{
  "title": "Unwinding from the Pandemic",
  "publication": "IMF News, April 6, 2021",
  "sourceUrl": "https://www.imf.org/en/news/articles/2021/04/06/sp040621-unwinding-from-the-pandemic",
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  "summary": "Event: Governors’ Meeting, IMF Middle East and Central Asia Department; April 6, 2021.",
  "publishDate": "2021-04-06",
  "sections": [
    {
      "heading": "Overview and strategic objective",
      "content": "- Event: Governors’ Meeting, IMF Middle East and Central Asia Department; April 6, 2021.\n- Central question: When and how should central banks and financial sector regulators withdraw interventions and emergency measures introduced in response to the COVID crisis?\n- Strategic objective: Balance economic activity with financial stability while transitioning from extraordinary emergency measures to normalized policy settings.\n- Two underpinning principles for every national unwinding strategy:\n  - Data: to inform timing, sequencing, and tailoring of measures.\n  - Communication: single-voice messaging, clear timelines, coordination with peer authorities and markets to avoid surprises."
    },
    {
      "heading": "Risks of prolonged emergency support",
      "content": "- Prolonged fiscal support and borrower relief risks:\n  - Undermines credit discipline and misallocates scarce resources to non-viable firms.\n  - Makes asset quality on banks’ balance sheets harder to determine when prudential and accounting standards are relaxed.\n- Central bank support risks:\n  - Undermines borrower discipline.\n  - Obscures central bank balance-sheet quality and policy solvency.\n  - Risks de-anchoring of inflation expectations if monetary easing is unwarranted, threatening economic growth and financial stability.\n- Need to plan withdrawal to avoid build-up of macro-financial vulnerabilities."
    },
    {
      "heading": "Banks and financial stability — supervisory priorities",
      "content": "- Two key factors for sequencing unwinding:\n  - Condition of borrowers subject to support measures.\n  - Condition of banks and other systemically important lenders that provided or received extraordinary measures.\n- Supervisory actions recommended:\n  - Increase supervisory intensity and reprioritize supervisory workplans.\n  - Require banks to collect information on interest income accrued but not received.\n  - Press banks to understand borrower condition and asset quality.\n  - Monitor and challenge banks’ triage of borrowers into: viable; viable with restructuring; and non-viable.\n  - Ensure supervisors oversee and challenge restructuring processes; promote loan-by-loan tailored restructurings and avoid blanket evergreening.\n- Reporting and transparency:\n  - Restore modified asset classifications and provisioning rules as soon as possible to ensure accurate, transparent reporting of asset quality and bank capital.\n  - Consider dual supervisory reporting: (i) loan impairment recorded in real time; (ii) reporting reflecting moratoria/relief measures.\n- NPLs and stress testing:\n  - Assess how much pandemic-affected portfolios will become distressed and ultimately non-performing.\n  - Require banks with high NPLs to develop NPL management capabilities, plans, and tools.\n  - Run scenario analyses and stress testing to estimate potential levels of NPLs and contingency planning for systemic distress."
    },
    {
      "heading": "Bank capital, buffers, and resolution",
      "content": "- Capital restoration:\n  - Where minimum requirements breached, require timely restoration plans.\n  - Where buffers depleted, allow a measured, steady restoration of buffers over time.\n  - Consider restricting dividend distributions or extending restrictions to support rebuilding of buffers.\n- Macroprudential buffers:\n  - Rebuilding buffers such as the CCyB should be prioritized only after COVID-19 shock impact becomes clearer and recovery is firmly underway.\n  - Return to steady-state levels should be gradual to avoid procyclical effects and downward pressures on lending.\n- Resolution and contingency planning:\n  - Avoid initiating bank resolutions while pandemic restrictions (e.g., on-site visit difficulties) apply; focus on preparatory work.\n  - Strengthen the financial safety net elements falling below international good practice.\n  - Apply corrective action frameworks, prepare bank resolution plans, and maintain up-to-date contingency plans to respond to potential systemic crises.\n  - Enhance insolvency frameworks and distressed asset markets where possible."
