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Buyers and sellers wearing protective masks in an outdoor market in Egypt during the coronavirus pandemic. (photo: Aleksej Sarifulin iStock by Getty Images)

How the Middle East and Central Asia can limit the economic legacy of COVID-19

Klakow Akepanidtaworn, Oluremi Akin-Olugbade, Gareth Anderson, Dalmacio Benicio and Joyce Wong

November 19, 2020

The economic crisis resulting from the COVID-19 pandemic has caused a shock of unprecedented scale and depth in recent history, the damage of which could permanently penalize countries in the Middle East and Central Asia.

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In their report which has just been published, Regional Economic Outlook: Middle East and Central Asia, staff are examining this possibility as well as the measures countries could take to prevent the economic consequences of this crisis and increase their resilience.

Normally, the economic consequences of a crisis result from a weakening of production or demand over time. The severity of these consequences depends on the situation of a country on the cusp of the crisis and its response to it. The global financial crisis, for example, has left far-reaching consequences in the region. Indeed, by the end of 2019, a third of the countries in the region had not recovered their pre-crisis production trend, and those that did have had to wait more than five years.

Why is there a risk of sequelae?

Given the unprecedented nature of the current problems and the fiscal and external vulnerabilities that were already pronounced before the pandemic, countries in the Middle East and Central Asia face a frightening prospect: the effects of this crisis could last even longer. long than those of the global financial crisis. We predict that within five years, the GDP of countries in the region could be 12% below the level of GDP that would follow the pre-crisis trend, compared to 9% for emerging and developing countries. In addition, countries in the region could take more than ten years to return to the pre-crisis trend.

The sequelae could manifest itself in several important areas. First, the continuation of containment measures results in serious disruption and losses for the service sectors, especially travel and tourism. Moreover, for countries that depend on tourism such as Georgia, Jordan, Lebanon and Morocco, we predict that GDP and employment growth will slow by 5 percentage points in 2020; the effects of this decline could persist for 5 years.

Second, more indebted and less profitable, businesses in the region have approached this crisis in a worse position than in previous crises. Data for the first half of 2020 shows that corporate revenues fell 7%, and many sectors, such as energy, manufacturing and services, even saw double-digit declines. It will probably take years to repair the damage to businesses in the region, which amplifies the risk of default in the medium term.

Third, the drop in remittances in the first half of 2020 is estimated at 23% on average. The persistent decline in remittances will weaken private demand and increase poverty and inequality. In fragile and conflict-affected countries like Yemen and Sudan, as well as other remittance-dependent countries like Egypt, Pakistan and Uzbekistan, a total of 1.3 million people could fall over in extreme poverty in 2020.

Finally, these countries already had high unemployment rates before the COVID-19 pandemic and their limited ability to telework combined with a high level of informality only amplified the effects of the lockdown on the labor market. Evidence from past shocks suggests that downturns in the region tend to have lasting effects on the labor market, and that long spells of unemployment can jeopardize the long-term employment prospects of members of the labor force.

Face the difficulties on the horizon

All of these factors seem to indicate that the Middle East and Central Asia region is heading down a difficult path. The good news is that these widespread sequelae can still be prevented if the authorities take decisive action quickly.

It will be essential to promote economic recovery and avoid creating “zombie” sectors that rely on state aid. It will therefore be necessary to support viable businesses, and also to facilitate professional retraining as well as the reallocation of labor and capital from sectors in permanent decline.

Measures such as temporary wage support, interest subsidies and tax deferral will be essential for businesses to have sufficient liquidity. In the event of solvency stress, strong insolvency regimes should be put in place for rapid resolution to minimize damage to financial stability.

Throughout this process, it will be necessary above all to worry about the most vulnerable populations and seek to protect them. Spending on health, education and social protection must be preserved, and innovative digital solutions should be explored to improve targeting and coverage of programs. For countries with weak fiscal leeway and social security systems, the government could consider provisional unconditional cash transfers, until they can better target beneficiaries. Equipping workers in the most affected sectors with skills required in other areas will be crucial to avoid prolonged unemployment. For expatriate workers, countries should promote greater internal mobility, support job retention, and expand both employer-candidate matchmaking and job search programs. Countries should also improve their digital platforms, which will make the labor market more resilient and allow countries to harness the benefits of the digital economy.

COVID-19 will leave an indelible mark on 2020 and the years to come: its human and economic cost is incalculable. However, with effective measures and determined action, countries in the Middle East and Central Asia can avoid losing a decade and emerge from the pandemic with the prospect of a prosperous, inclusive and more resilient future.

EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

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