The COVID-19 pandemic is expected to have “severe” short and long term effects on economic growth, the World Bank said in its Global Economic Prospects (GEP) June 2020 report, part of which was released on Tuesday. EMDEs (Emerging Market and Developing Economies) are especially vulnerable, the report says.
Sixty million people could be pushed into extreme poverty this year, World Bank President David Malpass said.
“The scope and speed with which the COVID-19 pandemic and economic shutdowns have devastated the poor around the world are unprecedented in modern times. Current estimates show that 60 million people could be pushed into extreme poverty in 2020. These estimates are likely to rise further, with the reopening of advanced economies the primary determinant,” Mr. Malpass said in a statement.
Policy choices
“Policy choices made today — including greater debt transparency to invite new investment, faster advances in digital connectivity, and a major expansion of cash safety nets for the poor — will help limit the damage and build a stronger recovery,” Mr. Malpass said.
“The financing and building of productive infrastructure are among the hardest-to-solve development challenges in the post-pandemic recovery. We need to see measures to speed litigation and the resolution of bankruptcies and reform the costly subsidies, monopolies and protected state-owned enterprises that have slowed development, ” he said.
Earlier, G20 countries had agreed to freeze loan repayments for low income countries (starting May 1) till year-end and had called on commercial creditors to do the same, but these creditors had not yet implemented this, Mr. Malpass told reporters on briefing call.
“The delay is particularly frustrating given the deepening poverty in the debtor countries and the amount of resources that are flowing from the poorest countries to investors,” he said. Most creditors are in advanced economies like the U.S., Europe, Japan, China and the Gulf, as per Mr Malpass.
Along with addressing health emergencies and securing core public services in the short run, policies to boost long-term growth, such as improving the environment for business, improving governance, and enhancing the outcomes of education and public health investments would be needed, the Bank said. Countries will also have to use policies that reflect and encourage new types of businesses, jobs and governance systems in the post-pandemic world.
Spillover effects
The report said EMDEs face health crises, restrictions and external shocks like falling trade, tourism and commodity prices, as well as capital outflows. These countries are expected to have a 3-8% output loss in the short term, based on studies of previous pandemics, as per the Bank’s analysis.
EDMEs are also expected to witness the spillover effects of the U.S., the Euro Area and China, which represent almost half of global output, being unlikely to return to pre-pandemic levels of output before the end of 2021. If these three big economies simultaneously lose 1% in output, EDMEs (excluding China) are expected to lose 1.3% in their output with the lag of a year, the Bank warned. Growth is likely to slow more in commodity-exporting EMDEs than in commodity-importing ones.
Longer term, there is a risk not just of a drop in the level of output but a lowering of potential output growth, the Bank said. The severity of the current recession has been unseen in eight decades.
“In the average EMDE, over a five-year horizon, a recession combined with a financial crisis could lower potential output by almost 8% while, in the average EMDE energy exporter, a recession combined with an oil price plunge could lower potential output by 11%,” the report said.
Since energy intensive activities have been restricted and energy exporting EDMEs do not have much fiscal or monetary room to counter the impact of the collapsed oil prices, these low prices are not likely to mitigate the adverse growth effects of the pandemic. However, there might be a short and early window of recovery as inventories continue to depress prices and support activity, the report said.
While the Bank released analytical chapters of the GEP on Tuesday, actual growth forecasts are expected next Monday.