    },
    {
      "heading": "Monetary policy — timing, calibration, and communication",
      "content": "- Role of data and communication in monetary policy decisions.\n- Central bank pandemic responses in MCD region:\n  - Lowered policy rates and provided liquidity to banking systems.\n  - Most MCD central banks eased stress in short-term funding markets; intervention in securities markets limited to one central bank (Egypt).\n  - Some central banks intervened in FX markets and provided FX funding (Morocco).\n  - Broadened collateral frameworks in some cases (e.g., credit claims in Morocco); decreased haircuts on government debt securities in Algeria.\n- Unwinding collateral and liquidity measures:\n  - Decisions on unwinding collateral-framework adjustments should reflect risks to the central bank’s balance sheet.\n  - Most liquidity-easing measures expected to self-liquidate over time (e.g., demand in fixed rate, full allotment liquidity-providing operations should decrease as banks stabilize).\n  - Unwinding should consider market resilience to avoid reemergence of liquidity stress and market dysfunction.\n- Interaction with fiscal policy:\n  - Fiscal space and debt sustainability judgments impact central bank policy freedom.\n  - Continuing or curtailing fiscal support (e.g., to SMEs) will affect banks and creditors; more domestic government debt affects the yield curve; more FX-denominated debt might influence exchange rate expectations and monetary stance.\n- Risks from global developments:\n  - Early monetary policy normalization in the U.S. and asynchronous global recovery could intensify depreciation pressures, higher commodity prices, and portfolio outflows.\n  - These pressures could complicate timing and calibration of tightening without provoking market stress and financial stability risks.\n- Exchange rate and balance-sheet considerations:\n  - Central banks must assess risks from depreciation and capital outflows, including adverse balance-sheet effects.\n  - Exchange rate regimes in MCD: 30% fixed (notably the GCC countries); 40% flexible; and 30% managed.\n- Prohibition on monetary financing:\n  - Central banks should refrain from engaging in monetary financing despite governments’ financing needs, to protect credibility, inflation expectations, and exchange-rate stability.\n- Communication:\n  - Clear and effective communication, supported by data, is essential to provide appropriate signals and incentives when unwinding measures and when central banks pursue multiple objectives with multiple tools."
    },
    {
      "heading": "Country-specific observations and challenges",
      "content": "- Algeria:\n  - BdA measures: reserve requirement ratio decreased from 10% to 2%; decreased haircuts on government debt securities; one-month refinancing operation introduced.\n  - Inflation still below the 4%-5% objective defined by the Council of Currency and Credit (CMC).\n  - BdA prioritizes credit expansion and seems willing to let inflation creep higher; willing to avoid uncontrolled increase in bank excess liquidity. Recent funding to the State (through purchase of T-bills) has driven up bank liquidity.\n- Lebanon:\n  - Immediate priority: formation of a government and engagement toward structural reforms.\n  - Supervisory prudential buffers released; broad forbearance persists, especially on sovereign and FX exposures.\n  - Monetary developments: currency in circulation almost tripled; dollar exchange rate in the black market is now 10 times the official rate; inflation is around 150%.\n  - Recommendations: unify official and parallel exchange rates to market conditions, restore external viability, rebuild and protect reserves, apply appropriate system-wide capital controls, and provide a safety net for vulnerable households.\n- Pakistan:\n  - SBP cut rates from 13.25% to 7%; inflation is around 9%.\n  - Debt relief schemes provided (Loan Extension and Restructuring); loan deferment = 7% of total bank loans; restructuring cases = 1.4% of total bank loans as of June 2020.\n  - NPLs increased by 1% in 2020 H1; NPLs unlikely to rise substantially once COVID policy expires in 2021.\n  - Banks benefited from large revaluation gains on government bond holdings and a surge of precautionary savings.