Bold action is required by policymakers and central bankers to keep the region’s economies afloat and contain the pandemic.
The COVID-19 outbreak will push the world economy into severe recession in 2020. Since early March, the pandemic has rapidly spread across Central and West Asia, which includes the countries of Afghanistan, Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Pakistan, Tajikistan, Turkmenistan and Uzbekistan.
The region now needs to cope with disruptions in global and regional linkages affecting supply chains, tourism, remittances and financial flows. At the same time, domestic outputs are expected to decline due to containment measures. On top of this, oil exporters have to deal with the sharp decline in oil prices. For many economies of the region, the downturn is now expected to be worse than during the 2008–2009 global financial crisis and the 2014–2015 fall of oil prices.
This blog post puts early observations on the economic impact of the COVID-19 crisis in perspective with the experience of Central and West Asia during the global financial crisis and the 2014–2015 oil price fall. Based on these experiences, we argue that limited monetary and fiscal buffers will slow down recoveries, compared to previous crises.
- As with past crises, growth in Central and West Asia may not recover pre-crisis rates. In 2008–2009 and again in 2014–2015, Central and West Asia was affected by harsh external shocks. While economies quickly recovered from the initial shocks, average growth in 2010–2013 and 2016-2019 remained below pre-crisis rates. ADB forecasts gross domestic product (GDP) growth in Central and West Asia to slow down considerably in 2020, followed by a weak recovery in 2021. More recent projections of other international financial institutions take an even bleaker view of the expected economic downturn (Figure 1). This global pandemic could leave permanent scars, resulting in fundamental and long-run changes to the global economy. Setbacks from the relatively open pre-crisis trade and investment system could be harmful for growth in Central and West Asia.
- As in past crises, monetary policy faces the challenge of providing liquidity to support demand while stabilizing the economy. During the global financial crisis, economic downturns combined with low inflation allowed most central banks in Central and West Asia to cut policy rates and provide liquidity to the banking sector. In contrast, during the oil price fall of 2014-2015, most central banks tightened monetary policies to curb inflation arising from local currency depreciations, which particularly affected oil exporters and countries dependent on remittances from oil-exporting countries. The COVID-19 crisis creates inflationary pressures from supply chain disruptions, although low demand is expected to somewhat counter these pressures. In March 2020—when the COVID-19 outbreak began in Central and West Asia—inflation slightly accelerated in Kazakhstan, the Kyrgyz Republic and Tajikistan, while it remained stable in Armenia, Georgia and Uzbekistan, and slowed down in Pakistan. In some countries, monetary authorities cut rates to support economic activity (e.g. Armenia, Pakistan), however, in others, sharper currency depreciations put upward pressure on inflation and limited the scope for accommodative monetary policies (e.g. Kazakhstan, the Kyrgyz Republic, Tajikistan).
- Fiscal policy is more constrained as public debt has increased, notably to cope with past crises. During the previous two crises, governments largely used countercyclical fiscal policies to contain the slowdowns, resulting in increased fiscal deficits and public debt. This, in turn, reduced fiscal buffers and required fiscal consolidation in the recovery years. Similarly, lower tax revenues, support packages and public health expenditure in 2020 are expected to weigh heavily on government budgets, ultimately adding to the existing debt.
The size and scope of the economic downturn due to COVID-19 will be unprecedented. In this context of extreme uncertainty, this blog post compares the early signs of the current crisis with what happened in the previous two crises.
Now is the time for governments and central banks to do “whatever it takes” – to quote the former president of the European Central Bank while fighting to preserve the Euro.
So far, most of the policy actions have mirrored past responses. But this time, margins for action are thinner. Yet bold actions are required to keep economies afloat and to contain the pandemic. Central banks should provide greater liquidity to support access to credit. A timely fiscal stimulus is critical to ensure that doctors are paid and personal protective equipment is provided, but also to support businesses, preserve jobs and expand social protection.
It is encouraging that most countries of the region already announced fiscal packages ranging from 0.1% of GDP (Kyrgyz Republic) to 9% of GDP (Kazakhstan). But where will the money come from? Governments will need to reprioritize public spending, eat into existing fiscal buffers, seek grants or debt financing, and find new ways of engaging the private sector in the relief and recovery effort. The recovery may also provide an opportunity to rebalance the role of the state and the private sector in the region. The private sector needs to be unshackled and allowed to grow and fully contribute to revitalizing economies and creating jobs.
After the storm has passed, governments will of course need to restore fiscal space and reduce debt vulnerabilities. They will also need to renew their commitment to reforms, to enable a strong and sustained private sector-led recovery. The COVID-19 crisis has demonstrated the critical importance of efficiency in public management and inclusiveness of social safety nets to ensure resilience against disasters.
The roof will need to be repaired and strengthened, so when the next storm hits, the house is ready and resilient to headwinds.