How poor countries can deal with the economic shock of COVID-19

The least developed countries (LDCs) have limited capacity and preparedness to handle the economic fallout of the COVID-19 crisis, and are likely to face significant hardships. Initial estimates suggest that these disruptions could potentially contribute to increased global poverty, with the number of poor and hungry people rising by 2%.

However, with appropriate support measures and policies, and coordinated efforts, the world’s poorest countries can navigate this crisis. Here’s how.

1. Keeping trade open

According to the World Trade Organization, 87.5% of goods exported from LDCs are sold in 10 major markets, all of which are either severely or moderately affected by the COVID-19 outbreak. Due to a fall in demand in these markets, LDCs are certain to lose a significant portion of their export revenues. This decline will make it impossible for LDCs to achieve Target 11 of the Sustainable Development Goal (SDG) 17 to double their share of exports.

A shortage of raw materials from China, due to supply chain disruptions will affect many LDCs. For example, shutdowns at Cambodia’s garment factories, which procure 60% of their raw materials from China, could affect 160,000 workers in a worst case scenario.

LDCs are equally affected by declining orders or the cancellation of ready-to-ship orders by Western clothing brands, some of which have already closed outlets. As a result of these closures, Bangladesh alone has seen garment orders worth $1.5 billion being cancelled, affecting more than 1,000 garment factories.

Another important aspect on the trade front highlighted by Global Trade Alert is that, as of 21 March 2020, 54 governments have put in place 46 export bans on medical supplies, including personal protective equipment, which is critical for medical workers to treat patients suffering from COVID-19. LDCs will need imported medical supplies to address the increasing number of COVID-19 patients, as many LDCs do not produce them domestically.

Exports of services from LDCs are another casualty, with the travel and tourism sector being the worst impacted. According to an initial forecast by the United Nations World Tourism Organization (UN WTO), up to $50 billion in income could be lost as a result of the crisis. Since many LDCs depend on this sector, which contributes to 7% of their export income, a prolonged downturn will have a significant impact on export revenues, foreign exchange reserves, GDP and, of course, jobs, especially for women.

To address these problems, countries should refrain from imposing trade restrictions when other policy options are available. And, it is important to keep trade open, not only for medical supplies but also other goods such as food, raw materials and energy supplies. Trade, transport and transit facilities should continue to operate without restrictions, in line with a recent joint ministerial statement issued by seven World Trade Organization members, including one LDC. More LDCs should come forward to join such an initiative. To minimize face-to-face contact between traders with border, transport and transit authorities, paperless trade should be promoted as a quick win measure.

2. Providing investment-related support

The latest projection from the United Nations Conference on Trade and Development (UNCTAD) shows that the overall flow of foreign direct investment could fall by up to 15% depending on when COVID-19 is contained. These figures are in stark contrast to the data released in January 2020, which predicted FDI growth of 5% in 2020-2021.

This decline will surely hit LDCs where significant investments have been made in fuels, minerals and manufacturing – all sectors that are experiencing demand and supply shocks. Despite an inevitable fall in FDI, the international community should work closely with the private sector to contribute to Target 5 of SDG 17, which envisages the adoption and implementation of investment promotion regimes for LDCs so that much-needed flows of FDI to LDCs can be maintained. This is even more critical for LDCs at the threshold of “graduation” from the LDC category.

3. Increasing aid for trade flows

Although it is too early to predict the impact on the Aid for Trade initiative, which is a critical lifeline for LDCs to achieve sustainable economic growth and poverty alleviation, there could be a temporary decline due to development resources being channelled toward COVID-19 response efforts. Since Aid for Trade, part of Official Development Assistance, is inextricably linked to the Gross National Income (GNI) of each donor country, a reduction in GNI would generally mean decreased Aid for Trade.

Despite these challenges, the significance of Aid for Trade in helping LDCs recover by supporting the competitiveness of their micro, small and medium-sized enterprises (MSMEs) should not be underestimated.

International Trade Centre (ITC) research shows how MSMEs are likely to experience four phases, either successively or simultaneously, as global trade stumbles – from shutdowns to disrupted supply, depressed demand, and eventually bouncing back in recovery. ITC has cautioned that MSMEs in different sectors are affected in different ways, and policy responses must be carefully tailored.

The case has never been stronger for meeting Target A of SDG 8 to increase the Aid for Trade allocation to LDCs to promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.

4. Harnessing the potential of e-commerce

E-commerce will continue to be a critical support to consumers during this time, as brick-and-mortar stores shut down and consumers avoid public spaces and move to cashless transactions.

LDC governments working closely with their telecommunication and internet service providers and central banks should use the opportunity presented by the crisis to adopt a few quick-win measures. These include: enhancing affordable internet access in line with Target C of SDG 9, providing robust payment solutions and facilitating mobile financial transactions.

5. Designing and implementing safety net policies

Several developed and a few developing countries have already announced stimulus packages through monetary policy, such as quantitative easing, or fiscal policy, such as resource transfer, to help prop up their economies and provide safety nets during the COVID-19 crisis and in its aftermath.

Although LDCs may not have the capacity to undertake such measures, they should use this crisis as an opportunity to put in place safety net mechanisms to provide relief to their companies, particularly MSMEs, and the poor and vulnerable segments of society. In order to ensure LDCs do not increase their debt burden, we should fully explore and make use of any support extended by international financial institutions – including a recent Call to Action to suspend debt payments from the so-called IDA countries, which are home to two-thirds of the world’s population living in extreme poverty.