Update Country Report Maldives 27 Mar 2020

Cases of the novel coronavirus have now been recorded in all South Asian countries. Dense living conditions, low hygiene awareness and overburdened healthcare systems make the region vulnerable to the worst effects of an outbreak. Preventive measures to stem the spread of the outbreak are set to exact a heavy economic toll. The Economist Intelligence Unit expects countries to provide fiscal and monetary stimulus, although the scope of such measures will vary. India and Bangladesh, given their stronger economic positions, will be able to provide relatively more; meanwhile, measures in Pakistan and Sri Lanka will be more limited.

On March 26th representatives of the South Asian Association for Regional Co-operation (SAARC) came together on a video conference to exchange experiences of combating the spread of the coronavirus. This came as the region is emerging rapidly as a hotspot for a large-scale outbreak. The number of cases in South Asia has grown swiftly, with Pakistan and India recording the steepest rises. We believe that the number of confirmed cases is being underreported, primarily because of a lack of widespread testing. India, for example, had carried out around 10 tests per million people by March 20th; in comparison, Vietnam had conducted 160 tests per million people by the same date.

South Asia has one of the world's youngest populations, which is advantageous, as younger people are generally less susceptible to the effects of the virus. Hot and humid conditions in many parts of the region would also inhibit the spread of the virus. However, these advantages are largely discounted in the face of other factors. The region has some of the world's most densely populated cities, making social distancing difficult. Low hygiene awareness and unequal access to clean drinking water make it especially vulnerable to the worst effects of an outbreak.

We expect the countries to struggle as the number of cases rises in the coming weeks. Chronic underinvestment in healthcare infrastructure and a low number of doctors and hospital beds in relation to the population mean that health systems will not be able to cope with the further toll, exacerbating the spread of the virus and the death rate.

Reacting swiftly to the outbreak has been tough for the region. Wages are low and a large share of households are heavily dependent on employment for their daily sustenance. As a result, some governments in the region, such as that in Pakistan, were reluctant to implement lockdowns. Nonetheless, given the delicacy of the situation, India and Sri Lanka have announced countrywide shutdowns. Nearly all regions of Pakistan have imposed restrictions on non-essential activities, while Bangladesh has imposed a partial lockdown from March 26th. However, Afghanistan continues to be exposed because of its porous border with Iran.

Heavy economic toll

We expect the coronavirus pandemic to dampen economic growth substantially. Preventive measures taken by governments to curtail the movement of people will lead to a demand-side shock to private consumption-the primary driver of economic growth in many South Asian economies. The closure of factories and businesses will result in a supply-side shock, and the subsequent lay-offs will exacerbate the demand shock.

Similar measures around the world will also constrain demand for exports. Countries like Bhutan, the Maldives and Sri Lanka have already experienced a halt in tourist inflows owing to travel restrictions and a collapse in demand. Lower private consumption and exports will lead to a loss of regular business revenue, making firms unable to pay dues on their loans and forcing them to defer investment plans.

Central banks and governments have responded by providing stimulus in the face of the economic costs of the pandemic. However, we believe the measures will not come close to offsetting the loss of economic activity. The Indian, Pakistani, Bangladeshi and Sri Lankan central banks have cut their policy rates and announced other measures to ensure liquidity in the financial sector, while the Indian, Pakistani and Bangladeshi governments have announced fiscal stimulus plans, primarily to support low-income households.

Stimulus measures unable to support growth

As the crisis worsens, we expect further fiscal and monetary stimulus to be provided by nearly all South Asian countries. Fiscal stimulus will continue to focus primarily on tax relief and support for low-income households through direct or indirect cash transfers, while monetary stimulus will focus on deferring loan payments and ensuring adequate liquidity in the financial market.

However, the extent to which different countries are able to stimulate their economy will vary. India and Bangladesh have yet to provide large-scale packages, although we expect them to ramp up stimulus aggressively, given sufficient monetary policy space and manageable public debt and fiscal deficit levels. While the relaxation of IMF fiscal targets for Pakistan and Sri Lanka will provide space for stimulus, it will still be largely limited by high borrowing rates and fiscal deficit levels.

Monetary policy stimulus in these countries will also be constrained, as the authorities try to limit the depreciation of their currencies and strain on the external account. Meanwhile, weak institutional capacity in Afghanistan and in-fighting within the government will leave it unable to respond aptly to the crisis. In the light of this, we will be revising down our GDP growth forecasts for various countries.