Preventing losses and preparing for recovery

This is a ‘crisis like no other’ as Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF) has been repeatedly saying. The reason this has become such a crisis in human history is for following reasons: 

• More complex, with interlinked shocks to our health and our economies that have brought our way of life to an-almost complete stop. 
• More uncertain, as we are learning only gradually how to treat the novel virus, make containment most effective, and restart our economies; and
• Truly global. Pandemics don’t respect borders, neither do the economic shocks they cause.

The economic outlook is dire globally and even more painful for small and underdeveloped countries like Nepal. Economic activities are expected to decline on a scale we have not seen since Great Depression. IMF has projected that 170 countries will see income per-capita going down. Only months ago, 160 economies were aiming to register positive per-capita income growth.

Exceptional times call for exceptional action!
Governments all over the world have taken unprecedented action to fight the pandemic – to save lives, to protect their societies and economies. Fiscal measures so far have amounted about US$8 trillion and Central Banks have undertaken massive (in some cases, unlimited) liquidity injections.IMF has said that it has US$1 trillion lending capacity – four times more than at the outset of the Global Financial Crisis – at the service of its 189 member countries. Recognizing the characteristics of this crisis – global and fast-moving such that early action is far more valuable and impact-ful- IMF has sought to maximize the capacity to provide financial resources quickly, especially for low-income countries. IMF has strengthened its arsenal and has taken some critical measures in last two months. In this regard, we have strengthened our arsenal and taken exceptional measures in just these two months.These actions include: 

• Doubling the IMF’s emergency, rapid disbursing capacity to meet expected demand of about US$100 billion. 103 counties have approached IMF for emergency financing, and IMF’s Executive Board will have considered about half of these requests by the end of the month.

• Reforming IMF’s Catastrophe Containment and Relief Trust, to help 29 of the poorest and most vulnerable members, of which 23 are in Africa – through rapid debt service relief, and it is working with donors to increase IMF’s debt relief resources by US$1.4 billion. Countries like UK, Japan, Germany, the Netherlands, Singapore, and China have supported IMF to make this immediate relief possible.

• IMF is aiming to triple concessional funding via its Poverty Reduction and Growth Trust for the most vulnerable countries. IMF is seeking US$17 billion in new loan resources and, in this respect, Japan, France, UK, Canada and Australia have committed totaling US$11.7 billion, helping IMF to secure about 70% of the resources needed towards this goal.

• Supporting a suspension of official debt repayments for the poorest countries through end 2020 – a ground-breaking accord among G20 countries. This is worth about US$12 billion to nations in need. IMF also has called for private sector to creditors to participate on comparable terms – which could add a further US$8 billion of relief.

• IMF is establishing a new short-term liquidity line that can help countries strengthen economic stability and confidence.

Preventing a protracted recession
But there is much more to be done and now is the time to look ahead. To quote a great Canadian, Wayne Gretzky: “Skate to where the puck is going, not where it has been.” Here are some of the thoughts from Managing Director: 

• Need to think hard about where this crisis is headed and how we can be ready to help countries in need being mindful of both risks and opportunities. Just as we responded strongly in the initial phase of the crisis to avoid lasting scars for the global economy, we will be relentless in our efforts to avoid a painful, protracted recession.

• Concerns about emerging markets and developing countries. They have experienced the sharpest portfolio flow reversal on record, of about $100 billion. Those dependent on commodities have been further shocked by plummeting export prices. Tourism-dependent countries are experiencing a collapse of revenues, as are those relying on remittances for income support.

• Engage through regular lending instruments, including those of a precautionary nature in case of emerging markets. This may require considerable resources if further market pressures arise. To prevent them from spreading, we stand ready to deploy full lending capacity and to mobilize all layers of the global financial safety net, including whether the use of SDRs could be more helpful.

• Need much more concessional financing for poorest countries. With the peak of the outbreak still ahead, many economies will require significant fiscal outlays to tackle the health crisis and minimize bankruptcies and job losses, while facing mounting external financing needs.

