The ongoing lockdown and the extreme uncertainty caused by Covid-19 bring home the deepest level of recession since the Great Depression of the 1930s. The contraction in global output and income on the one hand, and likely persistent scars in the vulnerable economies of South Asia on the other, could trigger a new variety of instability, disharmony and dislocation. The International Monetary Fund has estimated a $9 trillion global loss. And depending upon the duration and intensity of this pandemic, the debilitating consequences provide South Asian countries with no other option than to come to a common platform again.

With the basic premise of no trade-off between life and livelihood, sharp erosion in remittance from abroad, shrinking export base, the compulsion of keeping imports intact, unprecedented revenue loss and huge hike in domestic and international debt, all eight South Asian countries will suffer from a variety of downward matrices. The pre-Covid-19 regional growth rates that were projected to be between 6-7 percent during 2020-21 are likely to be negative, and in some cases, deeply negative. The esoteric debate about whether the recovery will be instant after this fiscal year (V-shaped) or stagger for a few more years (U-shaped) or even witness a long outbreak and a prolonged economic impact (L-shaped) is absurd at this stage. The redeployment of already limited resources to the health sector would severely limit the flexibility of development expenditure allocations.

Foreign exchange

The first major crisis will be that of foreign exchange, with a cascading paralysing impact across sectors and economic activities. As against India’s $485 billion, other SAARC countries Afghanistan ($7.8 billion), Bangladesh ($32.9 billion), Bhutan ($0.98 billion), Maldives ($0.72 billion), Nepal ($8.67 billion), Pakistan ($12.13 billion) and Sri Lanka ($7.5 billion) have relatively very low foreign exchange reserves. The effective stress could be beyond the purview of normal monetary management as remittance from abroad is likely to record the sharpest fall by over 22 percent to $109 billion as estimated by the World Bank.

In 2019, remittances to South Asia varied from Afghanistan's $0.9 billion to Nepal’s $8.1 billion and India’s $83 billion, Nepal’s southern neighbour being the world’s largest recipient. In India's case, this constituted hardly 2.8 percent of its gross domestic product as against Nepal’s 27.3 percent, Pakistan’s 7.9 percent, Sri Lanka’s 7.8 percent and Bangladesh’s 5.8 percent. This deceleration will hit Nepal the hardest as it has been the crucial financing lifeline for many vulnerable households.

Under such a dreadfully contractionary situation, the orthodox option of devaluation to enhance exports and cut down imports and even market-led depreciation in their currencies can hardly be used. The International Monetary Fund states that 'they will need to stabilise their macro economies through new IMF programmes, negotiate a delay in debt payments to bilateral and multilateral lenders, higher taxes and better revenue administration'. Though resorting to international borrowing is an attractive option, most of the South Asian countries are already within a narrow debt trap. For instance, India’s long-term external debt stocks of $411.68 billion is already incomparably higher than Pakistan’s $75.37 billion, Bangladesh ($41.55), Bhutan ($2.5), Nepal ($5.07) and Sri Lanka ($42.9). Most of their external debt stocks to exports ratios are pretty unsustainable with Bhutan’s as high as 313 percent and Pakistan’s 295 percent as against 93 percent for India. More precariously, the debt service to exports ratio is 36 percent for Sri Lanka as against India’s 11 percent.

The internal borrowing situations in some of these countries are dangerously hung between an already prevailing massive debt servicing and a burdensome entry into a more suffocating borrowing trap and insurmountable fiscal crevice. Just two months of lockdown has forced India to amend its once much-touted Fiscal Responsibility and Budget Management Act 2003 which primarily aimed at limiting the fiscal deficit to 3 percent of GDP by March 2021. Aimed at disciplining borrowing by hungry states, this provision has been used as a major criterion for the centre-state devolution of resources by the Finance Commission. This was before the crippling impact of a raging pandemic.

Under the amended Fiscal Responsibility and Budget Management Act, the borrowing limit of each state will be raised from 3 to 5 percent of GDP. However, in this plus 2 percent scenario, except the first 0.5 percent unconditional increase, the other four tranches of 0.25 percent are subjected to difficult conditions including One Nation One Ration Card, urban local body revenues, power distribution and ease of doing business reforms. This is indicative of a desperately intricate scenario ahead.

The three least developed economies of Bhutan, Maldives and Nepal could face an excruciating foreign exchange crunch. The historic pegging of Bhutanese and Nepali currencies with the Indian rupee has injected constant stability, and more crucially, protected both the ngultrum and the Nepali rupee from a wayward domestic economy and market-based depreciation. If it was a floating regime, Nepal would have witnessed a harrowingly unprecedented financial crisis during the dismal decade of the Maoist movement. A protracted trade deficit with a limited export base, dismal show in the tourism sector and necessity to keep the import quantum intact will further make Nepal extraordinarily vulnerable.

A large-scale return of migrants leading to a huge ‘reserve army’ (as Karl Marx called it) of workers and the compulsion of ensuring a minimum level of food and livelihood security could inspire so far invisibly destabilising rent-seekers, like hoarders, profiteers and fly-by-night operators, to blatantly come overground. It is, therefore, essential for Nepal to cool down in its neighbourly relations and be sagacious in diplomatic manoeuvrings, particularly when neighbourhoods are also painfully engaged in flattening the spread curve.

Currency swapping

This is where some of the beneficial instruments of SAARC such as food security, currency swapping and power trading need to be effectively utilised by all the member countries. Experiencing initial yet powerful turbulence and other risks, the Sri Lankan president has sought a special $1.1 billion currency swap facility from India to bring some ease in its already draining foreign exchange reserves. This is in addition to the $400 million it has already sought under the SAARC framework of 2012. Over the last three decades, particularly during the ethnic conflict, the Sri Lankan currency so acutely depreciated that, at one point of time, it was seriously considering a Nepal-Bhutan type pegging with the Indian currency.

The Reserve Bank of India amended the provisions of currency swap during 2019-22 wherein it offers a swap arrangement within the overall corpus of $2 billion. This swap can be made in US dollars, euros or Indian rupees. The framework provides certain concessions for swap drawals in Indian rupees for member signatories to bilateral swap agreements. Nepal and Bhutan have a distinct advantage both in terms of access to and acceptance of swapping. Besides providing an immediate cushion and manoeuvrability, this will further consolidate monetary and financial cooperation between Nepal Rastra Bank, Royal Monetary Authority of Bhutan and Reserve Bank of India.

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