As part of its country-by-country analysis of the impacts and consequences of the coronavirus pandemic on our lives and societies, the OECD has produced a study of Covid-19 responses in EU Eastern Partner Economies.
The study looks at how the virus is spreading in the region, what containment measures are being taken, and how healthcare systems and economies are coping.
Armenia, Azerbaijan and Georgia (because of their proximity to Iran) saw the region’s first cases of Covid-19 in late February. Swift containment measures and limited intraregional mobility have so far helped limit the spread of the virus, and the number of recorded cases remains relatively low in the South Caucasus. As the epicenter of the pandemic shifted first to Italy and then to other West European states in early March, the Republic of Moldova and Ukraine started to record more cases and adopted containment measures similar to those of other European countries: closure of educational institutions, limitations on international travel, and restrictions on public gatherings. Strict containment measures imposed in Georgia at the start of the outbreak have already led to promising initial results in flattening the curve of new infections. Currently, Belarus is the only EaP country without comprehensive containment measures in place.
The public health situation could change dramatically, even in a very short period. However, the immediate impact of the crisis on the region has so far been primarily economic. The simultaneous shock on supply and demand has already reduced economic activity in key European, North American and Asian markets more severely than during the Great Recession of 2008-09. The OECD estimates that the decline in the level of output is equivalent to a decline in annual GDP growth of up to 2 percentage points for each month that strict containment measures remain in place. If the shutdown lasted for three months, with no offsetting factors, annual growth could be between 4-6 percentage points lower than otherwise. Of course, the ultimate impact on annual GDP growth will depend not only on the magnitude and duration of national shutdowns, but also on the extent of reduced demand for goods and services in other parts of the economy, and, critically, the speed at which fiscal and monetary policy support takes effect. Nonetheless, it is clear that the crisis will weaken short-term growth prospects substantially. The economic impact on the EaP region is further exacerbated by the fall in oil prices, which directly hits Azerbaijan and Belarus but also affects some of the other EaP countries through the impact on trade and remittances, particularly Armenia and Georgia. The oil-price drop will likely push Russia into recession for the second time in five years.
Containment and social distancing measures, vital for slowing the spread of the pandemic, are also having a severe economic impact, particularly on small and medium enterprises (SMEs), as demand for services other than food retail has plummeted. EaP countries have implemented significant reforms in recent years to support their SMEs and build better institutional environments to enable their success (for more information, see the SME Policy Index 2020: Eastern Partner countries). However, the current crisis will require the adoption of comprehensive support packages that encompass not only direct SME support through credit lines and loan guarantees but also fiscal and social policy measures. Intensive support will also be needed in the medium to long-term, especially to help SMEs recover quickly from the crisis by supporting the digitalization of SMEs, more flexible regulation and expedited access to finance for SMEs. International organizations, including the European Union, are helping the region respond to the crisis. The EU is already reallocating €140 million of funds to support the immediate responses and the use of existing funds of up to €700 million to mitigate the socio-economic consequences of the crisis.
The duration and depth of the current turmoil remain uncertain. Still, many observers expect profound changes to the global economic system, both on the micro-level, with changes in organizational cultures, and on the macrolevel with reconfigurations to the current mode of globalization.
"The EaP countries reported their first Covid-19 cases in late February/early March 2020, shortly after the virus started to spread in the EU. In line with the global trend, the reported numbers have been increasing sharply (Figure 1). However, the real number of cases is thought to be much higher, as testing is still limited," the study shows.
"Following the outbreak of the Covid-19 pandemic, EaP countries quickly adopted measures to work towards its containment. Considering their proximity to Iran, an epidemiological hotspot, Armenia, Azerbaijan and Georgia introduced restrictions on travel and public gatherings and closed schools. However, the spread of Covid-19 within the region prompted most EaP countries to declare stricter quarantine measures, and, in some cases, states of emergency. New restrictions have included the closure of places of business except for those deemed essential (e.g. grocery stores and pharmacies), adoption of self-distancing and self-quarantine, limits on intercity and interregional transport, and penalties for violators. Moreover, international travel has been restricted or banned," it further reveals.
Most EaP governments have already implemented measures to mitigate the negative economic impact of Covid19. While it is difficult to estimate the magnitude of the effect of the crisis on EaP economies and their SMEs, it is clear that this crisis will cause a sharp contraction in domestic output, household spending and international trade. Taking into account the strong containment measures implemented by five of the six EaP countries, together with the disruption in global value chains and the structural characteristics of the EaP economies, this section outlines the anticipated economic fallout from the crisis, with a view to informing related policy responses.
"Based on the assumption of complete or partial shutdowns in selected sectors, the immediate impact on any given economy for the duration of the shutdown is estimated to be between 20 and 30% of GDP depending on the structure of economy. For example, Georgia’s economy, which is mostly driven by the service sector, can be expected to contract by around 30%, while economies driven more by extractive (Azerbaijan) and manufacturing sectors (Ukraine) will be confronted with a smaller direct impact of containment measures. However, developments in external markets will add to the impact, particularly in Azerbaijan – the estimate above does not include the effects of lower oil prices," reads the document.
