Corona Virus Impacting 3rd Wold Countries

The Economic Impact of COVID-19 on Developing Countries

What is likely to be the impact of the COVID-19 pandemic on developing economies?

 It is difficult to make predictions, because much will depend on the spread of the disease, especially in Africa, Latin America, Asia and the Middle East, and the measures various Governments will take in the coming weeks and months. 

The growing COVID-19 crisis threatens to disproportionately hit developing countries, not only as a health crisis in the short term but as a devastating social and economic crisis over the months and years to come. 

Income losses are expected to exceed $220 billion in developing countries. With an estimated 55 per cent of the global population having no access to social protection, these losses will reverberate across societies, impacting education, human rights and, in the most severe cases, underlying food security and nutrition.

Under-resourced hospitals and fragile health systems are likely to be overwhelmed. This may be further exacerbated by a spike in cases, as up to 75 per cent of people in the least developed countries lack access to soap and water.

Additional social conditions, such as poor urban planning and overpopulation in some cities, weak waste disposal services, and even traffic congestion impeding access to healthcare facilities, may all add to the caseload.

Check out this post about COVID-19 ATO Updates in Australia.

"This pandemic is a health crisis. But not just a health crisis. For vast swathes of the globe, the pandemic will leave deep, deep scars," noted Achim Steiner, Administrator of the United Nations Development Programme (UNDP). "Without support from the international community, we risk a massive reversal of gains made over the last two decades, and an entire generation lost, if not in lives then in rights, opportunities and dignity."

Working in close coordination with the World Health Organization (WHO), UNDP is helping countries to prepare for, respond to and recover from the COVID-19 pandemic, focusing mainly on the most vulnerable.

UNDP is already working to support health systems in countries including Bosnia and Herzegovina, China, Djibouti, El Salvador, Eritrea, Iran, Kyrgyzstan, Madagascar, Nigeria, Paraguay, Panama, Serbia, Ukraine and Vietnam.

A UNDP-led COVID-19 Rapid Response Facility has already been launched, funded by existing resources and capitalised with an initial US$20 million. This facility is disbursing through a fast-track mechanism enabling UNDP teams to offer immediate assistance to countries for their national response. UNDP anticipates a minimum of $500 million need to support 100 countries.

The virus that triggered a supply shock in China has now caused a global collapse. Developing economies in East Asia and the Pacific (EAP), recovering from trade tensions and struggling with COVID-19, now face the prospect of a global financial shock and recession.

Sound macroeconomic policies and prudent financial regulation have equipped most EAP countries to deal with regular tremors. But we are witnessing an unusual combination of disruptive and mutually reinforcing events. Significant economic pain seems unavoidable in all states. Countries must take action now – including essential investments in healthcare capacity and targeted fiscal measures – to mitigate some of the immediate impacts, according to East Asia and Pacific in the Time of COVID-19, the World Bank's April 2020 Economic Update for East Asia and the Pacific.

Developing Countries impacted by the pandemic

A Global Nightmare

At the rate it is spreading across the world, COVID-19 has become a global nightmare. Since China informed the World Health Organization (WHO) of a cluster of 41 patients with mysterious pneumonia on December 31, 2019, the world has seen COVID-19 cases balloon to 334,981 across 189 countries and territories, with 14,652 deaths, at the time of writing. In the Philippines, from the first case confirmed on January 30, 2020 (a 38-year-old Chinese national), COVID-19 cases have since shot up to 462 confirmed cases, with 33 deaths. Based on big data analysis, there is evidence of under testing and under-reporting in the Philippines, raising concerns that undetected cases could number in the thousands.

COVID-19 produces two waves of contagion. The first is a disease-based contagion that can swamp national healthcare and social protection systems, as well as cripple workers and factories through adverse health outcomes. The second type of contagion refers to the "chilling effect" of COVID-19 on both the economic demand and supply sides of a growing number of countries, notably those in "Factory Asia." Adequate and coherent policy responses on both fronts will be necessary to prevent this health crisis from turning into an even bigger economic crisis.

Affect on Developing Countries

The coronavirus outbreak threatens to disproportionately devastate the economies of already impoverished countries as they gear up to tackle a health crisis with extremely limited resources, the United Nations Development Programme (UNDP) has warned.

The socioeconomic hit on poor and developing countries will take years to recover from, UNDP said in a report released on Monday, stressing that income losses in those countries are forecast to exceed $220bn. Nearly half of all jobs in Africa could be lost, it also warned. 

