Vaccines and economic prospects

With the vaccine arriving in Sri Lanka the next hope is that fast immunisation will result in stronger economic growth, particularly in exports and other areas of the economy that have faltered due to the pandemic. However, policy makers will need to, among other things, look at funding for large scale public inoculation, coordinate to assist vulnerable communities and find new growth avenues to combat fresh virus variants.  

Although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus pose concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 5.5% in 2021 and 4.2% in 2022, according to the latest World Economic Outlook report released by the International Monetary Fund (IMF).

The 2021 forecast is revised up 0.3% relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.

The projected growth recovery this year follows a severe collapse in 2020 that has had acute adverse impacts on women, youth, the poor, the informally employed, and those who work in contact-intensive sectors. The global growth contraction for 2020 is estimated at -3.5%, 0.9% higher than projected in the previous forecast (reflecting stronger-than-expected momentum in the second half of 2020).

The strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis. 

Policy actions should ensure effective support until the recovery is firmly underway, with an emphasis on advancing key imperatives of raising potential output, ensuring participatory growth that benefits all, and accelerating the transition to lower carbon dependence. This would require policymakers to focus on a green investment push coupled with initially moderate but steadily rising carbon prices would yield needed emissions reductions while supporting the recovery from the pandemic recession.

Strong multilateral cooperation is required to bring the pandemic under control everywhere. Such efforts include bolstering funding for the COVAX facility to accelerate access to vaccines for all countries, ensuring universal distribution of vaccines, and facilitating access to therapeutics at affordable prices for all. This issue has already caused strained diplomatic relations, with Brazil openly calling on richer countries to stop hogging vaccine supplies as the country continues to be battered by the new variant. 

Many countries, particularly low-income developing economies, entered the crisis with high debt that is set to rise further during the pandemic. The global community will need to continue working closely to ensure adequate access to international liquidity for these countries. Where sovereign debt is unsustainable, eligible countries should work with creditors to restructure their debt under the Common Framework agreed by the G20, but this may not work for some countries like Sri Lanka who owe international financial markets and not necessarily other countries.   

Countries already hit by ratings downgrades and low reserves will struggle to find a way forward and will need to think beyond vaccine deployment to fix structural issues within their economies to achieve sustainable growth.