Wednesday, April 1, 2020

Impact of COVID-19 in East Asia and the Pacific

In its latest East Asia and Pacific Economic Monitor (April 2020), the World Bank argues that COVID-19 presents an unusual combination of disruptive and mutually reinforcing events, and that significant economic pain seems unavoidable in countries with excessive indebtedness. It presents an unusual combination of a supply and demand shock due to the preventive behavior of individuals and the transmission control policies of governments. 

Three types of activities are immediately affected: (i) collective high-density production (workers work closely together in manufacturing factories); (ii) collective high-density consumption (services activities such as sport, music, restaurant, travel, etc); and (iii) proximate production and consumption (suppliers meeting consumers activities such as personal care, health care, restaurants, retails, etc). 

The immediate effect was first on the Chinese economy, where lockdown and transmission control policies disrupted supply and froze demand, and affected other countries through flows of trade and tourists. As the virus spread beyond China, other governments took similar actions, leading to severe dent in demand and supply. This is amplifying the mutual shocks through trade and tourist flows, and finance stress. 

Under a baseline scenario, developing EAP growth is projected at 2.5% for 2020, but -0.5% under lower case scenario. PRC’s is expected to grow at 2.3% and 0.1%, respectively under the two scenarios. Baseline refers to a scenario of severe growth slowdown followed by a strong recovery. Lower case refers to a scenario of deeper contraction followed by sluggish recovery. 

The COVID-19 shock will also have impact on poverty and welfare through illness, death and lost incomes. Under the baseline scenario. About 24 million fewer people are estimated to escape poverty across developing EAP in 2020. However, under the lower-case scenario, poverty is estimated to increase by about 11 million people. Poverty rate refers to US$5.50 per person per day (2011 PPP) threshold. 

Effect on households is country-specific: households in Vietnam linked to manufacturing reliant on imported inputs will see poverty rates double but households depending on tourism income will be the hardest hit in the Pacific Islands. Developing EAP refers to Cambodia, China, Indonesia, Lao People’s Democratic Republic (PDR), Malaysia, Mongolia, Myanmar, Papua New Guinea, the Philippines, Thailand, Timor-Leste, Vietnam, and the Pacific Island Countries.

The WB recommends countries to flatten two kinds of curves: (i) flatten the pandemic curve by limiting transmission through lockdowns and travel bans, and (ii) flatten the recession curve by taking appropriate monetary, fiscal and structural measures. It also recommends augmentation of health capacity to fulfill potentially overwhelming demand. 

On macroeconomic policy, it argues that an expansionary policy is less effective given that the lockdown and social distancing limit production and employment. So, fiscal measures should initially focus on social protection to cushion against shocks, especially for the most economically vulnerable. These include subsidies for sick pay, expenditure on healthcare, expanded safety nets, cash and in-kind transfers when the informal sector is large, schooling feeding programs, and employment support to reintegrate into the economy among others. These would help to limit long-term human capital losses due to temporary deprivations. Also note that marginal propensity to consume of low-income households is reasonably high. 

On financial sector, it recommends easier access to credit for households to smooth consumption, and easier access to liquidity for firms to help them survive the disruption. However, regulators should ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially when debt levels are high. For low-income countries, debt relief will be essential. 

On trade policy, the recommendation is to stay open and not resort to export restrictions, especially export of coronavirus-related medical products. 

IMF enhances debt relief trust to support low-income countries

The IMF enhanced its Catastrophe Containment and Relief Trust (CCRT) to enable the Fund to provide debt service relief for its poorest and most vulnerable members. The CCRT enables the IMF to deliver grants for debt relief benefitting eligible low-income countries in the wake of catastrophic natural disasters and major, fast-spreading public health emergencies. 

The IMF now allows all member countries with per capita income below the World Bank’s operational threshold for concessional support to qualify for debt service relief for up to two years. This would apply when a life-threatening global pandemic is inflicting severe economic disruption across the Fund’s membership and is creating balance of payments needs on such a scale to warrant a concerted international effort to support the poorest and most vulnerable countries.

The COVID-19 pandemic is bound to create balance of payments crisis (declining exports, remittances, FDI, etc) and fiscal stress (lower revenue, higher expenditure) in some low-income countries.