In a rapidly changing environment, making precise growth projections is unusually tricky. Therefore, the report presents both a baseline and a lower case scenario. Growth in the developing EAP region is projected to slow to 2.1 per cent in the benchmark and to negative 0.5 in the lower case scenario in 2020, from an estimated 5.8 per cent in 2019. Growth in China is projected to decline to 2.3 per cent in the baseline and 0.1 per cent in the lower case scenario in 2020, from 6.1 per cent in 2019. Containment of the pandemic would allow for a sustained recovery in the region, although risks to the outlook from financial market stress would remain high.

The COVID-19 shock will also have a severe impact on poverty. The report estimates that under the baseline growth scenario, nearly 24 million fewer people will escape poverty across the region in 2020 than would have in the absence of the pandemic (using a poverty line of US$5.50/day). If the economic situation were to deteriorate further, and the lower-case scenario prevails, then poverty is estimated to increase by about 11 million people. Prior projections predicted that nearly 35 million people would escape poverty in EAP in 2020, including over 25 million in China alone.

The COVID-19 pandemic is first and foremost a human tragedy. Measures introduced to deal with the pandemic could save lives but are having wide-ranging economic effects and inducing financial contagion. There are already studies estimating the economic impact of the virus. But the greater focus is needed on the transmission mechanisms of the economic contagion and in critiquing how assessments of the economic effects are made, concentrating on the ASEAN region.

The loss in income could have severe repercussions for societies, including in areas such as education, human rights and food security. UNDP also warned that hospitals and clinics in developing countries are likely to be overrun and under-resourced, further risking the spread of the COVID-19 virus. Up to 75 per cent of people in least-developed countries lack access to soap and water.  

Affect on Business

Governments worldwide have ordered businesses to shut and billions of people to stay home to fight coronavirus. 

Last week, India's Prime Minister Narendra Modi issued a 21-day lockdown for the country's 1.3 billion people. The order stranded millions of migrant workers who were forced to walk hundreds of miles to their home villages after public transport shut down. Half of the population in India lives below the poverty level. 

The urgency to act to stem the spread of COVID-19 is being felt in Africa as well. In Kenya, President Uhuru Kenyatta recently ordered sweeping measures to slow the coronavirus outbreak, which some fear will bring more economic hardship. Informal labourers account for 83.6 per cent of Kenya's total workforce.

Demand on Supplies

Demand for food, medical assistance and other essential items may rise, but this would be more than offset by lower demand for non-essential goods such as apparel and various services.

Demand would also fall due to other factors such as foreign buyers delaying or withdrawing orders; tourists, both local and international, cancelling trips; and the declines in the stock market which erodes peoples' wealth and their willingness to spend.

COVID-19 is disrupting tourism and travel, supply chains and labour supply. Uncertainty is driving negative sentiment. This all affects trade, investment and output, which in turn affects growth. Tourism and business travel, as well as related industries, especially airlines and hotels, were the first to be changed. And the conditions are worsening as more countries go into shutdown.

Check Out This Post About The Biggest Business Impacts Of The Coronavirus Pandemic

The supply disruptions emanating mostly from China, will reverberate throughout the value chain and disrupt production. Since China is the regional hub and accounts for 12 per cent of global trade in parts and components, the cost of the disruption in the short run will be high.

On the supply side, there are also likely to be disruptions in developing countries, as there may be shortages of imported raw materials and spare parts. However, this is likely to be less of a factor than in developed countries, where long supply chains are now the norm rather than the exception. Moreover, lower fuel prices would help the developing countries, most of whom are net importers of energy.      

Economy dropping even lower in developing countries

The Future

The severity and duration of the short term demand and supply impacts depend on the measures various governments take to contain the spread of the virus. If the pandemic shows signs of spreading rapidly as it does in Europe and the USA, Governments will start to close factories and shops selling non-essential items. 

In India and parts of Pakistan, a lockdown has already been imposed. In such a scenario, the cut in GDP and incomes would be severe. It may even reach the 3-5% projected for Italy. Such a fall would cause severe hardship on the poorest section of the population, such as day-labourers in cities and rural areas.    

The adverse effects of quarantine arrangements on labour supply could also be high depending on duration and sector. Manufacturing has been hit harder than service industries, where telecommuting and other technological aids limit the fall in productivity.

The Philippines and Mekong countries have large overseas foreign worker populations, and restrictions on their movement or employment prospects as COVID-19 spreads will affect sending and receiving countries. Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will strike them. Others will benefit from lower oil prices, as will the struggling transport sector.

