Attachments
Introduction
As the Coronavirus disease continues to assail the world, the economic outlook – and with it any prospects for improvements in food security – continues to darken. The Financial Times recently ran a piece entitled “Global economy in sharpest reversal since the Great Depression”.
In this update, we explore the ramifications of the global economic downturn across different regions, building on insights provided by WFP’s Regional Bureaux. We recognize that COVID-19 entering Africa,
Asia and the Pacific and the Americas has added an important new dimension to the disease’s economic and food security implications. However, our focus – for now – remains on the exposure of poor and food-insecure countries to economic damage trickling down from the world’s biggest economies. We will examine the second layer of damage, caused by local outbreaks and measures to prevent the virus from spreading, more closely in future updates.
The extent to which the global economic downturn is impacting low-income economies through different channels is becoming increasingly visible. Prices of primary commodities, whose export is vital for large parts of the developing world, have plunged with the price of crude oil falling from more than 60 USD/barrel at the beginning of the year to around 25 USD/barrel today with jaw-dropping implications for export earnings from oil (Figure 1). Tourism contributes significantly to foreign exchange earnings in several vulnerable countries (Figure 3); the UN World Tourism Organization expects international tourist arrivals to decline by 20 - 30 percent in 2020.4 Remittances, responsible for up to 30 percent of GDP in low-income economies, fell considerably during the global financial crisis of 2008 – and are likely to do so again. The flow of foreign direct investments is expected to shrink by 30 - 40 percent in 2020/21.
Trade is typically denominated in USD and exports, thus, indicate growing reserves of foreign exchange. Similarly, tourists bring hard currency into a country and so do remittances. With these sources running dry, a country risks not having enough USD to pay for vital imports. This leaves countries reliant on imports to meet food needs very exposed. Ensuing currency depreciation can further aggravate the situation, putting upward pressure on domestic food prices at a moment when household purchasing power is tumbling on the back of incomes lost to the crisis. ILO estimates a reduction in working hours in the second quarter of 2020 equivalent to 195 million full-time workers.
A country’s vulnerability to any of these transmission channels, however, is not the lone determinant of the fate of its economy. Foreign exchange reserves worth several months of imports allow a country to maintain crucial food imports even in the face of crumbling export earnings. Meanwhile, a high public debt burden (Figure 2) can hamper a country’s capacity to respond to economic shocks – the World Bank estimates the debt stock of developing countries at USD 7.8 trillion. With a significant portion of the public budget devoted to servicing debt, it will be a struggle to find the necessary resources to respond to the impact of COVID-19. In the case of Africa, Brookings and the Overseas Development Institute had already warned about the continent’s growing debt burden constraining government spending before the arrival of the COVID-19 pandemic.