Covid-19 comes back to push world economy to the brink

world economy faces covid-19 trouble
The fiscal packages provided by the governments in the wake of Covid-19 pandemic could push the world economy into a fresh financial crisis

When everyone thought vaccination will bring the world economy back to normalcy, Covid-19 struck again. Many parts of the world have come under the grip of the third or fourth waves of the pandemic. On December 10, there were 6,18,016 new cases and 7,923 deaths worldwide. While the world is busy fighting the deadly Delta variant, a super-spreader variant, Omicron, has also emerged.

The pandemic has had a telling impact on the global economy. The IMF’s world economic outlook says the momentum of global economic recovery has weakened considerably. The multilateral lender has lowered its 2021 growth forecast for the world economy from 6% to 5.9%. According to some estimates, global debt rose 14% to $226 trillion in 2020. Of this, public debt accounts for $88 trillion, which is almost 100% of the world GDP. The rising debt will have a bearing on the post-Covid recovery of national economies.

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Fresh trouble for world economy

Advanced economies increased public spending to tide over the economic crisis triggered by Covid-19 and generate jobs. Many of these economies will face a problem when governments withdraw the fiscal packages announced last year. There is a clear shift in fiscal policy towards addressing climate change and reducing inequalities. Huge fiscal packages by the United States, European Union and Japan could add more than $5 trillion to the world economy by 2026.

public debt

public debt

It is an entirely different story when it comes to emerging markets and developing countries that still need to vaccinate a large number of people. While the governments are spending a lot of money to tide over the crisis, the funds are either inadequate or go to unproductive heads.

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They need to address the impact of the pandemic for a long period as it has been making it difficult for them to implement their development agenda. The developing world will need to invest heavily in free rations for the vulnerable population and healthcare. The economic crisis has pushed at least 6.5 crore people into poverty.

The fiscal packages provided by governments hold the potential to push the world into a fresh financial crisis. Policymakers will find it difficult to withdraw the support even as fiscal and monetary packages are leading to medium-term financial stability risks. The packages have resulted in high inflation as well as asset bubbles in housing and stock markets.

Emerging economies and developing nations need to ensure that enough funds are earmarked for efforts in economic development without losing focus on programmes to curb the pandemic. Also, their international commitments will require them to make their economies greener and more inclusive. This means higher spending in education, healthcare and social security.

Developing nations need more support from the international community to overcome their economic vulnerabilities. The developed world should chip in with more funds and technologies to help poorer nations achieve their net-zero commitments and anti-poverty efforts.