In February 2020, the coronavirus outbreak interrupted the recovery that was underway in the Europe and Central Asia region earlier in the year. Starting in the Hubei province of China, the outbreak quickly spread to Italy, Germany, Spain and the rest of the world. In March, the World Health Organization declared COVID-19 a global pandemic. By now, the number of confirmed cases is over 800,000, with more than 40,000 deaths, across 205 economies.
The impact of the coronavirus pandemic on growth in the region will depend on how the outbreak evolves. The situation is changing very fast, however it is likely that the emerging market and developing economies of the region will fall into a recession in 2020. Although the magnitudes are uncertain, the pandemic is derailing the near-term outlook by interrupting daily activity, putting further downward pressure on commodity prices, disrupting tightly linked global and regional supply chains, reducing travel and tourist arrivals, and decreasing demand for exports from economies in the region.
Earlier lessons from such outbreaks as well as the experience of countries that were initially infected with COVID-19 clearly show that fast containment measures such as imposing drastic social distancing, shutting down non-essential businesses and entertainment and closing schools are important measures in saving lives by “flattening the curve” of infections and preventing the health care systems from being overwhelmed. Policymakers face difficult trade-offs between the health benefits of these policies and their economic costs, since the more successful the containment policies are, and the flatter the infection curve is, the deeper the macroeconomic recession becomes.
During these difficult times, first, it is important for policy makers to act decisively in favor of saving lives. The most fundamental function of a government is to keep its population safe. There should be no gambling with the lives of people. The question is, once the disease is conquered? In other words, what measures do we need to take in order to flatten the recession curve as well as the infection curve?
Under these circumstances the case for fiscal stimulus is overwhelming. Wars, disasters, and epidemics are textbook examples for when it makes sense to run large fiscal deficits and accumulate debt. Admittedly, many of our countries already have rising debt levels and this is not a good time for additional spending. However, extraordinary times require extraordinary measures. Buffers will have to be used, and spending will need to be carefully re-prioritized to the most urgent needs.so that this does not become unconditional “free-for-all” deficit spending, jeopardizing debt sustainability and choking-off recovery. After all, while it is still early to tell, the Chinese economy is already showing signs of recovery, giving the rest of the world hope that growth will likely rebound in 2021.
What are the immediate policy priorities? Bolstering healthcare systems remains a critical challenge in the face of this public health pandemic. Expenditures could be prioritized to boost health investment, which could strengthen the capacity of health systems by increasing personnel training, expanding clinical facilities, and meeting medical supply needs to enable containment and faster treatment.
Strengthening safety nets by either tapping into emergency funds or reprioritizing public expenditures could help partially offset the negative impact of the epidemic on the vulnerable. Disruptions to supply chains, domestic outbreaks, and preventative measures to contain the virus may leave many workers idle in the region. Supportive measures that provide relief to households — such as cash transfers or healthcare subsidies, particularly to low-income households — can help ease associated difficulties with loss of work, cushion private consumption, and increase access to much needed medical care. For those who are laid off, unemployment insurance could be temporarily enhanced by extending its duration, increasing benefits, or relaxing eligibility. Where paid sick and family leave is not among standard benefits, governments should consider funding it to allow unwell workers or their caregivers to stay home without fear of losing their jobs during the epidemic. Digitalization and mobile finance can be leveraged to distribute cash and transfers to people, directly and quickly.
Support to the private sector will be important both to cushion the downturn and preserve jobs. Temporary business credit, tax cuts and tax payment deferrals, loan guarantees for small and medium enterprises (SMEs), or subsidies to worst affected industries will be important. To the extent fiscal space is available, broad-based fiscal stimulus can also help lift aggregate demand, but will probably be more effective after the immediate crisis has passed and business operations begin to normalize.
Finally, monetary policy can also play an important role. The region’s openness to trade and financial flows, exposes it to global confidence shocks. Policymakers will need to monitor volatility in markets and be prepared to respond. Broader monetary stimulus, such as policy rate cuts or asset purchases, can lift confidence and support financial markets in order to offset the risk of a sizable tightening in financial conditions. International coordination in monetary easing could further help alleviate the volatility. Central banks should also be ready to provide ample liquidity to banks and nonbank financial institutions, particularly to SMEs which are likely to suffer more from the sharp disruption. As in the case of fiscal stimulus, availability of buffers and monetary space varies across countries in the region.
On a more positive note, there may even be longer term benefits to the lifestyle changes brought on by the virus. As firms require their workers to telecommute relying on computing and video technology, educators at nearly every level scramble to replace classroom instruction with online alternatives, and consumer shopping and banking turns to digital platforms, these are bound to generate innovation and productivity increases that remain with us long after the crisis has passed.
For now though, these are challenging times for policymakers.. As the World Bank, we stand ready to support our clients in this fight.
Europe and Central Asia Economic Update “Fighting COVID-19” was launched on April 8 and can be accessed here.