The unfolding economic crisis due to the ongoing Covid-19 pandemic is unique in several ways, and South Asia might experience its worst economic performance in 40 years, the World Bank has said in its latest report. It estimates that regional growth will fall to a range between 1.8 and 2.8 per cent in 2020, down from 6.3 per cent projected six months ago.
Perfect Storm Factors
“The dire forecast is based on the analysis of several adverse impacts. South Asia finds itself in a perfect storm. Tourism has dried up, supply chains have been disrupted, demand for garments has collapsed, consumer and investor sentiments have deteriorated, international capital is being withdrawn and inflows of remittances are being disrupted. On top of the deterioration of the international environment, the lockdown in most countries has frozen large parts of the domestic economy,” the World Bank said in its report South Asia Economic Focus, Spring 2020: The Cursed Blessing of Public Banks.
The report anticipates a sharp economic slump in each of the region’s eight countries, caused by halting economic activity, collapsing trade, and greater stress in the financial and banking sectors. In the current fast-changing and uncertain context, the report presents a range forecast, estimating that regional growth will fall to a range between 1.8 and 2.8 per cent in 2020, which would be the region’s worst performance in the last 40 years, with temporary contractions in all South Asian countries.
In case of prolonged and broad national lockdowns, the report warns of a worst-case scenario in which the entire region would experience a negative growth rate this year. This deteriorated forecast will linger in 2021, with growth projected to hover between 3.1 and 4.0 per cent, down from the previous 6.7 per cent estimate.
Government Priorities
“The priority for all South Asian governments is to contain the virus spread and protect their people, especially the poorest who face considerably worse health and economic outcomes,” said Hartwig Schafer, World Bank vice president for the South Asia Region. “The COVID-19 crisis is also an urgent call-to-action moment to pursue innovative policies and jumpstart South Asian economies once the crisis is over. Failure to do so can lead to long-term growth disruptions and reverse hard-won progress in reducing poverty.”
To minimise short-term economic pain, the report calls for establishing temporary work programmes for unemployed migrant workers, enacting debt relief measures for businesses and individuals, and easing inter-regional customs clearance to speed up import and export of essential goods.
Once lockdown restrictions are loosened, South Asian governments should adopt expansionary fiscal policies combined with monetary stimulus to keep credit flowing in their economies. Since many South Asian countries have limited fiscal space, these policies should target people worst hit by the freeze on economic activity. The report urges governments to “adopt temporary spending measures and coordinate with international financial partners to avoid unsustainable long-term debt levels and fiscal deficits.”
“After tackling the immediate Covid-19 threat, South Asian countries must keep their sovereign debt sustainable through fiscal prudence and debt relief initiatives,” said Hans Timmer, World Bank chief economist for the South Asia Region. “And looking beyond the present crisis, lie great opportunities to expand digital technologies for payment systems and distant learning to unlock remote areas in South Asia.”
