From the loss of education to the impact on businesses, jobs and the flow of finance for development, the economic scars of the pandemic will take time to heal. In the light of COVID-19, development finance backing from the European Union is more important than ever.
The world was not doing enough for sustainable development, even before the pandemic. The existing gap in financing for the achievement of the Sustainable Development Goals has been estimated at around $2.5 trillion. Growth in developing and emerging economies was, however, steadily reducing the number of people in extreme poverty. The recession caused by COVID-19 has reversed that process, already pushing some 120 million people back into extreme poverty.
Judged by the number of positive COVID tests, many developing countries, particularly in Africa, seem to have weathered the pandemic quite well. But we shouldn’t be complacent. Comparing mortality rates since the start of 2020 with previous years suggests 130 000 excess deaths in South Africa alone. In Egypt, a country where infection rates have appeared comparatively low, we see 75 000 more deaths than usual. Global action to bring the spread of this disease to an end everywhere is a moral imperative.
Even where infection rates have been less high, we must remember that not all countries have the same capacity to respond, to cushion the social and economic impacts. The pandemic has exposed investment needs in public health systems and digital infrastructure, as well as vulnerabilities due to a lack of fiscal space and low economic diversification. Vulnerable groups such as those in precarious or informal employment, economic migrants and women are most exposed to the economic fallout, exacerbating inequalities.
Worse than the immediate economic consequences of the pandemic might be what economists call “scarring”: the damage that could weaken development prospects for years or decades to come.
1.5 billion children out of school
United Nations Secretary-General António Guterres has called the impact of COVID-19 on children’s education a “generational catastrophe”. At the initial peak of the pandemic in 2020, some 1.5 billion children were out of school due to school closures. The average child lost around half of their normal annual contact time with teachers. UNESCO estimates that the number of children not reaching an age-appropriate level of reading proficiency could rise by nearly 100 million to 581 million.
The impact of this learning loss will last decades. Not only might it take years for children to catch up with what they have lost, but lost learning may have long-term implications for earnings potential and economic development. Inequalities are likely to be exacerbated. One factor is that poorer children are less likely to have access to the internet and less likely to be able to benefit from online classes, if these are provided. Another is that the rise in poverty triggered by the pandemic is likely to cause more children of very low-income families to drop out of school. Girls are often more likely to be withdrawn from school, so the negative impact on the education of girls may be even greater than that for boys. An end to this disruption of education cannot come soon enough.
Businesses in trouble
The great majority of jobs in developing countries are in the private sector, from informal market stalls and small farms to large corporations. It is chiefly in the private sector that more jobs—and better jobs—must be created to help eradicate poverty. Businesses need to invest, to expand and to raise productivity, but the pandemic makes that harder. The private sector could potentially take years to recover.
Hopes for a rapid rebound of business activity should be tempered by a look at what the pandemic is doing to the financial situation of many firms, particularly smaller firms with more fragile access to finance. Working together with the World Bank and the European Bank for Reconstruction and Development, the European Investment Bank conducted Enterprise Surveys in 2020 of firms in countries across Europe’s Southern and Eastern neighbourhoods and in the Western Balkans. The results reveal some of the strains that weigh on businesses.
First, it is important to note that the situation for many firms was difficult to begin with. In some countries, as few as a fifth of firms were actually carrying out investment each year. That is partly because of credit-constraints. More than half of firms in the Eastern and Southern Neighbourhood, and 38% in the Western Balkans, were credit constrained. Most were discouraged from even seeking the loans they need.
A special survey module on the impact of the pandemic indicates that most firms in these regions have been forced to close temporarily and about three-quarters of them face reduced liquidity or cash-flow availability. 19% said they are already late on loan repayments. Small and medium-sized enterprises (SMEs) appear to be paying the price for limited use of digital technologies. Compared to large firms, only half as many were able to implement remote working and even fewer managed to shift some business online. Some firms will not survive the pandemic, and many of those that do will have to rebuild their finances before they can return to the long-term investment needed to create decent jobs.
In other regions, the situation may be even worse. A COVID-19 survey module in seven African countries found around 90% of firms have seen a decrease in sales and cash flow availability. 24% are in loan arrears. In a region where 38% of firms say access to finance is a major constraint, only 17% of firms used bank loans to tackle cash flow shortages.
Again, low penetration of digital technologies has increased vulnerability, with only 18% of firms able to increase online activity and just 17% able to shift to remote work. A mere 7% received or expected government assistance, which helps to explain why 9% had already filed for insolvency or bankruptcy.
