South Asia’s challenge to fend off economic contagion

With the coronavirus epidemic quickly evolving into a never-seen-before-scale of pandemic, South Asia’s economic activities have come to a standstill as governments impose a full or partial lockdown in their attempts to contain the contagion. Since the number of infections is on the rise, the lockdown may still be prolonged, further hitting the economy. Hence, the question now is to what extent South Asian countries’ governments are capable to rev up their public policy apparatus to mitigate the economic fallout.

As of the end of March, a total of 3,847 cases of COVID-19 were confirmed in the region while the death toll stood at 72. Bhutan, Maldives and Nepal have yet to report any death. Considering 1.9 billion population in South Asia, the rate of infection and deaths might appear miniscule. However, risk of fatalities in case of coronavirus contagion in South Asia is high as healthcare facilities in the region is woefully inadequate. Thus, social distancing and lockdown appears to be the most prudent measures to fight the threat of deadly pandemic. The lockdown means restriction on movements, schools, restaurants, shops and other businesses except for services deemed essential. Bangladesh, Nepal, India, Sri Lanka and Pakistan have suspended international air travel and closed borders, allowing only cargo movement. Even in the places where lockdown is not yet imposed, such as Bhutan and Afghanistan, restaurants, hotels, schools are shut and congregations of more than 50 people are not allowed.

In January, when China was battling the viral outbreak, the economies in South Asia struggled with supply chain disruptions as industrial inputs started running out with China temporarily shutting down its factories. As the virus spread through Europe in February and people started to cancel their planned vacations, tourism-dependent economies of Maldives, Sri Lanka and Bhutan started to feel the pinch. According to Maldives’ Minister of Foreign Affairs, Mr. Abdullah Shahid, the archipelago could suffer up to 35 percent drop in tourism revenue due to coronavirus. Sri Lankan tourism, which was recovering from the 2019 Easter attack in Colombo, saw tourist revenue falling 18 percent in the first two months of 2020. Nepal, which had declared 2020 as the Visit Nepal Year, had to suspend the promotional activities, eventually, cancelling the year-long event. The country even had to suspend the Mount Everest summit climbing permits for the 2020 spring season—denting tourism revenue substantially.

The economic shock of the lockdown could lead to businesses being shut down and job losses as companies look to cut down costs. This will further dent the consumer demand which has already contracted. India, the world’s fifth largest economy, has imposed a three-week lockdown starting 25 March, compelling 1.2 billion population to stay home. The growth outlook of India has been downgraded by all the rating agencies. Moody’s has slashed the growth outlook from 5.3 percent to 2.5 percent owing to possible liquidity constraints in the banking and non-banking sectors that will put a spanner in the recovery of other sectors too. The sudden announcement of lockdown turned out to become a humanitarian crisis as the exodus of migrant workers started a journey towards their hometowns on foot. The prospects and speed of recovery will greatly depend on the informal sector, which constitutes 45 percent of the national output and employs 95 percent of the population.

Besides the impact of lockdown within their own countries, the lockdown imposed in the major export markets in the US and Europe have started to show impact on the South Asian countries. Bangladesh, which is the second largest apparel exporter in the world today, has already laid off or furloughed about one million of garment workers as the country’s readymade garment industry saw orders worth US$2.8 cancelled by the end of March. Similarly, Sri Lanka, whose 15 percent of population is engaged in apparel manufacturing, is also looking at the order cancellations worth US$1.5 billion. Indian exporters are expecting to see a financial hit worth US$1 billion due to cancelled orders and closed border, according to the Federation of Indian Export Organization. The waning exports will further hit the downstream supply chain, affecting the company’s bottom lines, which will create a domino effect reinforcing contraction in consumer demand.

Another major factor to affect the consumer demand in South Asia is slowdown in remittance. South Asian countries are a major labour supplier to the world and remittance income make up a substantial source of foreign exchange. According to the World Bank’s Migration and Remittance Brief, South Asia received US$137 billion in remittance receipts in 2019, the figure is close to the combined GDP figure of Afghanistan, Nepal and Sri Lanka. As the economic activities in the destination countries –mostly in the Western Asia—have suffered with shops and restaurants closed and suspended construction activities, migrants are likely to lose jobs and return home. Likewise, these countries are facing historically low oil prices, dimming their economic outlook for the coming months. Already two million Afghan workers in

coronavirus-affected Iran have lost their jobs and are returning. At the level of households, this will mean losing income, which could further hit consumer demand. On the macroeconomic level, reverse migration means the countries will lose out on a major source of foreign exchange and spike in unemployment numbers nationally.

Given the limited social protections for citizens offered by the governments in South Asia, the potential economic crisis could spiral into a humanitarian crisis, pushing low-income population further into poverty. Hence, governments have started to announce relief measures to the affected workers and the industries, using both fiscal and monetary instruments. The most common measures adopted include providing food and essentials to the low-income households, increasing public health expenditure, deferral on payment of personal and corporate taxes, temporary custom duty exemption on import of healthcare-related items, among others. Similarly, the banking regulators in these countries have instructed the banks to allow the affected borrowers to defer interest payment for some months and provide the sector-specific refinancing facilities, subsidized loans, among others. Monetary authorities have also unleashed instruments to

release liquidity in the financial system and cut the policy rates. Since this pandemic has affected exports, remittance and tourism revenues, South Asia is facing a probable foreign exchange crisis. Strong US dollar has further weakened the positions of the currencies in South Asia. India has introduced a foreign exchange swap to provide liquidity to the foreign exchange market, Nepal and Sri Lanka have imposed a temporary ban on imports of selected luxury goods, and Maldives will use a foreign currency swap facility amounting to US$150 million under the currency swap agreement signed with India.

The measures required to support the economy would require governments spending billions which could exhaust their coffers. Moreover, countries like Maldives, Pakistan and Sri Lanka already are straining due to their external debts and this additional financing could destroy their fiscal stability. Although international financial corporations have pledged funds to support the affected countries, it is difficult to tell whether their support will be sufficient to weather the economic storm. Following the South Asian Association for Regional Cooperation (SAARC) video conference of the heads of states on 15 March, the members decided to create a COVID-19 Emergency Fund. So far, the member countries, except for

Pakistan, have announced their support amount. However, the collected sum of US$20.6 million looks paltry considering the need, this is a major gesture towards reinvigorating the regional platform that was in coma for the last six years. Moreover, it provides assurance to all the parties involved that the SAARC countries are willing to take a united front to face the disaster.

The measures announced by the governments so far are immediate relief efforts targeted at the most vulnerable people and businesses. These measures may be inadequate as the impact of the containment efforts on the economy starts to unfold. Realizing this, governments have created task forces to plan future steps to be taken to prop the economy. A longer term course of action will require preparing sectorspecific policy measures as a one-size-fits-all approach will not be able to address the differentiated impact on the different sectors and sections of the economy.

Hopefully, this pandemic has made governments in South Asia realize the need to strengthen their public healthcare infrastructure and labour welfare policies. Further, another important lesson learnt by the government has to be the need to diversify their export product portfolio—products as well as markets. Similarly, supply chain disruptions also make a case for diversifying supply chains to avoid being dependent on a single market to meet their needs.