COVID-19 pandemic & economic crisis


Dr Samina Sabir

THE novel Corona Virus (COVID-19) outbreak has already resulted in human losses and this epidemic has spread to almost all countries of the world. Now World Health Organization (WHO) has declared it pandemic. Two questions are frequently raised. First is: whether countries have enough health facilities to protect human lives? The second question is: how can a COVID-19 cause economic recession or economic crisis? Most of the developing countries don’t have proper health care units, screening, testing kits and inadequate hospital beds for treatment of the patients and even they do not have the vaccine of COVID-19. However, countries are taking substantial measures to save human lives and economic damages optimally. It has been forecast that the world economy will lose $2 trillion of GDP with $ 220 billion hit developing countries excluding China due to Corona Virus epidemic. Many developing countries are taking long term loans from China, if the lending capacity of China squeezes owing to its economic slowdown, these economies will recover slowly from the economic impacts of Corona Virus pandemic crisis. It is claimed that growth rate of leading countries such as US, Canada, Italy, France and UK will deaccelerate between 0.7 per cent and one per cent respectively. It is indeed true that no one can precisely and accurately predict and forecast the economic damages caused by Corona Virus. But its economic consequences will be worse than the global financial crisis of 2007-2008. For instance, three influenza pandemics of 20th century in 1918, 1957 and 1969 were globally spread. These pandemics took 15-16 weeks to end. In 1969, pandemic affected the UK late in the normal influenza season resulting in a small first wave in March and highest wave in midwinter of 1970. Therefore, it is expected that Corona Virus pandemic wgucg started early January 2020 will finish in April 2020 due to rise in temperature.
However, this pandemic has serious and troubling implications for developing countries. It is pertinent to say that low economic growth rate, financial fragility and diversion of economic resources to fight Corona Virus pandemic would reduce the funds set for development projects. Thus this will enhance extreme poverty in developing countries due to shutdown of factories and industries. Moreover, developing countries can dive down into a great depression due to slow down of their economic activities. The first channel through which economies would be affected is sabotage of trade due to lack of production and restrictions on the mobility. Both exports and imports will be affected, revenues will squeeze, productivity will cut down and unemployment will rise up. Second the inflows of foreign capital can fly away from pandemic affected countries. Third is shrinkage in tourism and transportation which are the major sources of revenue generation for developing economies due to travel restrictions, temporary education institutions closure, quarantines, cancellation of domestic and international air flights. Moreover, physical and human capitals will be underutilized due to disruption of supply chain and lack of demand for goods and services. All these factors will build the momentum to push the prices of the commodities to go down, and thus profits of the firms and industries would reduce. For instance, recently oil prices have decreased more than 30 per cent dramatically and this is an indicator of recession in the oil producing countries.
The Corona Virus has resulted in significant fatality rate that is worrisome for the people across the globe. Therefore, people are urged to cut down their social gatherings and contacts. They should not visit restaurants, shopping places, gyms, cricket stadiums etc. Reduction in social consumption also impacts other sectors providing services containing personal contacts such as parlours, stores, banks, ATMs, mobile phones etc. Therefore, decline in social consumption impacts economy inexorably. This will have knock on effects on jobs, businesses and stock market. This will happen because all countries are imposing much needed restrictions to slow the spread of Corona Virus. Central banks of relatively unscathed developing countries should cut down the policy rate to keep the wobbly economy on right track as recently US has adopted the zero policy rate. This policy measure will rectify their disorderly financial market movements. Other than this, developing countries that risk buckling under the fear of Corona Virus pandemic require financial support to fight against global health crisis from becoming financial crisis. Developing countries should provide free medical treatment to the vulnerable people to contain the outbreak of this epidemic, even they should provide cash transfers to compensate their financial losses too. In this regard, the World Bank is providing $12 billion to the developing countries to strengthen their health system to avert a humanitarian disaster, minimize the losses of people and the economy. To commemorate business sector, developing countries should incentives them by providing them interest-free loans for small and medium enterprises, subsidies and tax relaxations. Bottom line is that this is testing time for policy makers and practitioners in developing countries to act fast and think smart by adopting feasible policies quickly and decisively to contain pandemic, treatment of people suffering from it and to cope up with economic losses.
—The writer is Assistant Professor, Institute of Economics, the University of Azad Jammu and Kashmir Muzaffarabad.