Financial flows at risk
Businesses in financial trouble could spell bad news for banks. Although they have so far proved resilient, banks often suffer in the aftermath of economic crises, as bad debts build up on their books, even as the rest of the economy starts to pick up. There is a strong risk that rising numbers of non-performing loans could increasingly constrain the ability of banks to lend to healthy businesses. Preliminary results from a survey of banks in Africa, carried out by the EIB Economics Department in early 2021, reveal what these banks see as the main ways the pandemic is affecting them so far. Those effects are declining asset quality (e.g. more bad loans) as well as reduced demand for loans, mirroring what we see from surveying businesses.
In the end, the severity of the economic impact of the pandemic will depend a lot on whether governments are able to implement policy support that cushions the shock and supports recovery, keeping businesses afloat and people in employment. As well as aid to businesses, continued spending on public services, welfare systems and infrastructure is vital to support the recovery and prevent the negative consequences of the pandemic multiplying even further. This requires finance. On top of an annual $2.5 trillion gap to achieve the Sustainable Development Goals, the OECD estimates the gap in COVID-19 recovery spending for developing countries to be in the order of $1 trillion per year.
Yet most emerging and developing countries have little capacity to implement the kind of emergency economic measures deployed by developed economies. Instead, there are rising concerns for sovereign debt sustainability, especially for countries that already had high levels of debt before the pandemic. Currently, 36 of 70 low-income countries assessed are at high risk of debt distress or are already experiencing difficulties in servicing debt. The prospect of higher inflation and rising interest rates in the United States could potentially undermine risk appetite and place further pressure on access to external finance for emerging and developing economies. Private external finance for developing countries already collapsed by an estimated $700 billion in 2020, with remittances down an estimated 20%, foreign direct investment down 35% and net portfolio investment inflows (money invested in financial assets such as government bonds) down 80%.
Stopping the spread
The first priority, of course, is to stop the spread of COVID-19 and to end the global medical emergency. This requires global cooperation and solidarity. The EIB came together with the European Commission to finance the COVAX Advance Market Commitment to help COVAX secure and accelerate the deployment of one billion doses of vaccines for people in 92 low- and middle-income countries. Other elements of the EIB’s pandemic response include support for urgent medical equipment supplies and COVID-19 treatment facilities and increased local African manufacturing capacity of pharmaceutical ingredients.
Stopping the spread of COVID-19 also means stepping up our support for microenterprises and small businesses to help them weather the effects of the pandemic, limiting the degree to which a health crisis also triggers an economic one. In 2020, we increased our lending in support of microenterprises and SMEs outside the EU by 83% to €4.2 billion. At the same time, it is important that the strain placed on government finances by the pandemic does not lead to a decline in infrastructure investment. Our continued support for investment in social and economic infrastructure helps protect against this knock-on effect of the pandemic.
Green, inclusive, resilient
When this pandemic is over, can we return to business as usual? The truth is that COVID-19 has only exacerbated the already slow pace of progress towards the elimination of poverty and the achievement of the Sustainable Development Goals around the world – goals that we already looked likely to miss. When we examine the enormous challenges facing the world in the next decades, the kind of development finance provided by the EIB is clearly more important than ever.
Emerging and developing economies need to return to growth to speed the elimination of poverty and the elevation of living standards. But for all our sakes, that growth needs to be green. We must ensure that these countries have access to the finance and technical assistance they need to make new green technologies viable and attractive as the basis of a new sustainable development model.
This green growth must also be inclusive, expanding access to basic goods such as clean energy, water and mobility, as well as education and healthcare, to ensure equal opportunities. Ensuring that businesses and micro-entrepreneurs have access to the finance they need is essential to address huge needs for decent jobs. Development assistance must promote high standards on issues such as gender equality, human rights and labour rights, as well as the transparency needed to tackle corruption.
It must also be resilient. This a lesson we can draw from the pandemic. The next decades will see rising risks from climate change and extreme weather events, as well as ongoing risks from conflict and the possibility of future pandemics. Achieving resilience in energy, food, education, health and business systems requires urgent investment, not least in making sure that infrastructure is resilient. It requires investment to expand access to quality healthcare and digital services. It requires economic diversification and the mitigation of vulnerabilities arising from high debt and fragile financial systems.
- Tessa Bending, Economist, EIB
- Colin Bermingham, Economist, EIB
- Emily Sinnott , Economist, EIB
Compliments of the European Investment Bank – a member of the EACCNY.