The cyclicality of fiscal policy during Covid-19 pandemic in the OIC countries

The purpose of this research is to explore the cyclical behavior of fiscal policy during Covid-19 pandemic in 42 countries under Organization of Islamic Cooperation (OIC). Most of the OIC countries experienced doubled fiscal deficit along with slower growth during this unprecedented pandemic, which then led them to deal with an increase in debt burden. We use fixed effect panel estimation procedure to investigate macroeconomic determinants of fiscal deficits. The paper focused on secondary data of the democracy index, population, GDP growth, FDI, inflation, interest rate, current account balance, grant and expenditure variables between 2001 to 2022 period. The study revealed that macroeconomic variables determine the fiscal deficit, while good governance which is represented by the voice accountability and democracy index don’t. Further analysis showed that public participation, government accountability, and the democracy index strengthen the relationship between government spending and FDI in dealing with fiscal deficits. However, if good governance has interacted with the current account balance and grant funds, it turns out to have a significant negative effect. The findings are appropriate for the OIC country’s decision-makers to incorporate the need for recovery funds and fiscal deficit policy.