By Yasuyuki Sawada, Chief Economist and Director General, Economic Research and Regional Cooperation Department, Asian Development Bank, Cyn-Young Park, Director for Regional Cooperation and Integration, Economic Research and Regional Cooperation Department, Asian Development Bank, Rolando Avendano, Economist, Economic Research and Regional Cooperation Department, Asian Development Bank
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
The latest estimates of the COVID-19 impact paint a grim picture of severe economic and job losses for developing Asia. ADB’s latest study estimates that the pandemic could cost the region from 6.2% to 9.3% in lost regional GDP, depending on whether it entails a 3-month or a 6-month containment scenario. This effect accounts for 30% of the expected overall decline in global output. The region is also expected to take the brunt of employment losses: the study projects losses from 6.0% (109 million) to 9.2% (167 million) of total employment, representing 70% of global employment losses. The shock is estimated to be seven times higher than during the global financial crisis.
Developing Asia faces uphill challenges in the battle against the pandemic due to the economic, social, and geopolitical risk factors. The pandemic hurts Asia’s trade and current account balance through decreased exports, tourism receipts, and remittances. Trade was already slowing before the arrival of the pandemic against the backdrop of United States – People’s Republic of China trade tensions. And COVID-19 has since hit tradable services hard, tourism in particular, while heavy disruptions in global trade and supply chains have affected many export-dependent economies in the region. The investment landscape in Asia has also been shaken to its core. In March, Asian stocks plunged and short-term portfolio flows reversed sharply, putting local currencies under pressure. Should export declines and fiscal expansions lead to higher current account deficits, the region’s external and financial vulnerabilities may increase. High debt and exposure to global US dollar funding liquidity point to other macro-financial vulnerabilities.
Poverty and population density in developing Asia, meanwhile, combined with fragile social safety nets, threaten the lives and livelihoods of people who are already most vulnerable. There is a risk of COVID-19 reversing the course of poverty reduction in the region. The Asian Development Bank estimates that the pandemic could see 140 million more people fall to incomes of only $3.20 per day in a long (6-month) containment scenario. The urban poor are especially vulnerable, as many are employed in the informal sector and therefore at high risk of job and income losses, and meager living conditions in congested settlements increase their risk of infection. The situation is further aggravated by challenges in public service delivery during lockdown. COVID-19 also exposed the weakness of social protection programmes in the region, with nearly half of the intended beneficiaries remaining without support. Women and other vulnerable groups are disproportionately affected: pre-crisis, 60% of women’s jobs were in the informal economy in hard-hit sectors such as services or hospitality.
Multilateral agencies and national authorities are ramping up efforts to combat COVID-19 and prepare for the economic recovery
ADB has extended prompt and strong support to its developing member countries. On 13 April 2020, it announced a USD 20 billion package to cope with the crisis and facilitate the post-pandemic economic recovery (Figure 1). As part of this package, a USD 13 billion COVID-19 Pandemic Response Option was established to support governments’ countercyclical measures to mitigate the socioeconomic impact of the pandemic, particularly on the poor and most vulnerable. The package includes USD 2 billion for the private sector and USD 2.5 billion in concessional and grant resources. Several ADB members, including Bangladesh, India, Indonesia, Pakistan and the Philippines are accessing these resources to strengthen their policy responses.
Figure 1: Available ADB resources and current allocation to support COVID-19 response
Panel A. Available resources
Panel B. Current allocation
Note: Panel A includes available Asian Development Bank (ADB) instruments described in ADB (2020). Panel B includes total ADB assistance (code 08B1) in international assistance (borrower/recipient) as of 29th June 2020.
Source: Panel A: ADB’s Comprehensive Response to the COVID-19 Pandemic. Policy Paper Asian Development Bank, 2020. Panel B: Jesus Felipe and Scott Fullwiler. 2020. ADB COVID-19 Policy Database: Version 2.4 (29 June 2020). Manila: Asian Development Bank. https://covid19policy.adb.org/
ADB’s response joins efforts by other international financial institutions (IFIs) and development finance institutions (DFIs) to tackle the short and long-term effects of the pandemic. In the short term, national and regional development banks’ countercyclical role will be important to cushion immediate shocks, while adapting to a context where business activity is at a standstill. Today, there are more than 400 development banks globally (16% of them estimated in Asia) with a large capacity to mobilise financial resources. In the long term, they could be instrumental for financing the sustainable recovery and structural policies required in a post-pandemic context. While DFIs have traditionally focused on areas such as micro, small and medium enterprises, trade, infrastructure, agriculture, or housing, the opportunity now exists to rethink this focus and consider areas such as digital transformation, supply chain resilience, environmental sustainability, and regional co-operation for communicable disease control.
Development banks are better prepared today to address the COVID-19 crisis. Important lessons of the global financial crisis include the need for institutional readiness and flexibility in responding to crises. IFIs, including ADB, have established new facilities that allow them to respond quickly with flexible approaches to provide budget support, assist structural reforms, and target the most vulnerable countries and groups. ADB substantially expanded available financial resources and adopted more flexible countercyclical support modalities during crises, underpinning its role in Asia’s financial safety net. With a broader set of mandates, development banks are now asked to leverage their financing and policy advisory roles to tackle critical development challenges, such as cross-border infrastructure connectivity, climate change, and provision and financing of transnational public goods to meet the Sustainable Development Goals. Asia’s experience in establishing integrated early warning systems against natural disasters is a good example.
ADB is working with partners to support the recovery and build resilience. Multilateral development banks are keen to coordinate efforts and build consensus around emerging priorities. In a post-COVID-19 recovery, they could play an advisory role that takes advantage of the complementarities between financial assistance and the design of effective development policies for building resilience. ADB is already playing this role in some key sectors such as technology and infrastructure connectivity, finance, health and education. The current context opens a window for greater national reforms to facilitate digital transformation and improvements in water and sanitation, food security, social protection, and regional health security through stronger regional co-operation. In the hardest-hit sectors—such as tourism, transportation, and retail—ADB is assisting governments to design sustainable strategies for after the crisis. Such strategies might include, for example, building blocks around digitalisation, skills, and climate change.
Support to the private sector is a priority and collaboration among different actors, important. Recently, ADB and the Agence Française de Développement, the French development agency, agreed to USD 5 billion co-financing through the AFD Trust Fund. In the medium term, ADB’s recovery strategy will be focused on “building back better, differently, and together”. Better, by improving disaster preparedness, strengthening response systems, and facilitating early recovery. Different, by adopting new and smarter tools. Together, by strengthening regional co-operation.
As the largest financing partners to the multilateral financial system, the OECD Development Assistance Committee members are key actors. The Finance in Common Summit in November 2020 in Paris will be the first global meeting of public development banks to discuss their role in responding to COVID-19. Working with developing countries to define priorities will be crucial if the recovery is to be different from that of previous crises. Partnerships with inclusive policy dialogue platforms, such as the Development Centre, will certainly help. This will be an opportunity for all of us to set up an ambitious agenda towards economic recovery.