Coming out of the coronavirus economic contraction
By the end of next year, the economic sting of COVID-19 will likely be an ugly but fading memory for the world’s richest economies: their GDP levels are expected to be somewhat higher than pre-pandemic projections indicated they would be by 2023. This is not the case for most emerging market and developing economies (EMDEs), which will remain weak for much of this decade.
The World Bank’s latest Global Economic Prospects report predicts that by 2023 only one EMDE region – Europe and Central Asia – will be on track to return to the level of GDP expected before the pandemic (Figure 1 ). In Latin America and the Caribbean, the Middle East and North Africa, and Sub-Saharan Africa, the deviation from the pre-pandemic projection is expected to be 4% or more. South Asia will be the furthest behind, with a GDP level almost 8% lower than it would have been without COVID-19.
Each of these regions has been impacted in a way that warrants tailored responses. Four factors make these six regions different and also provide clues to faster recovery and convergence.
For many countries, vaccine delays are prolonging the pandemic and preventing a full economic recovery. In all but one region, significant gaps persist between the quantities of vaccine doses contracted and the quantities delivered. The exception is East Asia and the Pacific, and even there the gap remains large in many countries other than China.
In sub-Saharan Africa, only about 7% of the population was fully immunized by early February, compared to more than 50% of the population in all EMDEs (Figure 2). This reflects delivery delays and financial constraints, mainly, but also logistical challenges in the country such as insufficient vaccine storage and vaccination sites and difficulties in distributing vaccines to rural populations.
For all EMDE regions, the top priority must be to quickly overcome vaccine challenges. Success will depend on greater global cooperation, including a rapid increase in vaccine donations by countries that benefit from a vaccine surplus. Rich countries should also channel additional financial resources, through international financial institutions and regional development banks, to help poor countries improve their access to vaccines.
Increased financial stress
By the end of 2021, total EMDE GDP-weighted debt was over 200% of GDP, a 50-year high. The rise in debt during the pandemic follows a decade-long wave of debt accumulation. In East Asia and the Pacific, corporate and household debt is at record highs, as is the volume of non-performing loans held by banks. In Latin America and the Caribbean, South Asia and Sub-Saharan Africa, the greatest debt risks are in the public sector (Chart 3).
Rising indebtedness means that the debt service burden in some economies is growing rapidly. At the same time, inflation soared in 2021 in many EMDEs as energy and food prices rose, demand rebounded as pandemic restrictions eased and challenges of the global supply chain persisted. Already, around 40% of EMDEs have raised policy interest rates in response. In the near term, central banks in major advanced economies are set to raise interest rates and end the exceptional monetary policy support provided during the pandemic. This combination of record high debt and tighter global financial conditions is perilous, as it leaves EMDEs vulnerable to a sudden shift in risk sentiment in the markets.
Under these circumstances, EMDEs need to carefully formulate fiscal and monetary policies, focus on rebuilding foreign exchange reserves, closely monitor exchange rate risks, and strengthen macroprudential policies. They should also redouble their efforts to mobilize domestic resources and broaden their tax base.
Volatile commodity markets
Two-thirds of EMDEs depend on commodity exports for their growth and development. These countries, concentrated in Europe and Central Asia, Latin America, the Middle East and North Africa and Sub-Saharan Africa, are regularly rocked by cycles of boom and bust, the causes of which are generally beyond their control. . More than half of the world’s extreme poor live in some of these commodity-exporting countries. After a sharp decline during the early stages of the pandemic, commodity prices have soared (Chart 4).
COVID-19 ended a remarkable era of shared prosperity that began in the 1990s: when the incomes of the poorest nations began to catch up with those of the richest. Today, income inequality between countries is at levels not seen in a decade. Inequalities within countries, which were already higher in the EMDE than in the rich before the pandemic, have also increased. This reflects severe job and income losses, especially among vulnerable groups, including low-income people, youth, women and informal workers. Latin America and the Caribbean and sub-Saharan Africa face particularly high levels of inequality within countries.
Rising inequality should worry us all. Widening income gaps pose risks to social and political stability. The fight against inequality is all the more important when one considers that some regions such as sub-Saharan Africa have made little progress over the past two decades to catch up with the income levels of advanced economies, while gains in d others (Latin America and Middle East and North Africa) were partially reversed (Figure 6).
Overcoming the adverse economic effects of the pandemic will not be easy. But it can be done, and restoration must begin now. Some of these challenges underscore the importance of strengthening global cooperation to foster rapid and equitable distribution of vaccines, support health and economic policies, improve debt sustainability in the poorest countries, and address the rising costs of change. climatic.
National policymakers can do a lot by prioritizing investments in health and education, and by introducing policies that reduce the number of school dropouts and facilitate the reintegration into the labor market of those who have lost their jobs cause of the pandemic. Careful calibration of monetary and fiscal policy in light of the global financial landscape, as well as prompt responses to financial market stress, could help prevent debt crises. Policy efforts that will bear fruit in the long term, those that encourage diversification and inclusion, should not be set aside despite the myriad of short-term challenges.