IDB: COVID-19 could result in regional recession of more than 5 per cent of GDP

… relief-policy measures must target the most vulnerable; be administered transparently

THE Inter-American Development Bank (IDB) says unless governments of Latin America and the Caribbean implement well-focused programmes to offset the impact of the COVID-19 pandemic, the region may see growth reductions of up to 5.5 per cent of GDP in 2020.

In a report titled ‘Policies to Fight the Pandemic: 2020 Latin America and the Caribbean Macroeconomic Report’, the IDB gave an overview of the macro-economic circumstances of the region and outlined a number of scenarios to demonstrate the possibilities for relief for economies in various stages of development as is the case in the region.

“Our region will suffer an economic shock of historic proportions,” said IDB Chief Economist, Eric Parrado, in an IDB press release accompanying the report. “Countries should be saving lives, by ensuring social distancing and providing their health sectors with adequate resources. Complementary and temporary economic interventions can support economies during the partial, organized shut-downs.”

“We need to preserve the core of our economies intact to improve the chances of a quick rebound,” Parrado added. “Providing relief to those more vulnerable households that have lost their sources of income, helping and giving incentives to firms to reduce liquidations and avoid separation from their employees, and extending liquidity to banks so they be part of the solution, can all work in that direction.”

The IDB said that the region’s first priority should be to “stop the spread of the virus, prevent the health sector becoming overwhelmed, ensure it has adequate resources, and save lives”. It said a second focus should be to provide relief to those “more vulnerable households” that have lost their sources of income” as a result of social distancing and other measures. “And a third should be to support firms to minimize the rise in unemployment, to try to avoid the separation between firms and their employees and costly bankruptcies and liquidations,” the report said.

Quoting a study done by the Imperial College London, the IDB said that without policies to suppress the spread of the virus, there would be as many as 3.2 million deaths in Latin America and the Caribbean. However, the bank noted that countries are taking strong measures to suppress the spread of the virus.

STRONG MEASURES

“Most countries in the region have also established sound monetary arrangements with low inflation and relatively low interest rates. Eleven countries have established (or are in the process of adopting) inflation targeting regimes with exchange rate flexibility, banking sectors in general are strong, and most countries have built up reserve levels. Buffers and sound monetary, financial, and fiscal frameworks will be extremely important to weather the current crisis,” the bank said.

However, it noted that despite the safeguards, the coronavirus will have major impacts on fiscal balances and will place stress on currencies and other monetary and financial indicators.

The report said that while most countries in the region are relatively small and open both in terms of trade and finance, China, the United States and Europe will all suffer large losses in GDP. The report noted while there are positive indications that some places are recovering, the likely external shock to demand, the fall in commodity prices and the shock to financial markets could cause the region to suffer a significant recession in 2020 and this recession is likely to exceed the one in 2009.

The report pointed out that the most extreme scenario considered is one which would result in a recession of more than five per cent of GDP.

The IDB said that among their recommendations is that the financial sector should be closely monitored as an additional priority to ensure financial stability and allow commercial banks to assist firms and households.

The report said that advanced countries with historically low interest rates can support their economies for a long time without significant threats to their economic stability. However, many emerging economies such as those in the region may not be in such a privileged position. “As such, it will be extremely important to prioritise measures and ensure that the greatest bang is obtained for each [dollar] of support. The total volume of fiscal packages will depend on available financing,” the IDB said.

POSSIBLE POLICY INTERVENTIONS

The report said that since public health services are provided largely by local governments, central government should provide local government organs with resources in a speedy manner.

“Since institutions and implementation capacity is lower at this level of government, additional resources should be accompanied by technical help from federal governments for these resources to be effective,” the report pointed out.

“Additionally, many people will lose their income while under lockdown at home. This makes it imperative to design subsidy programmes that are well targeted to vulnerable groups, particularly the poor and informal workers. Given past experience, it is key that these programmes be designed as temporary, with separate accounts from other structural transfer programmes, including sunset clauses. Transparency in the administration of this policy is also essential,” the report said.

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