Covid-19: What’s at stake for developing countries?

Cross-border cargo trucks from Tanzania to Rwanda. Sam Ngendahimana

The latest projections from the World Bank suggest that the Covid-19 pandemic will cause global recession that is extreme than the 2008-2009 financial crisis, and the deepest since the end of the Second World War.

The largest fraction of economies is expected to experience declines in per capita output since 1870.

 

What’s more concerning is the grave impact that the pandemic will have on already fragile economies. Output of emerging market and developing economies is expected to contract in 2020 for the first time in at least 60 years.

 

Per capita incomes in the vast majority of emerging market and developing economies (EMDEs) are expected to shrink this year, tipping many millions back into poverty.

 

The impact is expected to be most severe for those with large domestic outbreaks and those that rely heavily on global trade, tourism, commodity exports, and external financing.

Per capita incomes are projected to contract deeply as a result, causing the first net rise in global poverty in more than 20 years, according to the current Economic Prospects report.

It shows that EMDEs will contract by 2.5 per cent in 2020, driven by a deep plunge in commodity-exporting economies, the impact that will be felt by almost all the countries.

Except for countries like China, Indonesia, Thailand, Bangladesh and Egypt that will register a moderate economic slowdown, economies of Russia, Poland, Turkey, Brazil, Mexico, Argentina, Saudi Arabia, and India will contract steeply.

Sub-Saharan Africa economies will contract by 2.8 per cent mainly due to economic slowdown in oil-producing countries and large economies of Nigeria, Angola and South Africa.

World Bank economists say the Covid-19 pandemic has resulted in a collapse of global economic activity, and EMDE financial conditions have tightened and commodity prices, especially oil prices, have plunged.

“The short-term collapse in global output now underway already seems likely to rival or exceed that of any recession in the last 150 years,” Kenneth Rogoff, Professor of Economics, Harvard University said.

Lockdowns and other restrictions needed to address the public health crisis, together with reductions in economic activity by many producers and consumers, constitute an unprecedented combination of adverse shocks that is causing deep recessions in many economies.

Those EMDEs that have weak health systems, those that rely heavily on global trade, tourism, or remittances from abroad, and those that depend on commodity exports will be particularly hard-hit.

Beyond its short-term impact, deep recessions triggered by the pandemic are likely to leave lasting scars through multiple channels, economists at the World Bank say.

This will lead to lower investment in emerging markets and developing economies, erosion of human capital of the unemployed, and disintegration of global trade and supply linkages.

According to the Economic Prospects report released last week, these effects may well lower potential output and labor productivity in the longer term, which demands policy actions.

Sub-Saharan Africa

Several countries in the region have experienced severe domestic outbreaks. This includes Burkina Faso, Democratic Republic of Congo (DRC), Guinea, and Niger.

Efforts to slow the spread through social distancing have been difficult, particularly in densely populated urban areas where large populations often live in informal settlements without access to proper sanitation.

Activity among industrial commodity-exporting countries has slowed during the first half of the year, reflecting the impact of growing domestic outbreaks, weakening demand in key trading partners, and sharply lower commodity prices in Chad and Mozambique.

Activity in many agricultural commodity exporters has also been severely affected, with its impact amplified in Madagascar, Rwanda, and Uganda which have large tourism sectors or strong trade links with China, the Euro Area, and the United States.

Growth in Sub Saharan Africa is expected to rebound in 2021 to 3.1 per cent. However, significant uncertainty surrounds the pace and timing of the projected recovery.

It rests heavily on the assumption that the pandemic recedes in such a way that mitigation measures are gradually lifted from the middle of this year, and that activity in major trading partners rebounds.

In industrial commodity exporters, growth is expected to contract by 1.3 percent in 2020, as low commodity prices compound domestic disruptions.

The projected pickup in 2021 is underpinned by the recovery in demand from key trading partners and firming commodity prices in Central African Republic, Chad, Democratic Republic of Congo, Guinea, Mozambique, and Niger.

Further investment

In some countries, growth will be spurred further by investment in new production capacity like in Chad, Mozambique, and Niger, according to the World Bank.

 In Niger, however, lower oil prices risk delaying completion of the country’s new oil production infrastructure.

In Liberia, activity is forecast to recover from two years of stagnation thanks to the adoption of structural reforms and the achievement of greater price stability.

In Ethiopia, growth is expected to fall to a 17-year low of 3.2 per cent this year from 9 per cent in 2019. The projected rebound in 2021 is expected to be underpinned by the implementation of reforms, such as addressing foreign exchange shortages, to boost private investment.

An assumed improvement in political stability and more stable business environments are projected to further support activity in Guinea-Bissau.

In Rwanda, Benin, and Togo, the recovery from this year’s coronavirus pandemic will be aided by increased private sector investment due to continued reforms to improve business environments.

Celestin Rwabukumba, the Chief Executive Officer of Rwanda Stock Exchange (RSE), says recovery demands addressing the pandemic first and laying out plans to support businesses and sustain employment.

“Countries in Africa should take hard decisions and continue deploying lockdown measures in the first phase of the pandemic like what Rwanda has done,” he notes.

“This is not a time to make profits for companies rather it is a time to sustain what’s already been built by supporting business activity and sustaining employment,” he adds.

editor@newtimesrwanda.com

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