\n  - Market expects interest rate hikes within three months, while SBP forward guidance indicated otherwise; financial conditions tightened as the yield curve steepened significantly.\n- Tajikistan:\n  - NBT measures in 2020: action plans to counter capital shortfalls; additional provisions against potential losses; refrain from unnecessary expenses; recommendations to refrain from buying back shares and paying dividends; temporary easing of fines/penalties for loan repayment difficulties; temporarily reducing fines on financial institutions for shortfalls of capital and liquidity requirements.\n  - In 2021, NBT banking supervision asked IMF and World Bank for advice on COVID-related policies; IMF advised refraining from paying dividends until uncertainty is reduced, increasing supervision intensity, and emphasizing effective communications.\n- Tunisia:\n  - Key central bank questions: how to unwind support to the financial sector and prepare for an increase in NPLs.\n  - Concerns on central bank independence after a monetary financing operation; pressure to renew could emerge given heavy gross refinancing needs in 2021.\n  - Risks from increased public debt on the bank-sovereign nexus and increased cross-exposure between weak SOEs and SOBs.\n- UAE:\n  - UAE recorded the second highest vaccination rate globally on a per capita basis.\n  - Policies amounting to around 23 percent of GDP helped alleviate crisis impacts on hard-hit sectors.\n  - Domestic activity slowed with containment measures and negative effects from oil price declines and OPEC+ production cuts in 2020.\n  - Financial sector resilient so far, but weakening asset quality and potential scarring in tourism, real estate, and hospitality could slow recovery.\n\nInternational Monetary Fund\n\n---\n\n\n References\n\n- Tobias Adrian\n- Algeria and the IMF\n- Arab Republic of Egypt and the IMF\n- Lebanon and the IMF\n- Morocco and the IMF\n- Pakistan and the IMF\n- Republic of Tajikistan and the IMF\n- Tunisia and the IMF\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/04/06/sp040621-unwinding-from-the-pandemic"
    }
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    "Published: April 6, 2021",
    "Event: Governors’ Meeting, IMF Middle East and Central Asia Department; April 6, 2021.",
    "Central question: When and how should central banks and financial sector regulators withdraw interventions and emergency measures introduced in response to the COVID crisis?",
    "Strategic objective: Balance economic activity with financial stability while transitioning from extraordinary emergency measures to normalized policy settings.",
    "Two underpinning principles for every national unwinding strategy:",
    "Prolonged fiscal support and borrower relief risks:",
    "Central bank support risks:",
    "Need to plan withdrawal to avoid build-up of macro-financial vulnerabilities.",
    "Two key factors for sequencing unwinding:",
    "Supervisory actions recommended:",
    "Reporting and transparency:",
    "NPLs and stress testing:",
    "Capital restoration:",
    "Macroprudential buffers:",
    "Resolution and contingency planning:",
    "Role of data and communication in monetary policy decisions.",
    "Central bank pandemic responses in MCD region:",
    "Unwinding collateral and liquidity measures:",
    "Interaction with fiscal policy:",
    "Risks from global developments:",
    "Exchange rate and balance-sheet considerations:",
    "Prohibition on monetary financing:",
    "Communication:",
    "Algeria:",
    "Lebanon:",
    "Pakistan:",
    "Tajikistan:",
    "Tunisia:",
    "UAE:",
    "[Tobias Adrian](http://www.imf.org/external/np/bio/eng/ta.htm)",
    "[Algeria and the IMF](http://www.imf.org/external/country/DZA/index.htm)",
    "[Arab Republic of Egypt and the IMF](http://www.imf.org/external/country/EGY/index.htm)",
    "[Lebanon and the IMF](http://www.imf.org/external/country/LBN/index.htm)",
    "[Morocco and the IMF](http://www.imf.org/external/country/MAR/index.htm)",
    "[Pakistan and the IMF](http://www.imf.org/external/country/PAK/index.htm)",
    "[Republic of Tajikistan and the IMF](http://www.imf.org/external/country/TJK/index.htm)",
    "[Tunisia and the IMF](http://www.imf.org/external/country/TUN/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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