results show that a twin-deficit problem exists in MENA oil-rich countries only while the problem does not exist in non-oil ones. This affirms the hypothesis that oil dependence results in high fiscal vulnerability to geopolitical shocks that automatically transmits to external balances. While a TDH isn’t proven to exist in non-oil countries, fiscal and external balances problems result from longstanding structural factors. A high reliance on tourism revenues and remittances as main sources of foreign currency receipts (together with poor tax administration and enlarged current spending bills) makes those countries more vulnerable to domestic and external shocks; reflected in both growing fiscal and current account deficits. A large imports sector and relatively poor exporting capacity also contribute to weakening external accounts. The main policy recommendations for MENA oil-rich countries rely in the importance of strengthening the non-oil sector in order to diversify domestic sources of revenues. Adopting flexible exchange rates is recommended to decrease the vulnerability of the external shocks to oil price dynamics. For non-oil MENA regions, fiscal consolidation, reforming current spending and strengthening tax administrations are crucial to improve fiscal performance. Export-led growth strategies and inclusive growth policies would also contribute to improving external accounts in the examined economies.

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We investigate the cyclicality of fiscal policy in Egypt during the period of 1976–2019 with a focus on how budgetary and political institutions affect fiscal performance during economic cycles. We define new variables for budgetary and political institutions and incorporate them in a vector error correction model (VECM) and impulse response functions (IRFs) analysis. While current and capital spending are proven to behave procyclically, revenues respond countercyclically during business cycles. Poor political and budgetary institutions have a negative impact on the primary deficit in a way that led to procyclical behaviour in fiscal policy in the long run. We recommend reinforcing the Golden Rule and changing the nature of the electoral system to a party-based to strengthen the role of parliament in keeping the government accountable

This paper examines how rules and institutions and monetary-fiscal coordination setup impact welfare outcomes during political instability. Our theoretical model extends the analysis of Alesina and Tabellini (1987), Alesina and Gatti (1995), and Ferre and Manzano (2014) to examine the signaling content of the fiscal authority’s decision to engage in a fiscal reform when the policymaker’s preferences are private information. In a two-stage signaling game featuring a central banker, a government, and private agents, we examine the fiscal authority’s decision to engage in a fiscal reform under a Nash game, a cooperative setup, and a model of Stackelberg leadership. Three main results: 1) rules and commitments contribute to decreasing time inconsistency; 2) the more control the fiscal authority has over monetary policy, the more undesirable welfare outcomes, especially during political instability; 3) central bank independence signals fiscal discipline and produces relatively more desired outcomes during times of political uncertainty. Nevertheless, even with low degrees of central bank independence, proper fiscal “rules” produce close outcomes of an independent central bank even under the dominance of a centralized political authority and can secure close welfare gains in terms of inflation and fiscal outcomes. We propose these theoretical findings for empirical examination in emerging countries with prevailing schemes of fiscal dominance and more dependence on discretionary interventions to secure growth rates and financing gaps. Such setups are argued to contribute to lowering welfare outcomes that could be reduced if proper fiscal rules were used as a substitute for low monetary independence.