After the pandemic

Covid-19 has wreaked havoc on the world's economy. According to the latest IMF estimates, the global economy will shrink by three percent this year and the global economic output will tumble by about $9 trillion over two years.

This suggests that the economic impact of Covid-19 will be felt in years to come and recovery will not be rapid as had been predicted earlier. The developing economies are more vulnerable to this pandemic as they have traditionally relied on exports to the developed countries and foreign remittances from their large diaspora working in foreign countries. Now that their exports will be hit by low demand in the target markets and foreign remittances will dry up due to large scale redundancies of expat workers in the Gulf Cooperation Council (GCC) Countries caused by the current pandemic and low oil prices – one of the biggest challenges for these countries will be to avoid going into recession.

This will be further exacerbated due to the flight of hot money by large international investors from these countries to the US treasury bonds as a safe haven, and a significant decrease in Foreign Direct Investment (FDI) globally. According to a recent UN report, international FDI flows may contract by up to 15 percent due to the coronavirus, while the capital outflows from the emerging economies have already exceeded $97 billion since January 2020. All of this may cause large currency depreciation in developing countries, adding to their already faltering economies due to the spread of Covid-19. Here, I discuss some of the challenges and provide some suggestions for developing countries to tackle these challenges and prepare themselves for the future.

Unemployment claims in the US alone hit more than 26 million as of April 25, and they are expected to rise further in the coming weeks. This implies an unprecedented slowdown in the world's largest economy and thus a lower consumer demand. This will severely affect exports from developing countries such as Bangladesh, India, Pakistan, and Vietnam, etc.

In 2019, Bangladesh, for example, exported goods worth $45.7 billion to the developed world. An overwhelming majority of the exported goods comprised textile-related items. Of which 71 percent were limited to only 10 countries including mainland Europe and North America with the US being the top destination.

As most of these economies have been most severely impacted by the current pandemic, the developing countries will have to propel local demand to absorb the impact of a sharp decline in their exports. This could in part be achieved through reducing the local interest rates, transforming export-oriented industries to be more competitive locally; promoting and incentivizing local industries to generate local employment, and removing the red-tapism for fast track policymaking and implementation of such policies.

In parallel, developing countries will have to invest in the local Research and Development (R&D) with a special focus on medical and industrial sectors to reduce their reliance on imports from the developed world. This would not only help in providing low-cost solutions to local businesses but could also mitigate some pressure on their exchange rates.

Another important challenge for the developing countries would be to cope with diminishing tourism in the post-Covid-19 regime. According to the World Travel and Tourism Council, the Covid-19 pandemic could hit 50 million jobs worldwide in the travel and tourism industry. In that, Asia is expected to be the worst affected. The travel restrictions could persist for many months and it may take two to three years for the travel industry to return to "new normal" as suggested by a recent Bloomberg article. All this puts developing countries such as Turkey, Egypt, Thailand, and India – which have traditionally attracted a large number of tourists – at odds and will badly aggravate their already sluggish economies in the post Covid-19 period.

The developing countries should focus on boosting local tourism to make up for the shortfall in international tourism, and must provide generous financial support for the local tourism sector to survive the aftershocks of this pandemic. In that regard, the rescheduling of bilateral/ multilateral loans as agreed by G20 countries and emergency financing from international donor agencies may provide much needed financial support to these sectors in the developing countries.

While big businesses have relatively fared better due to fewer interruptions in the physical supply chain, the SMEs have suffered the most due to the lockdowns around the world. This has particularly been more painful for the developing countries where SMEs contribute around 60-70 percent in Gross Domestic Product (GDP) and account for around 80 percent of the total employment in developing economies. The governments in developing countries need to provide generous financial stimulus in the form of bridge financing and microloans to avoid big layoffs and closure of SMEs, which may lead to a deep economic recession in these economies.

A piece of good news during the current pandemic for most of the developing countries has been a record low oil prices in our recent history. However, barring China, the emerging markets have not been able to take full advantage of plummeting oil prices due to very limited storage capacities and lack of robust risk management policies. The developing countries should invest in increasing their storage capacities and engage in hedging activities such as buying oil futures to benefit from the oil price slumps.

Even after the coronavirus is gone, the post-Covid-19 world will be different in many ways. The countries that will anticipate those changes in advance will do better than others in the post-Covid-19 regime. Adversaries always present new opportunities and these who grab these opportunities come out winners.

The writer is an assistant professor at the College of Economics and Political Science, Sultan Qaboos University in Muscat, Oman.