Policy Action for a Healthy Global Economy
IMF Blog, March 16, 2020
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- Authors: Kristalina Georgieva
- Published: March 16, 2020
Overview and key message
- Quarantining and social distancing are the right prescription for public health, while the opposite—constant contact and close coordination—is needed to secure the global economy.
- Increased coordinated action is key to boosting confidence and providing stability to the global economy as COVID-19 spreads.
- The IMF published a set of policy recommendations to guide countries in the difficult days ahead.
Three action areas for the global economy
- Fiscal
- Additional fiscal stimulus will be necessary to prevent long-lasting economic damage.
- Fiscal measures already announced prioritize health spending and those in need, including increased paid sick leave and targeted tax relief.
- The case for a coordinated and synchronized global fiscal stimulus is becoming stronger by the hour.
- Example from the Global Financial Crisis (GFC): fiscal stimulus by the G20 amounted to about 2 percent of GDP, or over $900 billion in today’s money, in 2009 alone.
- Monetary policy
- In advanced economies, central banks should support demand and boost confidence by easing financial conditions and ensuring the flow of credit to the real economy.
- The U.S. Federal Reserve announced further interest rate cuts, asset purchases, forward guidance and a drop in reserve requirements.
- Major central banks took decisive coordinated action to ease swap lines and thus lessen global financial market stresses.
- Going forward, there may be a need for swap lines to emerging market economies.
- Investors have removed nearly $42 billion from emerging markets since the beginning of the crisis—the largest outflow they have ever recorded.
- Central banks in emerging-market and developing economies will need to balance addressing capital flow reversals and commodity shocks; foreign exchange interventions and capital flow management measures can complement interest rate and other monetary policy actions.
- Regulatory response
- Financial supervisors should preserve financial stability, maintain banking system soundness and sustain economic activity.
- The crisis will stress test whether post-financial-crisis reforms serve their purpose.
- Banks should be encouraged to use flexibility in existing regulations, for example by using their capital and liquidity buffers, and undertake renegotiation of loan terms for stressed borrowers.
- Risk disclosure and clear communication of supervisory expectations will be essential for proper market functioning.
- IMF staff research shows that changes in spending have a multiplier effect when countries act together.
What the IMF can do (financial support and instruments)
- The IMF stands ready to mobilize its $1 trillion lending capacity to help our membership.
- As a first line of defense, the Fund can deploy its flexible and rapid-disbursing emergency response toolkit to help countries with urgent balance-of-payment needs.
- These instruments could provide in the order of $50 billion to emerging and developing economies.
- Up to $10 billion could be made available to our low-income members through our concessional financing facilities, which carry zero interest rates.
- The Fund already has 40 ongoing arrangements—both disbursing and precautionary—with combined commitments of about $200 billion; in many cases these arrangements can provide another vehicle for rapid disbursement of crisis financing.
- The Fund has received interest from about 20 countries and will be following up with them in the coming days.
- The Catastrophe Containment and Relief Trust (CCRT) can help the poorest countries with immediate debt relief to free up resources for health spending, containment, and mitigation.
- United Kingdom’s recent pledge of $195 million means the CCRT now has about $400 million available for potential debt relief.
- The aim, with the help of other donors, is to boost it to $1 billion.
Policy implications and recommendations (summary)
- Scale up fiscal stimulus, both domestically targeted and coordinated internationally, to prevent long-lasting economic damage.
- Continue and expand health-focused spending and targeted support for affected people and businesses (e.g., paid sick leave, tax relief).
- Central banks should ease financial conditions, ensure credit flows, and coordinate swap lines where needed, including potentially to emerging markets.
- Use foreign exchange interventions and capital flow management tools in emerging-market and developing economies to complement monetary policy.
- Regulators should encourage banks to deploy capital and liquidity buffers and to renegotiate loan terms for stressed borrowers, while ensuring clear risk disclosure and supervisory communication.
- International cooperation across fiscal, monetary, and regulatory domains amplifies policy effectiveness and helps stabilize the global economy.
Kristalina Georgieva, March 16, 2020 — Policy Action for a Healthy Global Economy (IMF blog)