Domestic demand and investment in Armenia, Georgia, Moldova and Ukraine are significantly supported by personal remittances from abroad, equivalent to more than 10% of GDP. The anticipated economic contraction in the EU, Russia and the USA will most likely result in increased unemployment in these economies, which in turn might lead to reduced inflows of personal remittances to the EaP region. In addition, the Covid-19 crisis has also affected energy markets and has caused a sharp decrease in oil and gas prices. This will have implications in particular for Azerbaijan where the extractives sector generates around 35% of GDP and over 90% of exports.
The prevalence of informal economic activity in the region might exacerbate the socio-economic impact of the crisis and complicate efforts to mitigate it. Armenia, Georgia and Moldova have comparatively large informal sectors. IMF estimates the size of the informal economies in the EaP region to range from around 30% of GDP in Belarus to 50% of GDP in Georgia, while International Labour Organisation estimates suggest that the informal share of total employment exceeds 20% across the region, rising above 50% in some countries. It can be difficult to provide support to households and firms that operate in the informal economy.
Quite apart from informality, some other employment patterns also point to an unusually high number of vulnerable workers in some EaP countries. Around half of those in Azerbaijan and Georgia are own-account workers (self-employed individuals without hired workers). Many of them rely on seasonal work related to tourism, are severely affected by the containment measures, and have only limited access to traditional forms of income support. Low saving rates, particularly in Armenia, Georgia and Moldova, further undermine the ability of households and individuals to absorb the economic shock related to the pandemic (Figure 8). Moreover, the global economic recession will exacerbate the social situation in EaP countries, as migrant workers might be unable to support their families back home. Returning migrants may also carry the risk of transmitting the virus from place to place.
As for the governments' efforts to help the households and firms through the crisis, the study shows that the government announced a GEL 2 billion (approx. USD 600 million or 4% of GDP) package to help the economy weather the economic impact of the pandemic, through tax concessions to the tourism industry, capital expenditures to provide economic stimulus, and expanding access to funding for micro, small, and medium-sized enterprises and private individuals. Companies in the tourism sector (approx. 18 000 companies and 50 000 employees) will benefit from tax concessions for March-June payments until November, and a four-month personal income tax and property tax relief. Interest payments on bank loans for around 2,000 small and medium-sized hotels (with 50 rooms or fewer), will be co-financed by the government for the next six months. Commercial banks will individually restructure loans for businesses and individuals struggling with loan repayment. Infrastructure projects will receive an extra GEL 300 million (USD 107 million) worth in investments by the end of the year. The volume of VAT returns in the private sector will be doubled to GEL 1.2 billion to supply firms with working capital. Hard-hit businesses will have loans restructured. Moreover, a post-crisis plan is under development to help economic recovery with an emphasis on credit guarantee schemes. Following negotiations with the government, commercial banks will accept loan repayments with a postponement of three months. On 1 April, the central bank announced new measures lowering capital and liquidity requirements – namely, the elimination of the capital conservation buffer (2.5% of the risk-weighted assets) and a portion of the pillar 2 buffer (equal to two-thirds of the currency-induced credit risk buffer). This supervisory relief is expected to free GEL 1.6 billion for the mitigation of potential losses. The banking sector benefits from a capital buffer of GEL 4 billion to release in case of necessity. In order to support liquidity, the NBG will provide GEL liquidity to commercial banks and microfinance organizations with swap operations with a maximum limit of USD 400 million. The term of the operation is set at one month, with the right to monthly renewal for the next year. A price restraint mechanism for nine products (rice, pasta, sunflower oil, flour, sugar, wheat, buckwheat, beans, milk powder and its products) by subsidizing corresponding businesses has been introduced.
Across the region, governments are also taking steps to provide working capital support, e.g. through fiscal measures such as, for example, Georgia’s four-month tax holiday program for firms in the tourism sector or a deferral of tax payments currently being prepared by Moldova’s Emergency Situations Commission. Such measures are also being introduced by OECD members like Turkey, Canada and Denmark. They offer the advantage of providing relatively quick support to SMEs through immediate deferrals and assistance that does not depend on applications or business risk assessments in the same way a loan or grant program might. In addition, many governments have introduced measures such as short-time work, which not only help entrepreneurs to alleviate immediate payroll burdens but also help SME employees retain part of their salaries.
On 21 March, Georgia declared a state of emergency for a month. Significant social prevention measures were adopted, including restrictions on the movement of people and the modification of public services. Schools and universities were closed, as well as all shops, except for supermarkets, pharmacies, petrol stations, post offices, and banks. Gatherings of over three people were banned and the government suspended public intercity transport, including busses and railway stations. The government also banned flights and closed borders with highly infected countries, leading to full border closure for foreign visitors, and quarantined those arriving in the country. However, essential economic activities, such as utility supply, food delivery and banking services may still be carried out in accordance with recommendations issued by national authorities. On 31 March, the government announced a nationwide curfew, forbidding individuals from leaving their homes between 21:00 and 06:00.
The full study available here
25 April 2020 13:58
