Covid-19 has wreaked havoc on the world's economy. According to the recent IMF estimates, the global economy will shrink by more than 3% this year and that the global economic output will tumble by about $9 trillion over two years (https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020). This suggests that the economic impact of Covid-19 will be felt in years to come and recovery will not be rapid as had been predicted earlier. The developing economies are more vulnerable to this pandemic as they have traditionally relied on exports to the developed countries and foreign remittances from their large diaspora working in foreign countries. Now that their exports will be hit by low demand in the target markets and foreign remittances will dry up due to large scale redundancies of expat workers in the Gulf Cooperation Council (GCC) Countries caused by the current pandemic and low oil prices – one of the biggest challenges for these countries will be to avoid going in the deep and sustained economic recession. This will be further exacerbated due to the flight of hot money by large international investors from these countries to the US treasury bonds as a safe haven, and a significant decrease in the Foreign Direct Investment (FDI) globally. According to a recent UN report, International FDI flows may contract by up to 40 percent due to Coronavirus (https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2313), while the capital outflows from the emerging economies have already exceeded US$97 billion since January 2020 (https://www.iif.com/Portals/0/Files/content/2IIF2020April_CFR.pdf). All of this may cause large currency depreciation in developing countries, adding to their already faltering economies due to the spread of Covid-19. Here, I discuss some of the challenges and provide some suggestions for developing countries to tackle these challenges and prepare themselves for the future.
Both the United States (US) and Europe have seen a huge surge in unemployment levels due to Coronavirus. The initial jobless claims in the US alone have surpassed 40 million as of May 23rd, 2020. This implies an unprecedented slowdown in two of the world's largest economies and thus a lower consumer demand. This will severely affect exports from developing countries such as Pakistan, Bangladesh, India, China and Vietnam, etc. As a matter of fact, Pakistan, Bangladesh and India have already reported a drop of 54 percent, 83 percent and 60 percent, respectively, in their exports in April 2020. Similarly, China’s global exports have fallen by 11.4% in the first three months of the current year. The developing countries will have to propel local demand to absorb the excess capacity due to a sharp decline in their export orders. This could in part be achieved through promoting and incentivizing local industries and transforming export-oriented businesses to be locally more competitive. In parallel, developing countries will have to invest in the local Research and Development (R&D) with a special focus on the industrial sector to reduce their reliance on imports from the developed world. This would not only help in providing low-cost solutions to local businesses but could also mitigate some pressure on their import bills and thus stabilizing exchange rates.
Another important challenge for the developing countries would be to cope with diminishing tourism in the post Covid-19 regime. According to the World Travel and Tourism Council (WTTC), the Covid-19 pandemic could hit 100 million jobs worldwide in the travel and tourism industry. In that, Asia is expected to be the worst affected. The travel restrictions could persist for many months and it may take two to three years for the travel industry to return to "new normal" as suggested by a recent Bloomberg article (https://www.bloomberg.com/news/features/2020-04-24/coronavirus-travel-covid-19-will-change-airlines-and-how-we-fly). This puts developing countries such as Turkey, Egypt, Thailand, and India - that have traditionally attracted a large number of tourists - at odds and will badly aggravate their already sluggish economies in the post Covid-19 period. After the lockdowns ease, the developing countries will have to focus on boosting domestic tourism to make up for the shortfall in international travel. Meanwhile, these countries must provide generous financial support for the local tourism sector to survive the aftershocks of this pandemic.
While big businesses have relatively fared better due to fewer interruptions in the physical supply chain, the Small and Medium Enterprises (SMEs) have suffered the most due to lockdowns around the world. This has particularly been more painful for the developing countries where SMEs contribute around 60-70% in Gross Domestic Product (GDP) and account for about 80% of the total employment. The governments in developing countries need to provide substantial financial stimulus in the form of bridge financing and microloans to avoid big layoffs and closure of SMEs, which may otherwise lead to a deep economic recession in these economies. The rescheduling of multilateral loans proposed by G20 countries and emergency financing from international donor agencies could provide much needed financial support to SMEs in developing countries. The less privileged developing countries such as Pakistan should also seek rearrangements and deferred payments of the bilateral loans to give its economy breathing space and to lessen pressure on their exchange rates.
A piece of good news during the current pandemic for most of the developing countries has been a record low oil prices in our recent history. However, barring China, the emerging markets have not been able to take full advantage of plummeting oil prices due to very limited storage capacities and lack of robust risk management policies. The developing countries should invest in increasing their oil storage capacities and engage in hedging activities such as buying oil futures to benefit from such oil price slumps.
Even after the Coronavirus is gone, the post Covid-19 world will be different in many ways. The countries that will anticipate those changes in advance will do better than others in the post Covid-19 regime. Adversaries always present new opportunities and those who grab these opportunities come out winners.
This article has been written by Syed Mujahid Hussain. The author holds a Ph.D. in Economics and currently works as an Assistant Professor at the College of Economics and Political Science of Sultan Qaboos University in Muscat, Oman.
Comments
Comments are closed.