Economy

Developing nations need $2.5 trillion to fight Covid-19 impact, says Unctad report

D Ravi Kanth Geneva | Updated on March 30, 2020 Published on March 30, 2020

The developing and poorest countries, including India, would need $2.5 trillion from international financial organisations, particularly the International Monetary Fund, for combating the Covid-19 pandemic, the United Nations Conference on Trade and Development (Unctad) warned on Monday

In a report titled, “The Covid-19 Shock to Developing Countries,” Unctad’s updated Trade and Development report has revealed that “in the two months since the virus began spreading beyond China, developing countries have taken an enormous hit in terms of capital outflows, growing bond spreads, currency depreciations and lost export earnings, including from falling commodity prices and declining tourist revenues.”

The Trade and Development Report, which has become the most credible gauge for assessing the adverse effects of hyper-globalisation since the 1990, suggested that developing countries have taken an enormous hit in terms of capital outflows, growing bond spreads, currency depreciations and lost export earnings, including from falling commodity prices and declining tourist revenues, following the Covid-19’s relentless march around the world.

According to the TDR’s (Trade and Development Report) latest update, portfolio or hot money outflows from major emerging economies surged to $59 billion during February and March due to the Covid-19 pandemic.

In contrast, during the 2008 financial crisis, the outflow of portfolio funds was only $26 billion. Consequently, the values of currencies of emerging economics, including India, against dollar fell down steeply between 5 per cent and 25 per cent since the beginning of this year.

The latest TDR update, prepared by the Unctad’s macro-economic division led by Richard Kozul-Wright, has suggested that “there is broad agreement that the global economy will contract given the sudden stop to large swathes of activity and the resulting income loss in the manufacturing and services sectors across most advanced countries and China, combined with the adverse effects on financial markets, consumption (through both income and wealth effects), investment confidence, international trade and commodity prices.”

The update is based on its “Global Policy Model” that “estimates a boost to the national incomes of advanced economies and China of about $1.4 trillion in 2020, substantially smaller than the headline values of the packages.”

US ‘rescue’ package

The US has already declared a stimulus package — which is referred to as the disaster relief package by several economists will have “a positive impact not only on their own economies but the world economy as well.”

“Although this will, in all likelihood, not prevent a global contraction this year it should (hopefully) avert the recession turning in to a prolonged depression,” the TDR update suggested. It argued that the so-called rescue package should also contribute to stemming the fall in the prices of both financial assets and commodities and will partially alleviate the negative growth impact from the crisis on developing countries.

In contrast, the developing countries, including India, “face distinct pressures and constraints which make it significantly harder for them to enact effective stimulus without facing binding foreign exchange constraints.”

Moreover, developing countries like India “do not issue international reserve currencies, they can only obtain them through exports or sales of their reserves.” Further, the developing countries such as India would need “significant imports of equipment, intermediate goods, know-how and financial business services” for their exports.

Also, “the financial turmoil from this crisis has already triggered sharp currency devaluations in developing countries, which makes servicing their debts and paying for necessary imports for their industrial activity far more onerous,” the TDR’s latest update argued.

Given the increasing precautions that developing countries with huge populations are forced to undertake to fight the Covid-19 pandemic, which is still in the early stages of spreading from individuals to communities, and the associated challenges imposed on governmental budgets from the public health crisis, international trade, fragile financial systems, and escalating debt-servicing costs since 2012, it is important to consider special package of measures for developing countries.

The package of measures include a coordinated global response to liquidity shortages to address immediate financing needs through IMF’s special drawing rights (SDRs), imposition of capital controls “as a necessary, permanent, and fully legitimate part of any policy regime, temporary “standstills” on a debt service payments as well as creation of new debt-relief measures, and a new Marshall Plan for Health Recovery, among others.

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Published on March 30, 2020
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