According to the new report released by the United Nations Conference on Trade and Development (UNCTAD), titled ‘The COVID-19 Shock to Developing Countries: “Towards a ‘whatever it takes’ program for the developing nations being left behind’, commodity-rich exporting countries will face a $3 trillion drop in investments from overseas in the next two years.”
It is believed that the world economy will go into recession due to the coronavirus pandemic which will severely affect the millions of people living in the developing countries with likely exceptions of India and China. The UN has called for a USD 2.5 trillion rescue package for these nations.
The report stated that in recent days, advanced economies and China have put together massive government packages which, according to the Group of 20 leading economies, will extend a USD 5 trillion lifeline to their economies. “This represents an unprecedented response to an unprecedented crisis, which will attenuate the extent of the shock physically, economically and psychologically,” UNCTAD said. Further, it added that while the full details of these stimulus packages are yet to be released, an initial assessment by the UNCTAD estimates that the packages would translate to approximately $2 trillion injection of demand into the significant G20 economies and a two percentage point turnaround in global output.
“Even so, the world economy will go into recession this year with a predicted loss of global income in trillions of dollars. This will spell serious trouble for developing countries, with the likely exception of China and the possible exception of India,” the UNCTAD said.
Although the report did not discuss the details as to how India and China will escape the global recession, the UN believes that these two countries will face lesser heat of the global economic crisis. Given the deteriorating global conditions and fiscal and foreign exchange constraints, UNCTAD also estimates a USD 3 trillion financing gap facing developing countries over the next two years.
Amid the global financial crisis, the UNCTAD has proposed a four-point recovery plan.
Four-Point Recovery Plan
- A $1 trillion investment injection for weaker economies, would come from so-called “special drawing rights” governed by the IMF.
- A debt freeze for distressed economies is required, involving an immediate standstill on sovereign debt payments, followed by significant debt relief. Also, around $1 trillion in debt should be canceled this year, overseen by an independently created body, the UN agency maintains.
- A $500 billion investment in poorer countries’ emergency health services and related social relief programs.
- An implementation of state-led capital controls to curtail already surging capital outflows from these developing countries, which would help to reduce a cash shortage driven by sell-offs in developing country markets.
“The economic fallout from the shock is ongoing and increasingly difficult to predict, but there are clear indications that things will get much worse for developing economies before they get better,” UNCTAD Secretary-General Mukhisa Kituyi said. UNCTAD further predicted that this global economic shockwave will hit more to developing countries and could be even worse than the 2008 global financial crisis.
The report shows that developing countries have already have taken an enormous hit in terms of capital outflows, growing bond spreads, currency depreciation and lost export earnings, including from falling commodity prices and declining tourist revenues.
Developing countries lack economic capabilities to deal with such a massive global recession and health crisis which may halt their progress towards sustainable development goals.
“Advanced economies have promised to do ‘whatever it takes’ to stop their firms and households from taking a heavy loss of income,” said Richard Kozul-Wright, UNCTAD’s director of globalization and development strategies. He added: “But if G20 leaders are to stick to their commitment of ‘a global response in the spirit of solidarity’, there must be commensurate action for the six billion people living outside the core G20 economies”.