Egypt’s economic growth is expected to decline by between 2% and 2.3% in 2020, according to Mahmoud Al Khafif, Senior Economic Affairs Officer with the United Nations Conference on Trade and Development (UNCTAD).
Al Khafif’s remarks came during a virtual conference, on Tuesday, to launch UNCTAD’s annual trade report, entitled Trade and Development Report 2020..
He added that the world has seen an unprecedented economic recession during 2020 due to the novel coronavirus (COVID-19) pandemic that has been unparalleled since the Great Recession of the 1930s.
As a result, the world has witnessed a severe and unprecedented crisis, the true dimensions of which have not been fully demonstrated
Revealing the pandemic’s impacts on global economies, Al Khafif revealed that UNCTAD expects global economies to decline by 4% over the year, equivalent to $6trn. He revealed that the value of the $6tr is very huge equivalent to the sizes of 3 large economies of Brazil, India, and Mexico, or 20 times the size of the economy in Egypt
“Global trade is expected to shrink 20% in 2020, just as foreign direct investment (FDI) will decline by about 40% in 2020,” he said, “There has also been a decrease in the remittances of overseas workers, and subsequently a severe decline will occur in tourism and oil sectors due to the weak global demand.”
He mentioned that the impact on global employment is stark, stating that the International Labor Organization (ILO) estimates that the crisis is currently threatening 500 million jobs worldwide. There is a great possibility that more than one hundred million jobs will disappear by the end of this year.
Al Khafif said that there is also a widening gap between income and wealth distribution, and hence inequality occurs.
Al Khafif also said that the key strategy to confronting the effects of the coronavirus will take place by confronting the problems that were present in the pre-pandemic period. These include inequality, debt aggravation, weak investment, slowing growth, stagnant wage increases and insufficient jobs in the formal sector.
“The global economy has not yet recovered from the global financial crisis of 2008/2009, because the economic policies that put in place after this period led to an increase in economic fragility,” Al Khafif said, “It also led to an imposed globalisation and concentration of wealth, which caused severe inequality both between and within countries.”
Public-debt-to-GDP ratios will increase substantially in 2020 and, if the past is any guide, they will not return to pre-COVID-19 values quickly. What matters, according to the report, is how that return happens.
“A proper fiscal consolidation requires, first and foremost, a strong economic recovery; and governments must take the lead,” UNCTAD Secretary-General Mukhisa Kituyi said.
This principle did not guide responses after the global financial crisis (GFC), when false parallels between government and household budgets led many economies to opt for austerity.
The idea of expansionary austerity was, the report shows, a failure, leaving a fragile fiscal situation on the eve of the COVID-19 shock.
But given the constraints on spending in many developing countries, significant international support will be needed to ensure they have the required fiscal space.
The report noted that public debt-to-GDP ratios will increase substantially in 2020 and, if the past is any guide, they will not return to pre-COVID-19 values quickly.
“A proper fiscal consolidation requires, first and foremost, a strong economic recovery, and governments must take the lead,” said UNCTAD Secretary-General Mukhisa Kituyi.
The coronavirus pandemic has upended public balance sheets, at a time when the global economy was already running into a wall of debt. According to the Institute of International Finance, in the first quarter (Q1) of 2020, global debt stocks reached record levels of $258trn.
In response to the COVID-19 crisis, the global debt-to-GDP ratio jumped by more than 10 percentage points, to 331% of GDP in the first few months of the pandemic alone.
In developed economies, fast rising non-financial corporate debt of deterioriating quality was the problem. The total indebtedness of non-financial corporates had risen to $75trn at the end of 2019, twice its level in 2008.
According to the report, of the global stock of outstanding non-financial corporate bonds, which stood at record levels of $13.5tnr at the end of 2019, only 30% were rated A or higher.
Corporate defaults therefore reached new heights in the first half of 2020, in particular in the US and the euro area, reflecting both falling earnings due to the COVID-19 shock and their long-term addiction to debt-financing.
The report argues that for the foreseeable future, sustained fiscal expansions can be managed in developed economies – who can borrow at close to zero interest or less –, and in some larger developing economies, without inflationary impacts and in a self-financing manner, if oriented to productive investment in new greening technologies, and leveraging technological progress for social inclusion and the provision of universal public services.
“What is required now is not a submissive retreat into austerity, but a strong collective voice to support sustained and coordinated state-led fiscal expansion around the globe,” said Richard Kozul-Wright, director of UNCTAD’s division on globalization and development strategies.
Smaller and open developing economies, at all levels of income, will need financial assistance from the international community to preserve and expand domestic fiscal space.
This is because they remain dependent on hard currency incomes and have to negotiate the adverse impacts of global economic volatility on their balance-of-payments constraints, their management of exchange rate fluctuation and of international reserves as well as continued access to international financial markets, where relevant.
Al Khafif saud that at present, the initiative by the G20 and the Paris Club to suspend bilateral debt service repayments for a select number of vulnerable developing countries from May to December 2020 is the main deal on the table.
“But the numbers don’t match the scale of the problem: The initative has been taken up by just over half of eligible countries so far, promising to deliver around $14 bn of temporary debt repayment relief for 2020,” he contiuned.
This compares to developing countries facing substantial redemption schedules for their public external debt in 2020-21, amounting to between $2 tr and $2.3 tr for high-income developing countries and to between $600 bn and $1 tr for middle- and low-income developing countries, according to UNCTAD calculations.
In the meantime, billionaire stockholders that own the vast bulk of corporate stocks profiting from the COVID-19 shock rather than faltering under it, have seen their personal wealth grow by over $500 bn in the US alone in the first months of the pandemic.
Al Khafif said that much more ambitious multilateral measures will be required if a global crisis is to be transformed into a global recovery including, expanding the use of Special Drawing Rights (SDRs) to support national development strategies in developing countries through a truly internationally governed reserve system. At the very least, developing countries’ fiscal spaces should be backed by the equivalent of $1 tr of SDRs to meet current liquidity constraints.
In addition to Financial support for boosting the health emergency response to COVID-19 in developing countries through a Marshall Plan for Health Recovery funded through increased official development assistance (ODA) commitments, international tax reform and enhanced multilateral financing mechanisms, on a scale to build resilience and boost recovery.
“Having an international Public Credit Rating Agency to provide objective expert-based ratings of the creditworthiness of sovereigns and companies, including developing countries, and to promote global public goods. This would, moreover, help to promote competition in a highly concentrated private market,” he said.
As well as having a Global Debt Authority to stop a repeat liquidity crises from turning into serial sovereign defaults. Such an authority would build a repository of institutional memory on sovereign debt restructurings. It would also oversee the establishment of a global publicly accessible registry of loan and debt data pertaining to sovereign debt restructurings. In addition, it would develop a blueprint for a comprehensive and transparent international legal and institutional framework to govern automatic temporary standstills on sovereign debt repayments in times of crises and to manage sovereign debt workouts in a fair, efficient and transparent manner.