COVID-19 pandemic batters South Asia’s economies

South Asia is staring into a gloomy economic future as the COVID-19 pandemic appears untameable in spite of severe containment measures imposed by South Asian countries.

South Asia has detected 132,190 number of cases of coronavirus infection with 3,541 deaths as of 13 May 2020. Either whole or at least major parts of the countries in South Asia have been in curfew-like strict lockdown in the past one and a half months. In the face of an unconquerable pandemic, arresting movement of people to prevent the virus from spreading is the most suitable containment measure, more importantly for countries that do not have adequate healthcare infrastructure to face-off a viral outbreak. However, the prospect of economic contraction has become more evident as the lockdown keeps getting extended.

The economic outlook of the individual countries has worsened in the last one and a half months since the lockdowns were imposed, bringing almost all of the economic activities into a standstill. The direst of the warning is sounded by the World Bank. According to the multilateral development assistance agency, South Asia ‘will likely experience the worst economic performance of the last 40 year’. The South Asia Economic Focus estimates that regional growth will fall to a range between 1.8 and 2.8 percent in 2020, down from 6.3 percent projected six months ago. However, Asian Development Bank’s projections are relatively generous which estimates the region’s growth to slow to 4.1 percent in 2020 compared to the 5.1 percent growth achieved in 2019. The ADB has said that the COVID-19 slowdown will be the mildest in South Asia in developing Asia.

The World Bank report says that the impact on South Asia mostly will be felt through the slump in the service sector, which is quite labour-intensive and provides employment to millions of informal workers in the region. Considering high poverty rate and unequal societies, arrested manufacturing growth, overdependence on agriculture and informal works, insufficient social protection, South Asia is particularly vulnerable to the economic fallout. According to an estimation by the United Nations University World Institute for Development Economics Research, the COVID-19 will push 16 million people in South Asia into extreme poverty.

Projections for India, the world’s fifth largest economy and South Asia’s largest, range from the International Monetary Fund’s projection of 1.9 percent to ADB’s projection of 4.2 percent to the World Bank’s projection of 5 percent. Moody’s, the rating agency, downgraded India’s economic growth outlook for 2020, from 2.5 to 0.2 percent. Indian economy was already mellowed as the troubles in the non-bank financial institutions already had dampened domestic demand and credit. Likewise, a poll of Indian economists suggests the economy will shrink by 5.2 percent in the second fiscal quarter, which would be India’s first quarterly contraction since at least the 1990s. Although, at the end of April, as the country partially opened some of the economic activities, the unemployment rate fell to 21.1 percent compared to the 26.2 per cent rate recorded in the preceding week. However, the bounce is accompanied by a decline in labour participation as many working-age people quit the labour market. Too boost the economy and preserve jobs, the Indian government announced a US$265 billion economic stimulus package on May 12.

In the case of Nepal, the national statistical agency, the Central Bureau of Statistics, has projected GDP growth rate for fiscal year (FY) 2019/20 to limp to 2.28 percent, against the government target of 8.5 percent, which was revised to 7.01 percent considering the tepid prospects of agriculture sector. The biggest brunt of the slowdown due to COVID-19 containment measures will be experienced by the hotels and restaurants sector, which is estimated to contract by 16.3 percent. The World Bank has also downgraded the growth to 2.8 percent, reflecting lower remittances, trade and tourism, and broader disruptions caused by the COVID-19 outbreak. It has also warned that 31.2 percent of the population faces significant risks of falling into poverty due to reduced remittance, foregone earnings and job losses. According to the World Bank’s Migration Brief, Nepal could see remittance, the major source of foreign exchange income for Nepal, contracting by as much as 14 percent this year due to global economic fallout. The CBS has projected an 18.5 percent slump in remittances this fiscal year. Besides affecting household consumptions, Nepal’s balance of payments will come under strain due to slowing remittance. Further, the ranks of the unemployed will swell, if the returnees are not absorbed into gainful employment.

Bangladesh is estimated to grow by 2 percent according to the IMF projections while the World Bank expects the growth to level to 3 percent. Although the most obvious impact of the pandemic is visible on the readymade garment sector, which contributes about 12 percent of the GDP, the month-long lockdown has impacted fishermen, artisans, and retail businesses which have foregone the business during the lucrative month of Ramzan. According to some estimate, the cancelled order for fast fashion items could amount to US$4 billion. The disruption comes at a time when Bangladesh’s exports have been on a decline as the first half of the fiscal year ending in 2020 had seen garment orders decline by 5.8 percent. But according to Moody’s this disruption could be short-lived and the orders can bounce back, but analysts and economists are not as optimistic about Bangladeshi economy’s resilience. The other impact on the Bangladeshi economy is through a slowdown in remittance, which is expected to fall by 22 percent. These all will have ramifications on income and poverty level. According to an estimation by South Asian Network for Economic Modelling (SANEM), the poverty rate in Bangladesh may rise to 40.9 percent if there is a 25 percent fall in family incomes due to the pandemic.

Pakistan, which was already under mild recessionary pressures, is estimated to witness a contraction in its GDP by 1.3 percent according to the World Bank, and by 1.5 percent according to the IMF. The country has been undergoing a balance of payments crisis leading to difficulty in sovereign debt repayment. IMF has provided the country with a US$1.4 billion loan under its rapid financing scheme. Similarly, other creditors of Pakistan have also offered bilateral debt relief with repayment deferrals allowing the country to buy some time. Pakistan has launched a US$7.5 billion relief package to stimulate the economy. However, the prospects of double-digit inflation will further dampen the recovery.

In 2020, Sri Lanka was expected to grow between 4.5 to 5 percent owing to modest recovery from the Easter Sunday attacks in April 2019 and the political stability after the Presidential elections. However, the global spread of COVID-19 and the containment measures are expected to hit the Sri Lankan economy bad enough for the GDP to contract by 0.5 percent according to both the World Bank and the IMF while ADB has estimated the growth to be 2.2 percent. In the first three months of 2020, the country saw a 30 percent decline in tourists, and apparel exports, which makes up to 46 percent of Sri Lanka’s total export, will weigh down the economy reeling from the lockdown. In additions, Sri Lanka’s high indebtedness (debt to GDP ratio is 87 percent) has left the country with small fiscal space to provide a greater fiscal response to fight the disease.

Among the economies in South Asia, the Maldives is expected to fare the worst as its GDP is expected to contract by as much as 8.5 percent according to the World Bank, while the IMF expects the contraction to be by 8.1 percent as the COVID-19 has hurt the tourism sector the most. For similar reasons, Bhutan’s growth rate is also expected to slowdown to 2.9 percent (World Bank) and 2.7 percent (IMF). Afghanistan, whose economic prospects were expected to have improved in 2019, will also see the GDP contract by 3.8 percent (World Bank) and 3 percent (IMF). Besides the obvious impact of COVID-19 that has halted the economic activities and forced almost a million migrant to return home from their employment in neighbouring Iran, ongoing political instability and deteriorating security conditions with Taliban forces accelerating the bombings even during the month of Ramzan will have equal ramifications on the economy.

The COVID-19 pandemic has deteriorated economic conditions of South Asian economies that were already staring into a host of problems ranging from slowing export growth, waning remittance incomes, increased political instability, piling of external debts, among others. However, the drastic circumstances that now these economies are facing have made evident that the ‘business-as-usual’ responses to stimulate the economies will fall short. It is crucial that government step up and take measures to protect the health and well-being of the most vulnerable and in doing so restore consumer and business confidence to prevent job losses.