IMF sees pandemic shocks leaving long-lasting scars on economic recovery

BY CHISOM NWATU

The International Monetary Fund (IMF) said some economies are still recovering from the unexpected shock induced by the pandemic, leaving long-lasting scars that have reduced the rate of economic growth in these countries.

The fund, in a recent post, made the assertion in consonance with its various positions in the April World Economic Outlook, that the pandemic-incurred losses for both economic output and employment will be significant in future years.

The coronavirus pandemic that brought the world to a standstill in 2020 has had an adverse effect on the economic prospects of some emerging markets and advanced economies compared with its pre-crisis trends to date.

Thus, the fund noted that emerging market economies like South Africa, Brazil, and Indonesia are likely to suffer greater losses because they had relatively less access to vaccines and their pandemic support packages were smaller. The war outbreak in Ukraine is also adding to the challenges of many economies, the fund stated.

Among the major causes of the scarring from the pandemic, the IMF highlighted, include that the prospective weak labour market and the severe disruptions to schooling over the past two years across both advanced and emerging economies hampered recoveries in emerging market economies. And as noted in findings contained in a recent analytical work, the G20’s emerging market economies will see greater losses from the pandemic than their advanced counterparts.

However, the report stated that advanced economies have experienced strong labour market recoveries due to massive policy support and widespread vaccination while the scarring continues to run deeper in emerging economies. Although, initially, they were worried that the pandemic would create a large-scale mismatch between workers’ skills and employers’ labour demand due to the persistent shifts in activities across sectors.

Recessions often have lasting effects on workers who lose jobs during the downturn as they may find it difficult to get a new job during the recovery and may lose some skills due to prolonged unemployment, the IMF noted, adding that such a loss induces harm not only to the affected workers but also reduces the overall economic growth and performance of the country.

Nonetheless, workers in many G20 emerging market economies face a very different ordeal, with employment rates remaining below pre-pandemic projections due to weaker economic recoveries.

There is also a marked impact on the extent of informal work, which fell sharply at the peak of the crisis when contact-core sectors that tend to acquire the higher shares of informal employment were hit hard by social distancing efforts which are widespread in many of these economies. Thus, informal employment rebounded much more than formal employment in several G20 emerging market economies since then, including in Brazil, Indonesia, and South Africa.

Furthermore, with the share of informal work relative to total employment surpassing pre-pandemic levels for some economies by late 2021, the share of informal employment could rise even further as the contact-intensive sector continues to recover. Although informal workers often earn lower wages and enjoy less access to social safety nets, the increase in informality, if persistent, could weigh on income for affected workers.

IMF also took into account the un-comparable school shut down during the pandemic, which hurt many students learning across many G20 economies. They went further to say that, according to their research, today’s students will account for close to 40 per cent of the combined working-age populations across G20 economies for decades.

As presented by the IMF research, “In addition to the challenges in the labour market from disruptions of schools, other areas scarred include investment and productivity due to increase in corporate debt and vulnerabilities as a result of the pandemic. Such a long-lasting effect on the labour force will significantly affect the economies.

“While much is yet to be uncovered, their simulations show that, once all such students are in the labour market, gross domestic product for advanced G20 economies could be as much as 3 percent lower, in the long run, relative to the baseline scenario. Whereby poorer households suffer the worst learning losses, their prospects could be particularly diminished, further escalating income inequality,” the fund asserted.

Despite all these challenges highlighted by the fund, it went further to say policymakers can minimise the pandemic scars if they act decisively.

“In the educational sector, countries must quickly assess setbacks to learning and implement the appropriate measures to assist students. Also Pandemic-era support measures for firms and workers that helped limit pandemic scaring; like, credit guarantees and job retention policies will scale back as recoveries strengthen.

“By so doing, it will help avoid restriction of reallocation of workers and resources to their most productive use as the pandemic relieves and help foster productivity growth. Instead, there should be policy adjustments to help people adapt to the labour markets, through well-targeted job-search programmes and additional support for training to acquire and build new skills. However it is important to ensure a well-functioning mechanism for corporate insolvency and out-of-court restoring to limit elevated pockets of corporate distress turning into significant business failures or investment slumps,” it said.

The IMF stressed that while the challenges are robust, the policymakers around these G20 economies ought to act promptly and appropriately to repair the damage from the crisis and prevent decades of diminished economic output derived from the loss of human capital and set the platform for strong and vibrant inclusive recoveries in the world’s largest economies irrespective of the pandemic.