## Unwinding from the Pandemic

_IMF News, April 6, 2021_

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**Canonical URL:** [Unwinding from the Pandemic](https://www.imf.org/en/news/articles/2021/04/06/sp040621-unwinding-from-the-pandemic)

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## Bibliographic details
- Published: April 6, 2021

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### Overview and strategic objective
- 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:
  - Data: to inform timing, sequencing, and tailoring of measures.
  - Communication: single-voice messaging, clear timelines, coordination with peer authorities and markets to avoid surprises.

### Risks of prolonged emergency support
- Prolonged fiscal support and borrower relief risks:
  - Undermines credit discipline and misallocates scarce resources to non-viable firms.
  - Makes asset quality on banks’ balance sheets harder to determine when prudential and accounting standards are relaxed.
- Central bank support risks:
  - Undermines borrower discipline.
  - Obscures central bank balance-sheet quality and policy solvency.
  - Risks de-anchoring of inflation expectations if monetary easing is unwarranted, threatening economic growth and financial stability.
- Need to plan withdrawal to avoid build-up of macro-financial vulnerabilities.

### Banks and financial stability — supervisory priorities
- Two key factors for sequencing unwinding:
  - Condition of borrowers subject to support measures.
  - Condition of banks and other systemically important lenders that provided or received extraordinary measures.
- Supervisory actions recommended:
  - