COVID-19: Without Help, Low-Income Developing Countries Risk a Lost Decade
IMF Blog, August 27, 2020
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- Authors: Daniel Gurara, Stefania Fabrizio, Johannes Wiegand
- Published: August 27, 2020
Key findings and short-term outlook
- Growth in LIDCs is likely to come to a standstill this year, compared to growth of 5 percent in 2019.
- Absent a sustained international effort to support them, permanent scars are likely to harm development prospects, exacerbate inequality, and threaten to wipe out a decade of progress reducing poverty.
- The International Monetary Fund has provided emergency financing to 42 LIDCs since April.
Multiple external and domestic shocks
- LIDCs entered the COVID-19 crisis in an already vulnerable position—for example, half of them suffered high public debt levels.
- Since March, LIDCs have been hit by a confluence of external shocks:
- sharp contraction in real exports;
- lower export prices, especially for oil;
- less capital and remittances inflows;
- reduced tourism receipts.
- Remittances:
- exceeded 5 percent of GDP in 30 (out of 59) LIDCs in 2019.
- Between April and May, they fell by 18 percent in Bangladesh, and by 39 percent in the Kyrgyz Republic, compared to the previous year.
- Domestic containment and mobility:
- From mid-March, many LIDCs implemented international travel controls, school closures, cancelation of public events and gathering restrictions.
- Mobility—a proxy for domestic economic activity—declined sharply with further retreats as workplace closures, stay-at-home orders, and internal movement restrictions were implemented.
- From late April/early May, containment measures have gradually loosened and mobility has recovered, but has yet to return to pre-crisis levels.
Managing trade-offs with scarce resources and policy responses
- Constraints in LIDCs:
- Large segments of the population live at near subsistence levels, making strict containment measures hard to sustain.
- Large informal sectors, weak institutional capacity, and incomplete registries of the poor hinder targeted assistance.
- Governments have only limited fiscal resources to support vulnerable populations.
- Impact on food security: Recent surveys across 20 African countries reveal that more than 70 percent of respondents risk running out of food during a lockdown that lasts more than two weeks.
- Policy stance:
- Short, sharp front-loading of containment flattened the infection curve and bought time to build health-sector capacity.
- LIDCs expended less fiscal support overall than advanced or emerging market economies, but the share of additional spending dedicated to health has been higher.
- As broad-based containment becomes difficult to sustain, LIDCs should transition to more targeted measures, including social distancing and contact tracing (Vietnam and Cambodia cited as examples).
- Policy support should focus on supporting the most vulnerable, including the elderly, and on limiting the health crisis’s long-term fallout.
- Education protection: Protecting education is critical to avoid creating a “COVID generation who loses out on schooling and whose opportunities are permanently damaged.” (quote from a recent Letter to the International Community by a group of eminent persons)
- Technology and administrative innovation examples:
- Rwanda is leveraging its digital finance infrastructure to discourage the use of cash.
- Togo employs the voter registration database to channel assistance to vulnerable groups.
Long-term scarring and development risks
- Scarring mechanisms include:
- mortality;
- worse health and education outcomes that depress future earnings;
- depletion of savings and assets that force firm closures—especially of small enterprises that lack access to credit—and cause irrecoverable production disruptions;
- debt overhangs that depress lending to the private sector.
- Historical precedent: In the aftermath of the 2013 Ebola pandemic, Sierra Leone’s economy never recovered to its pre-crisis growth path.
- Potential consequences:
- Scarring would trigger severe setbacks to LIDCs’ development efforts, including undoing the gains in reducing poverty over the last 7 to 10 years, and exacerbating inequality, including gender inequality.
- The Sustainable Development Goals (SDGs) will be even more difficult to achieve.
International support priorities and policy recommendations
- Priorities for the international community:
1. guaranteeing essential health supplies, including cures and vaccines when they are discovered; 2. protecting critical supply chains, especially for food and medicines; 3. avoiding protectionist measures; 4. ensuring that developing economies can finance critical spending through grants and concessional financing; 5. ensuring that LIDCs’ international liquidity needs are met, which requires International Financial Institutions to be resourced adequately; 6. reprofiling and restructuring debt to restore sustainability where needed, which, in many cases, may require relief beyond the G20/Debt Service Suspension Initiative; and 7. keeping sight of the United Nations' SDGs, including by reassessing needs when the crisis subsides.
- Overarching conclusion: The COVID-19 pandemic will be defeated only when it and its socioeconomic consequences are overcome everywhere. Urgent action by the international community can save lives and livelihoods in LIDCs.
Source: IMF blog “COVID-19: Without Help, Low-Income Developing Countries Risk a Lost Decade” (Daniel Gurara, Stefania Fabrizio, Johannes Wiegand), August 27, 2020.