Impact of Covid-19 on South Asia

The pandemic, COVID-19, hit most parts of South Asia almost seven months ago. It has had a variable impact on the different countries in the region. The worst hit is India with incidence of 5.1 million, second only to the US. This is equivalent to 3709 persons per million people. Next is Nepal with incidence of 2064 persons per million and Bangladesh following closely with 2053 persons per million. Pakistan and Sri Lanka have been less affected with numbers at 1485 and 138 per million, respectively.

Beyond the widespread health impact and the pressure on the health system, the different economies of the region have been badly hit by the pandemic. Imposition of lockdowns and other preventive measures have affected investment, production, consumption and employment. The big slowdown in the global economy and the resulting decline in the volume of world trade have curtailed exports. Simultaneously, the quantum decline in oil revenues of Middle East countries has increased the risk of plummeting of remittances and return of large numbers of expatriate workers.

The World Bank has undertaken an impact assessment of COVID-19 for each South Asian country for the years, 2019-20 to 2021-22. This assessment includes the likely fall in the GDP rate initially and the pace of recovery thereafter. In addition, projections are made of the size of the current account deficit in the balance of payments and of the budget deficit to determine the extent to which South Asian economies are destabilized by COVID-19.

The impact on the GDP growth rate is expected to vary across the major South Asian countries - Bangladesh, India, Nepal, Pakistan and Sri Lanka. Countries which were performing poorly in terms of growth are likely to have actually seen negative growth already in 2019-20 following the big early impact of COVID-19. The GDP, in fact, has fallen in 2019-20 in Pakistan and Sri Lanka. It is expected to rise only modestly in these countries in 2020-21 to about 1 percent.

Faster growing countries of the region like Bangladesh, India and Nepal all had GDP growth rates above 6 percent in 2018-19. The growth rate is likely to have fallen to 3 percent in Nepal, to 5 percent in Bangladesh and to 4 percent in India in 2019-20. It is expected that the negative impact will be even greater on these three countries in 2020-21 and the growth rate could fall to below 3 percent. Overall, South Asia could see a big loss in its growth momentum.

Fortunately, the inflation rate is likely to remain low single-digit in all South Asian countries, with the likely exception of Pakistan. This is the consequence of the overall fall in aggregate demand due particularly to lower investment and private consumption spending. This will provide some relief to the otherwise badly hit population, due especially to higher unemployment and falling real wages.

There is also the prospect of a reduction in current account deficits, with the possible exception of Nepal which has seen a quantum decline in tourism. The fall in exports is likely to be accompanied by an even greater decline in imports, especially due to the fall in import prices. However, the fiscal balance, measured by the size of the budget as a percentage of the GDP, is expected to rise in all five countries. On the one hand, tax revenues have been hit badly by the contraction in the tax bases, especially industrial production, and on the other hand expenditures have risen sharply due to health-related and relief measures.

There are two big sources of uncertainty currently. The first relates to the magnitude of remittances. South Asian countries are very reliant on this inflow to sustain their current account in the balance of payments. For example, remittances at $20 billion are almost as large as exports of Pakistan. Similarly, India receives remittances of over $80 billion and Bangladesh, $18 billion. Contrary to expectations, Pakistan has actually seen a jump in remittances in the last two months.

The World Bank has projected that in 2020-21 remittances could fall globally by $100 billion, from the past level of $350 billion. If this happens, then most of the South Asian countries will be hit badly. Similarly, if exports continue to contract then a country like Bangladesh which specializes in garment exports could see the loss of employment of millions of workers, especially female.

There is a big divergence in the incidence of poverty in South Asia, according to the poverty line of $3.2 per day as per the 2011 PPP. Sri Lanka has only 10 percent of the population which is poor. Despite having a relatively higher per capita income over 61 percent of the population is below the poverty line in India. Pakistan has an intermediate level of poverty at 35 percent. The corresponding estimates for Bangladesh and Nepal are 53 and 51 percent, respectively.

The impact of COVID-19 on the incidence of poverty is likely to have been the greatest in Pakistan and Sri Lanka with negative GDP growth rates in 2019-20. Despite having a positive growth rate, Bangladesh may also see a rise in poverty due to the big decline in labor-intensive garment exports. Similarly, the number of poor may also rise in Nepal due to a big decline in tourism.

Overall, the pandemic has taken the South Asian region back by almost two years. Poverty and unemployment have increased exponentially. Unfortunately, no regional initiative could be taken due to the dormancy of SAARC. India has the buffer of relatively large foreign exchange reserves. Pakistan, Bangladesh and Nepal have already accessed the Rapid Financing Facility of the IMF for $1.4 billion, $732million and $214 million respectively. More support may be required from international agencies if the negative impact on exports and remittances is bigger and lasts longer.

(The writer is Professor Emeritus and former Federal Minister)

Copyright Business Recorder, 2020