Measuring the Impact

In measuring the impacts of COVID-19, it is essential to separate its marginal impact from observed outcomes. This is important because the remedy may vary depending on the cause of the disruption. This requires an analytical framework that can measure deviations from a baseline scenario that incorporates pre-existing trends. A model-based analysis, rather than casual empiricism, is necessary to reduce the problem.

The Philippines and Mekong countries have large overseas foreign worker populations, and restrictions on their movement or employment prospects as COVID-19 spreads will affect sending and receiving countries. Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will strike them. Others will benefit from lower oil prices, as will the struggling transport sector.

In measuring the impacts of COVID-19, it is essential to separate its marginal impact from observed outcomes. This is important because the remedy may vary depending on the cause of the disruption. This requires an analytical framework that can measure deviations from a baseline scenario that incorporates pre-existing trends. A model-based analysis, rather than casual empiricism, is necessary to reduce the problem.

The World Bank and the International Monetary Fund (IMF) stressed the need to provide debt relief to developing countries. In addition to activating emergency programmes that offer grants and loans, the two financial institutions called on official bilateral creditors to provide immediate debt relief to the world's poorest nations.

"Poorer countries will take the hardest hit, especially ones that were already heavily indebted before the crisis," the World Bank's President David Malpass, told the International Monetary and Financial Committee, the steering committee of the IMF.

"Many countries will need debt relief. This is the only way they can concentrate any new resources on fighting the pandemic and its economic and social consequences," he said, according to a text of his remarks.

It is worth mentioning that the World Bank has set aside US$12 billion, the Asian Development Bank US$6.5 billion and the IMF US$50 billion for helping countries with COVID-19. Others, including International NGOs, also need to be brought in. A unique role has to be played by the World Food Programme, which has much-needed expertise in dealing with the logistics of crisis as well as in raising resources.  

Immediate Relief

In addition to stepping up quick relief actions, Governments should also bring into play the two primary policy instruments at its disposal – the rate of interest and the exchange rate. The central banks need to cut interest rates and require commercial banks to make corresponding decreases in interest rates on outstanding loans to consumers and businesses.

They should also encourage commercial banks to allow customers and enterprises to delay payments, and at the same time increase liquidity in the system by reducing the deposits commercial banks are required to hold with the central banks. Central banks and ministries of finance also need to recognise that devaluation of the currency may be necessary to keep them competitive in the face of falling global demand. 

The Government should try and take advantage of the lower international price of oil. As mentioned above, these cuts should be passed on to consumers, mainly industrial and commercial users, through lower prices for fuel and electricity. Price cuts should also prioritise diesel which is mostly used in agriculture, industry, and truck and bus transporters.  

The World Bank Group is rolling out a $14 billion fast-track package to strengthen the COVID-19 response in developing countries and shorten the time to recovery. The immediate response includes financing, policy advice and technical assistance to help countries cope with the health and economic impacts of the pandemic. The IFC is providing $8 billion in funding to help private companies affected by the pandemic and preserve jobs. IBRD and IDA are making an initial US$6 billion available for the health-response. As countries need broader support, the World Bank Group will deploy up to $160 billion over 15 months to protect the poor and vulnerable, support businesses, and bolster economic recovery.

Check Out This Post About The Economic Impact Of Coronavirus

Tackling COVID-19 and its impacts will require partners who can work across systems and sectors and in contexts that are both complex and uncertain. With years of experience on the frontlines, this is what UNDP is designed to do. UNDP is fully operational in 170 countries and territories and focused on its COVID-19 response, mobilising all its assets to respond to this unprecedented challenge.

Will these measures be enough? Probably not. The developed countries should, where possible, help. China is undoubtedly playing its part by providing equipment and technical assistance to many countries in Asia and Africa. 

The USA and countries in Europe should also step up their level of assistance outside their borders. One way to quickly and effectively do this has been suggested by Imran Khan, the Prime Minister of Pakistan: – cancel, or at least reschedule, some of the debt of developing countries affected by the pandemic. Debt repayment takes a large proportion of public expenditures. At this time, this money would be far better spent on helping people survive the crisis.    

Any assessment of impacts must recognise that the spread of COVID-19 is unpredictable, and so too the response by governments. It is difficult to estimate the effects of a shock that is uncertain in itself. This reiterates the need for rigorous modelling and scenario analyses. The current trend points to risks rising, often accelerating, as with previous epidemics. This uncertainty underscores the need for caution in assessing, and regular recalibration in producing assessments.

Scroll to Top