Day: August 13, 2021

The coronavirus disease (COVID-19) pandemic has had a significant negative impact on global trade and supply chains with many vulnerable economies in low-income countries being disproportionately affected. Although developing Asia’s trade recovered somewhat in the latter half of 2020, mainly due to the People’s Republic of China (PRC), the rebound was less pronounced in other economies in the region.

The Asian Development Bank’s (ADB) Basic Statistics 2021 is a publication presenting relevant social and economic data. It indicates the extent of trade disruption in many countries in developing Asia in 2020, at the height of the pandemic. Particularly badly hit were the oil and gas exporting countries, who had to deal with low prices and plummeting demand for hydrocarbons globally as industrial activity, trade, and international travel tanked.

Azerbaijan’s large oil and gas reserves are a major contributor to its economy. Exports from the country contracted by 36.6% in 2020, the data show. On the demand side, in 2020 imports declined by 11.1%, compared with import growth of 3.5% in 2019. Azerbaijan’s economy as a whole reversed 2.5% growth in 2019 to contract by 4.3% in 2020, according to the data. Growth is forecast to resume in 2021 and accelerate in 2022 as the pandemic eases and global demand for energy recovers, the Asian Development Outlook (ADO) 2021 forecasts. The gas rich Central and West Asian country, Turkmenistan, experienced a similarly severe economic downturn in 2020. ADO 2021 noted a dramatic decline in external demand and prices for hydrocarbons, which provide more than 80% of exports and 30% of Gross Domestic Product (GDP) meant exports were down by 24.2% in 2020, according to Basic Statistics 2021. This is in marked contrast to the previous year, when exports had been growing by 8.2%. Neighboring Kazakhstan, another major oil producer, saw its exports dive by 19.4% during 2020.

Azerbaijan and Kazakhstan saw their economies contract significantly due to COVID-19. Although both are resource-rich, upper middle-income countries, economic shocks like the COVID-19 pandemic underline the need to expand economic diversification to make their economies less dependent on one export sector to become more resilient.

Some countries with more marginal economies fared even worse. Basic Statistics 2021 noted that Vanuatu in the Pacific saw its exports collapse by 40.7% in 2020. Agricultural exports and foreign tourism are the mainstays of the economy. Trade and travel restrictions due to the pandemic, combined with a devastating cyclone in April, led to economic contraction of 9.8%, according to ADO 2021. Growth is forecast to return to Vanuatu in 2021, rising to 2.0% as tourism and agriculture slowly recover, according to ADO 2021. In the Maldives, there was also severe contraction in tourism, which makes up three quarters of the economy. As a result, GDP plummeted by an estimated 32.0% in 2020, according to ADO 2021. Alongside this major slump, exports contracted by 28.9% in 2020, Basic Statistics 2021 notes. This significant drop in export trade was largely due to disruption to global supply chains and the grounding of air transport. The result was that the country’s leading export commodity, fish, could not reach traditional markets in Thailand, Sri Lanka, Italy and France. As in other tourism-dependent countries in developing Asia, growth is expected to resume in the Maldives as foreign visitors slowly return. Economically vulnerable Timor-Leste also had a challenging year in 2020 as global demand for oil and gas, its key exports, rapidly collapsed. The export sector as a whole contracted by 33.0%, contrasting markedly with 2019 when exports saw healthy growth of 5.5%, according to Basic Statistics 2021. But like Vanuatu, the impact of the COVID-19 pandemic was only partially responsible for Timor-Leste’s sudden economic decline. A domestic political crisis stopped the state budget from being passed until October. As a result, ADO 2021 estimates GDP contracted by 7.9% in 2020, down from a modest 1.8% expansion in 2019.

The pandemic highlights how less robust economies like Vanuatu, Maldives, and Timor-Leste, often subject to extreme weather events, volatile commodity prices or political instability, need to be strengthened to be able to ride out the series of unexpected fiscal shocks they all experienced in 2020.

Countries where manufacturing for export is an economic mainstay were also badly impacted by the pandemic. Bangladesh’s garment industry, its largest export sector, was badly hit as buyers cancelled shipments and new orders from lucrative markets in Europe and the United States evaporated. Exports reversed a 9.1% expansion in 2019 to contract by 17.1% in 2020, the data show. The combination of stunted exports and domestic COVID-19 containment restricting economic activity meant imports were down by 8.6% in 2020.

With the decline in imports offsetting much of the reduction in exports, the trade deficit widened only moderately, according to the data. Despite the battering to exports, Bangladesh continued to experience GDP growth in 2020 of 5.2% while fiscal policy remained supportive to mitigate the adverse economic effects of COVID-19.

“There are many lessons for the region from the COVID-19 pandemic. One of the most important is how vulnerable to economic shocks many countries in developing Asia remain. Creating more mixed, high-value, economies should be a priority for member governments. This will not only reduce poverty but also make economies more robust, helping them to recover quickly. ADB is working with member governments to support this transition,” ADB’s Chief Economist, Yasuyuki Sawada said.

