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.