• But more lending may not always be the best solution for every country. The crisis is adding to high debt burdens and many could find themselves on an unsustainable path. 

• Need to contemplate new approaches, working closely with other international institutions, as well as the private sector, to help countries steer through this crisis and emerge more resilient.

• Need to venture even further outside the comfort zone to consider whether exceptional measures might be needed in this exceptional crisis.

Preparing for recovery

• To help lay the foundations for a strong recovery, policy advice will need to adapt to evolving realities. We need to have a better understanding of the specific challenges, risks and trade-offs facing every country as they gradually restart their economies.

• Key questions include how long to maintain the extraordinary stimulus and unconventional policy measures, and how to unwind them; dealing with high unemployment and ‘lower-for-longer’ interest rates; preserving financial stability; and, where needed, facilitating sector-al adjustment and private sector debt workouts.

• Not forget about long-standing challenges that require a collective response, such as reigniting trade as an engine for growth; sharing the benefits of fin-tech and digital transformation which have demonstrated their usefulness during this crisis; and combating climate change—where stimulus to reinforce the recovery could also be guided to advance a green and climate resilient economy.

Finally, in the new post-COVID-19 world, we simply cannot take social cohesion for granted. So, we must support countries’ efforts in calibrating their social policies to reduce inequality, protect vulnerable people, and promote access to opportunities for all. This is a moment that tests our humanity. It must be met with solidarity. There is much uncertainty about the shape of our future. But we can also embrace this crisis as an opportunity—to craft a different and better future together.

Source: Kristalina Georgieva, 2020. 

Nepal on Precipice of Poverty

This article was first published in The Annapurna Express. 

Covid-19 has made the world pause. Nepalis stayed home on the eve of New Year 2077 and started the first morning of the new year with no idea of when they would get back to normal life. New cases of the novel coronavirus continue to appear, adding to the widespread fear. Meanwhile, the government is taking ad hoc measures instead of coming up with a firm strategy to support the poor and sustain the national economy.

The Ministry of Finance, which is supposed to come forward aggressively with plans that can be adjusted each day depending on the scenario, doesn’t seem to have a clue of what’s happening in the economy, let alone be bothered of the impending poverty and privation. Finance Minister Dr. Yubaraj Khatiwada, who seems intent on sidelining private sector and entrepreneurship, doesn’t know what holds the economy together. If he did, the situation today would be much different.

His statements before the World Bank Group Nepal Office representatives exemplified the stupidity, insensitivity, and recklessness of his leadership at this time of crisis. He talked about vague issues that had nothing to do with fighting the broad economic impact of the pandemic.

Likewise, Prime Minister KP Sharma Oli addressed the nation last week. But he too had no message of hope for the panicked public. Rather he spent his time explaining why it’s futile to question the procurement process of health materials from China. Estimates show that globally, around 600 million people will be pushed into poverty and that certainly includes people from Nepal. Those at the bottom of the income and wealth ladder have harder days ahead. But the government is silent on what can be done to help them survive this ‘man-made crisis’.

A recent World Bank update shows South Asia sub-region’s growth falling to between 1.8 and 2.8 percent in 2020, down from 6.3 percent projected just six months ago. Although Nepal’s share in sub-regional GDP is minimal, the country’s economic growth is expected to significant slow down in 2020.

The national economy, including the agriculture sector, has come to a halt. There is no preparation to ensure availability of agriculture inputs as planation time closes in. In the event of the country’s inability to control the crisis in agriculture, the economy will be in a free-fall, driving vast numbers of farmers into absolute poverty. The government doesn’t seem to be paying attention to this critical issue.

There will be severe food insecurity in the country due to supply shock. The World Bank has warned that a rapid spread of the virus could reverse the recent positive trends in poverty and result in high levels of food insecurity and widespread malnutrition among children.