Most governments across developing Asia responded decisively to the economic damage and uncertainty caused by the COVID-19 pandemic. Policy makers used a large number of channels to support firms, workers and households. These included, providing liquidity via government loans to the private sector, and direct income or revenue support through government transfers, loan cancellations, and tax cuts or forbearances.

 

Source: Asian Development Bank

Many countries in developing Asia have been left with large negative fiscal balances due to the impact of coronavirus disease (COVID-19), Asian Development Bank (ADB) data show. A fiscal imbalance occurs when a government spends more money than it takes in through tax and other revenues. The pandemic landed a back-to-back blow on many economies in the region in 2020; a huge drop in government income as industry and commerce slowed, combined with significant hikes in official expenditure to deal with the health, economic and social fallout from the virus.

In Basic Statistics 2021, an ADB publication presenting relevant social and economic data, government finance figures for 2020 show that many countries in the region had double digit fiscal imbalances by the end of the year.

The countries that fared worst tended to be those where the economy is largely reliant on a single product, service or export commodity, making them particularly vulnerable to the impact of the pandemic. The Maldives had a fiscal balance of -27.5% of Gross Domestic Product (GDP) in 2020, according to the data, compared with -6.6% in 2019 and -5.3% the year before. The large increase in its fiscal imbalance was due largely to this small country’s dependence on foreign tourism, which remained limited for most of 2020 as international travel bans and national lockdowns became the norm in wealthy countries.

The economic shock to the Maldives was confirmed by a GDP contraction of -32% for 2020, according to the data. Although the country launched a concerted vaccination campaign that weighed heavily on government expenditure, COVID-19 cases began increasing again across the Maldives in the second quarter of 2021. On a more positive note, the Asian Development Outlook (ADO) 2021 forecasts growth returning to the Maldives in 2021 at 13.1%, assuming international travel resumes and the virus can be controlled through vaccination.

Many countries run fiscal imbalances, sometimes referred to as the current account deficit. The gap between income and spending is subsequently closed by government borrowing, increasing the national debt. An increase in the fiscal deficit can sometimes boost a sluggish economy by giving more money to people who can then buy and invest more. Long-term deficits, however, can be detrimental for economic growth and stability.

The data also show that the pandemic badly affected Brunei Darussalam. The country ran a high fiscal deficit in 2020 at -17.1%, a steep increase from the previous year when it stood at just -5.6%. The deficit is mainly the result of a marked decline in fossil fuel prices (a key export sector), combined with a jump in government expenditure to try and contain the effects of the virus. Mitigation measures included partially funding salaries and deferring loan payments to help keep small and medium enterprises afloat. The pandemic stunted GDP growth in Brunei Darussalam slowing it from 3.9% in 2019 to 1.2% in 2020, according to ADO 2021. A recovery is anticipate though, with growth forecast to tick back up to 2.5% in 2021 and 3.0% in 2022.

Although Sri Lanka was relatively successful in containing the pandemic with growth recovering in the second half of 2020, its annual deficit jumped -11.9% from a more moderate -8.2% the previous year. The country’s tourist industry was badly hit, but this was compensated for to a degree by the IT and business process outsourcing sectors that did not suffer so markedly. ADO 2021 noted that the Sri Lankan government’s economic response to COVID-19 in 2020 relied mainly on monetary easing and credit creation.

In some cases, the large fiscal deficit in low-income Asian economies can be explained by the cost of financing correspondingly large vaccination or social support programs. Data from Basic Statistics 2021 tell us that the Pacific nation of Palau ended 2020 with a national deficit of -11.2%, substantially higher than what it was the previous year at 0.3%, according to ADO 2021. But the government spent significant sums on COVID-19 vaccines, having administered 74.3 doses per 100 people by April 2021, the highest vaccination rate in Asia at the time.

“The data illustrate clearly that in Asia, where an economy vulnerable to the pandemic has had to increase government expenditure markedly to deal with its effects, the results have been extremely detrimental to national budget deficits. This raises issues of long-term debt sustainability which may have serious implications for achieving the Sustainable Development Goals,” said ADB’s Chief Economist, Yasuyuki Sawada.

This sharp contraction in fiscal revenue brought about by the pandemic means that governments in the region will no longer be able to rely solely on public money when funding economic and social recovery, ADO 2021 argues. They will need to use much more private capital and develop creative ways of raising finance, such as green and social bonds. Recovering from the pandemic presents an opportunity to realign economic growth, making it greener and more oriented to the needs of people. This includes clean energy and transport, along with social investment in health, education and employment.

Even as the COVID-19 crisis has reduced revenues from tax and other sources in Asian economies, some governments in the region are investing to ensure sustainable recoveries after the pandemic. Examples include the Green New Deal in the Republic of Korea, green components in Japan’s economic stimulus packages, and Thailand’s issuance of sovereign sustainable bonds.

 

Source: Asian Development Bank