Economy

COVID-19: $2.5 tln needed by developing countries to weather economic crisis, says report

Debts of $1 trillion owed by developing countries needs to be cancelled

 
By Kiran Pandey
Last Updated: Wednesday 01 April 2020
Over 90 per cent of the country’s total workforce in India’s unorganised sector was affected by a nationwide lockdown Photo: Wikimedia Commons

A $2.5 trillion rescue package was needed to save developing countries from severe financial distress because of the novel coronavirus (COVID-19) pandemic, said a report released by the United Nations Conference on Trade and Development (UNCTAD) on March 30, 2020.

The $2.5 trillion ‘coronavirus economic package’ could be divided into three different categories “to turn expressions of international solidarity into meaningful global action”, the report said.

Debts worth $1 trillion owed by developing countries should be cancelled while $1 trillion should be made available through the use of special drawing rights.

Another $500 billion was also needed to fund a Marshall Plan for health recovery and be disbursed as grants, according to the report.

The Marshall Plan was an initiative by the United States to fund economic recovery programs in western European countries after World War II.

COVID-19 has spread to more than 203 countries, with more than 800,000 cases and 38,700 deaths as of March 31, according to the World Health Organization.

More than a third of the world’s population was under some form of a lockdown or quarantine because of the pandemic, affecting economies of both the developed and developing countries.

Developing countries, however, will be the most affected by the global recession, the report said, underscoring three major reasons for this.

Loss in earnings from exports

Developing countries were affected on several fronts after the virus spread across the world in January.

The economies took a hit in terms of:

  • capital outflows
  • growing bond spreads
  • currency depreciations
  • lost export earnings, including from falling commodity prices and declining tourist revenues

The unorganised sector in developing economies was the most severely hit.

Workers in this sector form the backbone of economies in developing countries. Severe restrictions placed on them have increased difficulties in mitigating the fallout from the pandemic.

Over 90 per cent of the country’s total workforce in India’s unorganised sector was affected by a nationwide lockdown invoked by the Union government to curb the spread of the disease.

The informal sector in Zimbabwe — a source of livelihood for 95 per cent of the country’s working population — also took a hit after a lockdown was announced in the country.

Decrease in value of domestic currency

Portfolio outflows from emerging economies surged to $59 billion between February and March, according to the UNCTAD report.

This was more than double the outflows experienced by the same countries in the immediate aftermath of the global financial crisis of 2008 ($26.7 billion).

The values of national currencies against the US dollar fell 5-25 per cent, since the beginning of this year.

Low export earnings

The prices of commodities — on which many developing countries heavily depend for their foreign exchange — dropped precipitously since the crisis began.

The overall price decline has been 37 per cent this year, according to the report.

World may go into recession except China and India

The world economy is likely to go into recession this year with a predicted loss of global income worth trillions of dollars. This would spell serious trouble for developing countries, except China and India.

The report does not explain why the two countries would escape recession. The report goes against recent economic forecasts for India, predicting recession in 2020.

The slowdown in the global economy caused by the pandemic was estimated to be at least $1 trillion by the UNCTAD report.

Global growth could drop to one and a half per cent in 2020, half the rate projected before the disease outbreak, according to estimates released by the Organisation for Economic Co-operation and Development (OECD) in March.

Fiscal and foreign exchange constraints are bound to worsen further this year because of deteriorating global conditions.

Halts progress of 2030 sustainable development agenda

The ongoing crisis will also halt the progress made by developing countries for achieving sustainable development goals, the report said.

A financing gap of $2-3 trillion financing gap will be faced by developing countries for the next two years, according to the report.

Almost half of the poorer economies assessed by the International Monetary Fund were found to be at high risk of sovereign external debt distress or already in debt distress at the end of 2019, according to an UNCTAD analysis released on March 9.

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