The COVID-19 pandemic is battering economies in Asia with a contraction expected for the first time in many decades. The economic outlook for 2020 in Asia has deteriorated since the International Monetary Fund‘s April forecasts, and the deterioration is even larger when compared with Asia’s average growth rate of some 6 percent per year over the last decade. Even worse, the pandemic is likely to increase inequality in Asia further, hurt employment prospects of those with limited education and affect the rest of the world, including countries in Sub-Saharan Africa.
“For instance, trade flows are likely to be affected and the demand for African products in Asia is likely to be weaker than before the pandemic,” Chang Yong Rhee, the Director of the IMF’s Asia and Pacific Department told TODAY NEWS AFRICA‘s Simon Ateba in an exclusive interview in Washington D.C. on Thursday.
“Also, weaker Asian economies can lead to lower commodity prices, thereby affecting several African economies via a negative terms of trade shock. Slower growth in Asian economies might also lead to a scaling back of outward foreign direct investment and other financial flows to their development partner countries, including those in Sub-Saharan Africa.”
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According to Dr. Rhee, after the pandemic, there hope the recent South-South integration between Asia (China in particular) and African economies can recover quickly and deepen in a sustainable manner.
The Korean national, prior to joining the IMF, was chief economist at the Asian Development Bank (ADB), the chief spokesperson for ADB on economic and development trends, and the secretary-general of the G20 summit’s Presidential Committee in the Republic of Korea.
You can read the full interview below
The IMF is projecting that Asia’s growth would contract by 1.6 percent in 2020 amid COVID-19 pandemic, a downgrade to the April projection of zero growth. For those who do not understand what a contraction of 1.6 percent looks like, what does this mean for people in Asia in terms of losses? How many billions of dollars for instance would be lost in Asia in 2020 as a result of COVID-19?
This is indeed the first time in living memory that Asia’s economy is expected to contract. The outlook for 2020 has deteriorated since our April forecasts and the deterioration is even larger when compared with Asia’s average growth rate of some 6 percent per year over the last decade.
Notwithstanding the unprecedented contraction in 2020, GDP growth in Asia is still expected to surpass that of the United States and the euro area (-8 and -10.2 percent respectively). This is partly because the region is in Phase II of the pandemic, i.e., tentatively exiting the most stringent phase of containment.
Despite the weaker outlook for 2020 compared to our April forecast, it is the pace of Asia’s recovery that worries us the most. The recovery will be protracted, with persistent and somewhat permanent output losses over the medium-term relative to the pre-pandemic outlook. Our latest forecast suggests that even by 2022, Asia’s real output levels (measured in purchasing power U.S. dollars) would be 5 percent lower than what we had expected before the pandemic.
The protracted recovery is due to several factors. In particular, Asia is heavily dependent on global supply chains and it will take time to fundamentally reorient its growth model towards domestic demand and away from a heavy export reliance. Moreover, the adverse effects of the pandemic are likely to be larger in Asia which has a high proportion of informal workers, who are more likely to face deeper scarring, thereby making the recovery more protracted. Finally, should the private sector led recovery not occur as we are currently forecasting, policy makers in Asia will not have the space to provide as much economic support as they have been able to in 2020 so far.
And what is the estimated number of people who may fall below the poverty line in Asia due to this serious global health emergency?
As I discussed in a recent IMF blog, the adverse impact of economic shocks are exacerbated in emerging and developing economies in Asia, which have a high proportion of informal workers. Our recent analysis of past experience shows that the pandemic is likely to increase inequality in Asia further and hurt employment prospects of those with limited education.
Informal workers are disproportionately more affected by the health effects of COVID-19 and the containment measures to reduce the spread of the disease. The longer the detachment from the labor market, the deeper the scarring, the more protracted the recovery.
Without adequate safety nets and the right policies to support those most affected by the pandemic, the combination of rising inequality, unemployment and high informality can increase poverty levels sharply in Asia.
China and Japan are very strong partners of countries in Sub-Saharan Africa. In practical terms, what does an economic contraction in Asia mean for countries in Sub-Saharan Africa?
An economic contraction in Asia is likely to affect Sub-Saharan Africa through several channels. For instance, trade flows are likely to be affected and the demand for African products in Asia is likely to be weaker than before the pandemic. Also, weaker Asian economies can lead to lower commodity prices, thereby affecting several African economies via a negative terms of trade shock. Slower growth in Asian economies might also lead to a scaling back of outward foreign direct investment and other financial flows to their development partner countries, including those in Sub-Saharan Africa. Post-pandemic, we hope that the recent South-South integration between Asia (China in particular) and African economies can recover quickly and deepen in a sustainable manner.
Is the IMF recommending that China for instance provide more debt service reliefs for countries in Sub-Saharan Africa to mitigate the impact of COVID-19?
The pandemic is likely to lead to a sharp economic contraction and protracted recovery in many countries around the world, worsening public and private sector balance sheets in many cases. We have supported policies that help ease private sector debt burdens where ever possible without compromising financial stability or creating moral hazard. Similarly, we are calling on all creditors to ease public sector debt burdens to help create the necessary space with which governments can address the immediate health and social challenges that have resulted from the pandemic, and provide targeted economic support that can prevent scarring and, thereby, worsen economic outcomes. All creditors need to realize that delay only makes things worse, especially for the country, but also for themselves as creditors.
On China, it is already providing multilateral debt relief through the G20’s Debt Service Suspension Initiative that benefits up to 73 low income countries. In addition, China has been engaging bilaterally with borrowers in cases where a longer rescheduling is needed.
On our part, the IMF is seeking to provide a framework that enables the needed debt restructuring to be agreed in a timely way, where all creditors including China, will often have a valuable role to play.