C H A P T E R 1
G L O B A L E C O N O M I C P R O S P E C T S | J A N U A R Y 2 0 2 1
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Recent developments
The COVID-19 pandemic has dealt a heavy blow to low-
income countries (LICs). In 2020, disruptions to activity
due to social distancing and lockdowns implemented to
mitigate the pandemic’s spread were worsened by sharply
lower external demand, falling industrial commodity
prices—particularly oil—and a collapse in tourism activity.
Although the virus so far appears to have spread more
slowly through LICs than previously expected—likely due
in part to more limited testing capacity understating the
true size of the pandemic and a younger population than
in most other economies—the number of new cases
remained elevated during the second half of last year
(Ethiopia, Mozambique, Uganda; figure B1.2.1.A and
B1.2.1.B). Output among LICs is estimated to have fallen
by 0.9 percent in 2020—the steepest contraction in three
decades (figure B1.2.1.C). As a result, a decade or more of
per capita income gains has been reversed in about 15
percent of LICs (figure B1.2.1.D
)
.
Fragile and conflict-affected LICs have been particularly
hard hit by the pandemic, with activity contracting by an
estimated 3.9 percent. The resultant fall in per capita GDP
is expected to set average living standards back by a decade
or more in 25 percent of fragile and conflict-affected LICs.
Four of the five most severe COVID-19 outbreaks among
LICs, in cases per million, have been in fragile and
conflict-affected LICs (Afghanistan, Central African
Republic, Guinea-Bissau, The Gambia). The adverse
effects of the pandemic have been exacerbated by the
underlying vulnerabilities of these economies. Weak state
capacity and limited fiscal space have constrained the scope
for authorities to respond decisively to the pandemic. In
Sudan, output fell an estimated 8.4 percent in 2020 as the
pandemic’s impact on activity was compounded by civil
unrest, sharp declines in real income from a tripling of
inflation, and falling agricultural production amid a locust
infestation and severe flooding (FAO 2020a). In
Afghanistan, the disruptions to domestic trade and
commerce contributed to a 5.5 percent drop in output
(World Bank 2020j).
Activity also weakened markedly among other LICs, with
growth slowing to an estimated 2.2 percent last year.
Growth in Ethiopia—the largest LIC economy—
decelerated sharply to 6.1 percent in the 2020 fiscal year,
which ended in early July. With the pandemic in Ethiopia
gathering significant pace in the second half of last year,
activity at the start of the 2021 fiscal year has been tepid.
In other countries, the pandemic and lockdown measures
substantially reduced tourism revenues, weighed on
consumption and investment, and disrupted exports
(Guinea, Rwanda).
Current account deficits widened in three-quarters of LICs
last year, as reduced external demand and lower industrial
commodity prices, particularly oil, weighed on export
revenues in several countries (Chad, Democratic Republic
of Congo, South Sudan; figure B1.2.1.E). Remittance
inflows have fallen amid widespread job losses in host
countries, weighing further on current account balances in
several economies (Rwanda, Tajikistan). Despite global
financial conditions easing appreciably in 2020, financing
of current account deficits has remained challenging for
many LICs that have limited access to international
financial markets and are reliant on official development
assistance.
The pandemic led to a sharp increase in government
indebtedness last year, as revenues collapsed along with
economic activity while government spending rose to
address the health crisis and mitigate the pandemic’s
adverse economic impacts (figure B1.2.1.F). Contractions
in activity also contributed to higher debt-to-GDP ratios.
In the average LIC, government debt jumped 7 percentage
points to 69 percent of GDP. In fragile and conflict-
affected LICs, where fiscal positions were already weaker,
government debt rose to 73 percent.
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