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Development finance and the macro economic impact of Covid-19

New research highlights the need for additional multilateral finance coupled with impactful reform to accelerate post-pandemic recovery.

Our new research looks at the macroeconomic impact of the Covid-19 pandemic in 15 countries across sub-Saharan Africa and South Asia, and uses economic modelling to forecast different scenarios for recovery, outlining important roles for bilateral and multilateral donors.

Using a combination of World Bank and IMF forecasts , observational data and economic modelling, the research identifies drastic drops in gross domestic product since the start of the pandemic with output and spending in most countries likely to remain below pre-Covid forecasts for years to come unless recovery can be accelerated by additional finance and impactful reform.

Through new modelling of potential recovery scenarios we make the case for strong multilateral financing, including an early replenishment of the World Bank International Development Association (IDA) and a new issue of Special Drawing Rights (SDRs) from the IMF, to help reduce ‘scarring’ – or the severe poverty and welfare impacts that would remain long after rates of growth return to normal.

Other recommendations include a modification of IDA criteria to become more counter-cyclical and further debt cancellation.

Importantly, we identify a potential role for bilateral donor countries, such as the UK, who could redeploy their fresh SDRs to fund the replenishment of ‘soft windows’ of international financing institutions. We estimate a potential US$50-100 billion replenishment would be possible in this way, equivalent to several years of the additional lending provided at the peak of the pandemic last year.

Moreover, as well as supporting countries to access the multilateral resources they have helped replenish, bilaterals should begin to adapt their development programming towards supporting country-led reform which will be key in accelerating recovery from the economic impacts of the pandemic.

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