Impact of COVID-19
The impact of COVID-19 and the oil price plunge in the Middle East and Central Asia has been substantial and could intensify. With three quarters of the countries reporting at least one confirmed case of Covid-19 and some facing a major outbreak, the Coronavirus pandemic has been the largest near term challenge to the region. Like much of the rest of the world, people in these countries were taken by surprise with this development, and I would like to express my solidarity with them as they cope with this unprecedented health crisis.
The outbreak could be compounded by reduced imports due to disruption in Global trade, giving rise to shortage of medical supplies and other goods resulting in substantial inflation. Uncertainty about the duration and nature of shocks has complicated the Policy Response.
Beyond the devastating toll on Human Health, this Pandemic is causing significant drop in Domestic and External demand, Disruption in production, Fall in consumer confidence and tightening of financial conditions like fall in equity prices and bonds spread have risen, sizable outflows of foreign funds.Region's oil exporters are facing the additional shock of plummeting oil prices.
Travel restrictions following public health crisis have reduced the Global demand for oil and the absence of new production agreement among OPEC members has led to a glut in oil supply. As a result, oil prices have fallen by over 50% since the start of Public Health crisis. The interlinked shocks are expected to deal a severe blow to economic activity in the region, at least in the first half of the year with potential lasting consequences.
To sum up, the channels of Economic Impact are -
1. Measures to contain the Pandemic's spread are hurting key job rich sectors, Tourist cancellations,
Hospitality and Retail have been affected. Rise in unemployment.
2. Production, Manufacturing are disrupted and Investment plans put on hold. Plunge in consumers
confidence.
3. Rise in Global risk aversions and flight of capital to safe assets have led to a decline in Portfolio.
flows by near $2 billions since mid- February with sizable outflows observed in recent weeks.
Such a tightening in financial conditions could prove to be a major challenge.
Against these challenging backdrops, the region is likely to see a big drop in growth this year.
Policy Priorities
The immediate policy priority for the region is to protect the population from the Coronavirus. Efforts should focus on mitigation and containment measures to protect Public Health. Govt. should spare no expense to ensure that health systems and social security nets are prepared to meet the needs of the people, even in countries where Budgets are squeezed.
Temporary fiscal support should consist of measures that provide well targeted support to the affected households and businesses, where liquidity shortages are a major concern. Banks should be ready to provide sufficient liquidity, particularly to MSME, while regulators could support restructuring of distressed loans without compromising loan classification and provisioning rules.
When immediate crisis from Coronavirus begin to dissipate, more conventional fiscal measures to support the economy be given such as Restarting infrastructure spending, even though the fiscal space has been significantly eroded over the last decade. Given the nature of current slowdown, trying to stimulate the economy at this time is unlikely to be successful and would risk eliminating limited fiscal space that is still available. Lower revenues from lower imports, on top of the additional pandemic mitigation spending are expected to widen fiscal deficits.
As such, country should try balancing between easing credit conditions and avoid vulnerability to capital outflows and where possible allow the exchange rate to cushion some of the shocks. Sizable financing needs are likely to arise.
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The outbreak could be compounded by reduced imports due to disruption in Global trade, giving rise to shortage of medical supplies and other goods resulting in substantial inflation. Uncertainty about the duration and nature of shocks has complicated the Policy Response.
Beyond the devastating toll on Human Health, this Pandemic is causing significant drop in Domestic and External demand, Disruption in production, Fall in consumer confidence and tightening of financial conditions like fall in equity prices and bonds spread have risen, sizable outflows of foreign funds.Region's oil exporters are facing the additional shock of plummeting oil prices.
Travel restrictions following public health crisis have reduced the Global demand for oil and the absence of new production agreement among OPEC members has led to a glut in oil supply. As a result, oil prices have fallen by over 50% since the start of Public Health crisis. The interlinked shocks are expected to deal a severe blow to economic activity in the region, at least in the first half of the year with potential lasting consequences.
To sum up, the channels of Economic Impact are -
1. Measures to contain the Pandemic's spread are hurting key job rich sectors, Tourist cancellations,
Hospitality and Retail have been affected. Rise in unemployment.
2. Production, Manufacturing are disrupted and Investment plans put on hold. Plunge in consumers
confidence.
3. Rise in Global risk aversions and flight of capital to safe assets have led to a decline in Portfolio.
flows by near $2 billions since mid- February with sizable outflows observed in recent weeks.
Such a tightening in financial conditions could prove to be a major challenge.
Against these challenging backdrops, the region is likely to see a big drop in growth this year.
Policy Priorities
The immediate policy priority for the region is to protect the population from the Coronavirus. Efforts should focus on mitigation and containment measures to protect Public Health. Govt. should spare no expense to ensure that health systems and social security nets are prepared to meet the needs of the people, even in countries where Budgets are squeezed.
Temporary fiscal support should consist of measures that provide well targeted support to the affected households and businesses, where liquidity shortages are a major concern. Banks should be ready to provide sufficient liquidity, particularly to MSME, while regulators could support restructuring of distressed loans without compromising loan classification and provisioning rules.
When immediate crisis from Coronavirus begin to dissipate, more conventional fiscal measures to support the economy be given such as Restarting infrastructure spending, even though the fiscal space has been significantly eroded over the last decade. Given the nature of current slowdown, trying to stimulate the economy at this time is unlikely to be successful and would risk eliminating limited fiscal space that is still available. Lower revenues from lower imports, on top of the additional pandemic mitigation spending are expected to widen fiscal deficits.
As such, country should try balancing between easing credit conditions and avoid vulnerability to capital outflows and where possible allow the exchange rate to cushion some of the shocks. Sizable financing needs are likely to arise.
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