# **1. Introduction**

The pandemic led to lockdowns in several countries, which resulted in various challenges, including economic slowdowns and higher debt levels. GDP growth was negative in most developing countries in 2020, and GDP growth forecasts for 2021, 2022 and 2023 have been downgraded in many countries (World Bank, 2021; 2023). <mark>To help combat the pandemic, many countries received financial support from various institutions, including multilateral and regional financial institutions as well as bilateral development agencies. Internal debt tools were also leveraged to face the short-term challenges caused by the pandemic.</mark> Global external debt as a share of GDP reached 114% in 2020, one of the highest levels since 1990 ( <mark>Kose et al., 2021). Unprecedented fiscal stimulus combined with declining government revenue has triggered concerns about debt sustainability (World Bank, 2021, Kose et al., 2021). M</mark> any developing countries were either “in” or “at risk of” debt distress before the onset of the COVID-19 pandemic and could be further challenged by the rising debt levels. High inflation in several countries prompted rapid monetary policy tightening in 2022 and 2023, which resulted in an unexpected increase in interest rates (World Bank 2023). Developing countries with high external debt stocks are thus facing a sharp increase in debt service costs, which poses an increasing concern about debt sustainability.

High public debt raises the risk of a fiscal crisis and keeps the borrowing costs high. Higher levels of debt may demand greater financing through deficit, which leads to more debt, thus generating a vicious circle that could be explosive. Some empirical evidence suggests a negative relationship between debt and economic growth (Reinhart and Rogoff, 2010; Greenidge _et al_ . 2012; Calderón _et al_ . 2013). Reducing debt through economic growth is one of the best options to face a debt crisis. However, given the uncertainty of the post-pandemic economic environment, economic growth is not expected to accelerate substantially. Growth projections in many emerging and developing countries show modest growth prospects for the coming years (World Bank 2021 and IMF, 2021).

Fiscal consolidation is one of the tools commonly used to face fiscal imbalances. Governments have a set of tools (such as inflation targeting, financial repression, debt default, or restructuring) at their disposal to face a debt crisis (Kose, et al, 2021). However, reducing debt through fiscal consolidation remains one of the most appropriate tools that governments possess to curb fiscal imbalances (Amo-Yartey, _et al_ . 2012; Salmon and Rugy, 2020; Beetsma, _et al_ . 2021; Kose, et al, 2021). Fiscal consolidation indeed describes the government’s policy intended to reduce the fiscal deficit and the accumulation of debt. While there is no consensus on the most effective route to fiscal consolidation, empirical evidence from several countries seems to suggest that fiscal consolidation based on expenditure reduction tends to be more effective than tax-based consolidations (Amo-Yartey, et al 2012; Antelo and Peón, 2014; Beetsma, et al, 2021).

Expenditure-based fiscal consolidation may have some implications for human capital spending. Government expenditure plays a central role in education financing, especially in developing countries. World Bank (2018) shows that public education expenditure contributes to 46.4% of total education expenditure in low-income countries, 66.5% in lower-middle-income countries and 89.5% in uppermiddle-income countries. Education is mostly financed by public resources in many developing countries and an eventual contraction of public expenditure could lead to fewer resources for human capital investments. Evidence from developed countries shows that fiscal consolidations can be harmful to government spending on human capital (Castro, 2005).

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