Investment, both domestic and foreign, will fall, leading to lower job creation. A large fiscal deficit will be added to public debt, directly affecting Nepal’s fiscal sustainability. Daily wage earners will be hit the hardest. Remittances will significantly decrease, impacting both forex reserve and the livelihood of those who rely on it. The informal sector, which makes up nearly 70 percent of the national economy according to same estimates, has stopped functioning.

Against this bleak backdrop, the government seems the least concerned and ill prepared to handle the corona fallout. Worryingly, the Ministry of Finance does not seem to have a clue about how to move ahead. It is not having necessary dialogues with development partners, it lacks detailed analysis and insights on what’s happening, and it has failed to undertake a rapid assessment of the economic impact of Covid-19.

Dr. Khatiwada can always argue that even the best of government plans failed in tackling the virus, just as has happened in far more developed countries. But this will be a lame excuse even as the economy teeters on the edge. Let’s hope people won’t have to start dying for the government to come to its senses.

Asia to See Lowest Growth in Sixty Years

Growth in Asia Pacific is expected to stall at zero percent in 2020. This is the worst growth performance in almost 60 years, including during the Global Financial Crisis (4.7 percent) and the Asian Financial Crisis (1.3 percent). That said, Asia still looks to fare better than other regions in terms of activity.

• Thailand and New Zealand = Hit by global tourism slowdown. 
• Australia = Hit by lower commodity prices 
• Pacific Island Countries = Vulnerable due to the limited fiscal space as well as comparatively underdeveloped health infrastructure 

In addition to the impact from domestic containment measures and social distancing two key factors are shaping the outlook for Asia:

• The Global slowdown: The global economy is expected to contract in 2020 by 3 percent—the worst recession since the Great Depression. This is a synchronized contraction, a sudden global shutdown. Asia’s key trading partners are expected to contract sharply, including the United States by 6.0 percent and Europe by 6.6 percent.
• China slowdown: China’s growth is projected to decline from 6.1 percent in 2019 to 1.2 percent 2020. This sharply contrasts with China’s growth performance during the Global Financial Crisis, which was little changed at 9.4 percent in 2009 thanks to the important fiscal stimulus of about 8 percent of GDP. We cannot expect that magnitude of stimulus this time, and China won’t help Asia’s growth as it did in 2009.

Policy priorities

This is a crisis like no other. It requires a comprehensive and coordinated policy response.

1. Support and protect the health sector to contain the virus and introduce measures that slow contagion. If there is not enough space within countries’ budgets, they will need to re-prioritize other spending.
2. Targeted support to hardest-hit households and firms is needed. This is a real economic shock—unlike the Global Financial Crisis—and requires protecting people, jobs, and industries directly, not just through financial institutions.
3. Monetary policy should be used wisely to provide ample liquidity, ease financial stress of industries and small and medium-sized enterprises, and, if necessary, relax macro-prudential regulations temporarily.
4. External pressures need to be contained. Where needed, bilateral and multilateral swap lines and financial support from the multilateral institutions should be sought. In the absence of swap lines, foreign-exchange market interventions and capital controls may be the alternatives.
5. Targeted support, combined with domestic demand stimulus in a recovery, will help to reduce scarring, but it needs to reach people and smaller firms.
6. Additional actions may be needed for emerging-market Asian economies that have limited space for increased spending in their budgets. If the situation deteriorates, many emerging economies may to be forced to adopt a “whatever it takes” approach, despite their budget constraints and non-internationalized currencies. In many cases, they will face policy trade-offs. For example, central bankers are considering buying government bonds in the primary market to support critical financial lifelines to smaller firms and households to avoid mass layoffs and defaults. An alternative to direct monetization could be to use the central bank’s balance sheet more flexibly and aggressively to support bank lending to small and medium-sized enterprises through risk-sharing with the government. In doing so, there can be a role for temporary outflow capital controls to help ensure stability in the face of large capital flows, balance sheet mismatches, and limited scope to use other policy tools.

Source: Chang Yong Rhee, 2020.