COVID-19 a Setback to Intra-Regional Trade, but fiscal policies will play a leading role in mitigating the shock

Due to its openness to international trade and migration, COMESA region should brace for the adverse effects of COVID-19, which are both exogenous and endogenous, according to a report by the COMESA Monetary Institute.

According to the report prepared by the Director of the COMESA Monetary Institute (CMI) Mr. Ibrahim Zeidy, the exogenous effects arise from policy actions directed towards containing the spread of COVID-19 by the rest of the world.

“The slowdown in major economies will see global demand fall,” says the CMI Director. “Disruptions to production and world supply chains will slow down trade. Tighter global financial conditions will mean limited access to finance.”

He further notes that COMESA countries are likely to experience delays in getting investment or development projects off the ground. Some of the exogenous effects expected are declined remittances from African Diaspora; less foreign direct investment and official development assistance; illicit financing flows and domestic financial market tightening.

With regard to the endogenous effects, that is, those occurring as a result of the rapid spread of the virus in many COMESA countries, Mr. Zeidy observes that the very measures that are crucial to slowing the spread of the virus have a direct cost on all the affected economies.

“The fact that most people in many of the affected economies have been restricted through various forms of lockdowns, imply that daily economic activities necessary to sustain livelihoods are affected,” he says. “This mean less paid work, less income, less spending, and fewer jobs.”

Accordingly, the slowdown in economic activities as the result of the two shocks will cause a decrease in domestic demand and  a fall in  tax revenue collection at a time when there is considerable pressure to  increase public expenditure to safeguard human health and support economic activities.

From the foregoing, coupled with the direct and indirect effects of the crisis including supply and demand shocks, commodity slump, fall in tourism arrivals, the global economy may enter a recession at least in the first half of the year 2020, Mr Zeidy observes.

However, fiscal policy will play a leading role in mitigating the shock with countries adjusting their fiscal positions by especially, reallocating resources previously planned for development to tackle the immediate concerns of supporting livelihoods.

Going forward and where feasible, Mr. Zeidy says governments should consider targeted and temporary support for sectors such as tourism and air transport which are some of the worst hit by the effects of the Coronavirus pandemic

 

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