Shaping the Macroeconomy of Low- and Middle-income Countries in Response to Covid-19

Abstract

There is heterogeneity in the magnitude of the pandemic’s shortterm impact across the five low- and middle-income countries (L&MICs) that are the focus of this synthesis paper: Bangladesh, Kenya, Peru, Sri Lanka and Tanzania. Based on pre-Covid-19 forecasts, Peru was supposed to grow by 3.6% but the pandemic led to an actual contraction of the Peruvian economy by 11% – suggesting 15 percentage points loss of growth due to the pandemic. Similarly, Sri Lanka was forecast to grow by 1.5% but the pandemic led to a -3.6% economic contraction in 2020 – the worst in the country’s 73 years of independence. Meanwhile, Tanzania grew by 4.8% in 2020, which is only about 1 percentage point lower than pre-Covid-19 forecasts. Structural characteristics, initial macroeconomic conditions, and the size and quality of policy responses largely shaped the absolute and distributional impact of Covid-19 in the five L&MICs. Impacts from sharp declines in tourism activities in 2020 were offset partly by increased global demand from their major exports of agricultural products (e.g., Kenya, Peru) and gold (e.g., Tanzania). Bangladesh benefitted from a quick recovery of major trading partners’ demand for garments (comprising 90% of Bangladeshi export).