Event Recap: Economic Implications of COVID-19 for South Asia

South Asia hosts more than a fifth of the world's population and contributes more than 15 percent of global economic growth. It also suffers from high rates of poverty and inequality, as well as major infrastructure and connectivity constraints. For these and other reasons, some experts believe South Asia will be hit quite hard economically by the COVID-19 pandemic. A recent World Bank study predicts that South Asia may experience its worst economic performance in 40 years, and that half the region could experience a serious recession.

On May 18, the Asia Program hosted a virtual event with economists from Afghanistan, Bangladesh, India, and Pakistan. It focused on potential short and longer term economic impacts of COVID-19 in those countries, how governments should respond, and what economic stress in the region could mean for the world on the whole.

Dr. Azam Chaudhry (Pakistan) kicked off the discussion by providing an account of the Pakistani economy. He stated that before this pandemic, a lot of the economic shocks had been demand shocks, but this time the pandemic has triggered a supply-side shock, which means that the government’s policies might not be as effective as the ones implemented before. As 80 percent of the Pakistani economy is driven by consumption, the COVID-19 crisis will have a huge impact on the Pakistani economy. Dr. Chaudhry pointed out that the Pakistani economy has transitioned over the last decade—now, almost 2/3 of the economy is made up by the service sector, which is severely hampered right now. Dr. Chaudhry’s macro model sees a 3 percent drop in the Pakistani GDP, which could go up to 6 percent if the lockdown extends into the future. He also expected 100 million job losses over the period of lockdown.

One thing Dr. Chaudhry worried most about is poverty. There are a huge number of people hovering around the poverty line. The poverty headcount had been 4 percent in Pakistan, and this number has jumped to 5 to 6 percent. The Pakistani government has been trying to help lower-income residents and poor people with a program that would give $75 per month over the next couple of months to 12 million people. However, it is questionable whether the government can distribute this money to the right hands.

Dr. Chaudhry also mentioned the balance of payment challenges for Pakistan. Before the pandemic, Pakistan had $25 billion in exports and $40-45 billion in imports. As the demand for exports drops and oil prices and output fall, there is going to be a huge pressure on the existing budget deficit of Pakistan. He also briefly talked about Pakistan’s food security problems, weak health care system, and virtual learning environment, which he believed will exacerbate inequality in the country.

Dr. Omar Joya (Afghanistan) first provided brief context to those who are unfamiliar with the Afghan economy. He stated three crises that Afghanistan was going through simultaneously: 1. A conflict and security crisis, as the country had experienced 3-4 attacks just in the current week; 2. A political crisis, as disputes over the election results were still ongoing; and 3. An economic crisis triggered by the COVID-19 pandemic. According to Dr. Joya, the impact of covid-19 has been relatively limited—only 6,000 confirmed cases have been reported. However, this number may be heavily underreported.

Dr. Joya then shared 3 to 4 structural characteristics of the Afghan economy which differentiate this country from other countries in South Asia:

1. High dependence on foreign aid. Sixty percent of Afghanistan’s national budget is financed by donor countries. In addition to the government budget, 75 percent of public spending is financed by donor practices.
2. The government in Afghanistan does not have the access to domestic financing sources. These two characteristics suggest that there is no fiscal space for the government to mobilize in order to respond to the current economic crisis.
3. A high dependence on imported food. Afghanistan imports almost all of its food products from foreign countries, including wheat and rice. Therefore, the food security risk in the country is unmatched in the region.

Following the summary of crises, Dr. Joya provided a macro outlook, which was separated into two parts. In the moderate scenario where the pandemic is contained by summer, and interruptions in trade are only temporary, he expects an economic contraction of 3.3 percent. In a tougher scenario where the pandemic worsens and the country experiences a persistent interruption of trade, economic contraction could be as large as 10 percent this year. Dr. Joya also expects that domestic revenues will decline quite substantially, as even in the first four months of the year, domestic revenues in Afghanistan were down 25 percent compared to the previous fiscal year. Because of high dependence on the imported food, he expects rising inflation in the country, which could go as high as 25 percent. The poverty rate, which was already very high, could be pushed from 58 to 80 percent if the economic contraction is between 3 and 10 percent.

Dr. Nazir Kabiri (Afghanistan) focused more on regional dynamics. He made five points:

1. Poverty in the region will worsen. Millions of daily wagers cannot afford the lockdown for too long.
2. Aspects of trade remain very limited as new restrictions are imposed at borders. Thousands of Afghan containers are stranded in Pakistan; also, Afghanistan cannot export to Pakistan.
3. Because Afghanistan is a western region in South Asia, it can not move forward as India and Pakistan have a historical conflict.
4. The chance of Covid19-unlocked regional cooperation remain very low, as political rivalry in the region is deep-rooted. Covid-19 will not encourage regionalism, but only nationalistic and inward policies as we have seen in other regions. Covid-19 will not change any geopolitical frontlines in South Asia.
5. If the virus gets out of control, so would the country.

He then provided some recommendations for the governments in the region to consider:

1. A joint regional research program for the development of a vaccine, with India taking the lead.
2. Keep the borders open to allow trade to flow.
3. Promote collective attention on the region despite differences among the countries. Fast and collective responses will be required for containing the virus and recovering the regional economy.

Dr. Ahsan Mansur (Bangladesh) claimed the pandemic could counter the social and economic improvements Bangladesh has achieved in recent years. The impact of this pandemic has two sides—an external trade shock and an internal demand shock. As Bangladesh has close trade relationships with both the European Union and North America, including the U.S. and Canada, the impact of an external shock would be huge. On the other hand, there could be a lockdown-induced demand shock in the country. The World Bank and IMF both project a severe contraction of Bangladesh’s growth this year. Meanwhile, the economic impact has been immediate. Fifty million people have lost their jobs; the poverty rate has doubled from 20 to close to 40 percent. The gains Bangladesh has made in the past 20 years have been lost in just two months.

According to Dr. Mansur, there are three major issues the government has to handle:

1. Control the disease itself. Bangladesh is still on the left side of the climbing curve of infection, and it is uncertain how high this curve will get.
2. Support livelihood issues. Millions of people could be jobless, and the government should provide support to these people in the coming months.
3. Focus on economic recovery. The government has already announced a 3.5 percent GDP package for putting the economy back on track, which is equivalent to $11 to $12 billion. Dr. Mansur hopes that it will be a starting point, and that the government will provide more money to support the industrial sector.

Dr. Ila Patnaik (India) focused on the 80 million migrant people in cities, who suddenly found themselves unable to go back home after a nationwide lockdown was announced suddenly during the early stages of the pandemic. Now, the Indian government has started announcing the easing of the lockdown and implemented a new arrangement based on zones. The country’s 700 districts were divided into zones. In the districts classified as being in orange and green zones, most activities are allowed. However, there is a constantly changing geography in terms of what is allowed and what is not.

Dr. Patnaik also focused on the relief package that has been announced by the government. She claimed that there is very little fiscal space for the government to spare. The Indian government has increased its borrowing, but that barely makes up for the loss of domestic revenue. The government has come up with monetary policies to induce banks to lend, but banks are reluctant to lend. Dr. Patnaik emphasized that the government should make cheap loans available to small and medium enterprises because they make up most of the employment in the country.

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The views expressed are the author's alone, and do not represent the views of the U.S. Government or the Wilson Center. Copyright 2020, Asia Program. All rights reserved.