Home Business Tough times require a good economy: the economic impact of COVID-19 in the Western Balkans

Tough times require a good economy: the economic impact of COVID-19 in the Western Balkans

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Like other parts of the world, the Western Balkans are suffering a major blow as the novel coronavirus spreads. Governments are sending people home and only a few businesses are allowed to operate. What began as a health shock necessitated a conscious – and necessary – temporary freeze of activities to slow the spread of infection, leading to a decline in both demand and supply of goods and services . As the pandemic continues to spread across the region, Western Balkan countries potentially face the worst economic recession in decades.

The Western Balkans region is expected to enter a recession in 2020, the extent of which depends on the duration of the COVID-19 outbreak in Europe. In the event that the pandemic and the required confinement recede by the end of June for the region, the latest Regular economic report forecasts that growth in the Western Balkans will fall between 3 and 5.6 percent in 2020. A particularly severe recession will affect Montenegro, Albania and Kosovo due to their dependence on tourism: their economies are expected to contract by around 5 percent in the reference scenario and by 2020. up to 11 percent in the pessimistic scenario. Disruptions to global value chains and falling demand are further depressing export-oriented manufacturing industries, which are largest in North Macedonia, Serbia and Bosnia and Herzegovina. And liquidity constraints and acute uncertainty will stifle investment everywhere. Although the economic impact of the current pandemic is uncertain, there is no doubt that it is wreaking havoc on the region, taxing health systems, paralyzing economic activity and compromising people’s well-being. .

COVID-19 could cause a recession worse in the Western Balkans than the global financial crisis

And it could get worse. A prolonged pandemic would make the ongoing economic crisis increasingly difficult to manage. Beyond increased human and social costs, a longer pandemic would amplify the global fallout from reduced trade, capital outflows and falling commodity prices. It would also intensify investors’ risk aversion and thus borrowing costs, thereby increasing debt servicing costs in the Western Balkans region, characterized by high external debt-to-GDP ratios. Future waves of COVID-19 outbreaks, requiring further lockdowns, would further amplify economic uncertainty, as well as economic and social costs.

Economic policy has a critical role to play in mitigating the impact of the crisis on livelihoods. Rapid and bold mitigation measures can limit the social and economic impact. The governments of the six countries announced measures to support households and businesses during the emergency, ranging from 1% to 6.7% of GDP. Countries like Serbia, which entered the crisis with larger fiscal and external reserves, have more room to finance larger support programs.

Table 1. All six countries announced support for households and businesses during the emergency

Additional spending by Western Balkan countries, in billions of euros

Total Percentage of GDP
Albania 0.4 2.4
Bosnia Herzegovina 0.4 2.3
Kosovo 0.2 2.8
Montenegro 0.05 1.0
North Macedonia 0.2 2.0
Serbia 3.2 6.7

Source: Ministries of Finance, World Bank staff calculations.

Note: Estimates include budget support in 2020 but not guarantees, announced until April 22.

The announced measures aim to preserve incomes and productive capacities during the first phase of this crisis, while containment restrictions aimed at slowing the COVID-19 pandemic are still in force. For example, Western Balkan countries have introduced access to credit guarantees and subsidized credits for businessesreductions or deferrals of taxes and loan payments, and wage subsidies to reduce layoffs. And all countries have temporarily increase in social assistance for the poor.

These short-term measures are necessary and aligned with the policy responses of EU countries. However, in the Western Balkans, more and more people rely on self-employment, part-time work and income from informal activities. These groups are vulnerable to the crisis but difficult to track using these conventional measures. Therefore, country-specific policy design and additional support, tailored to the local context, are needed to support all vulnerable groups in the region. Some Western Balkan countries have, for example, announced an expansion of the coverage of existing social transfer programs to support independent families and more vulnerable people.

And given the uncertain duration of this crisis, policymakers around the world face the same dilemma: using all available fiscal space to mitigate the immediate impact may backfire if the crisis persists and corporate liquidity become solvency constraints. Policy responses must therefore be calibrated to mitigate immediate effects, adapt to new realities that may emerge, and allow space to prepare the economy for recovery.

Fast, bold, and carefully designed policy measures are important, but they must take into account national conditions and uncertainty about how long the crisis will last.

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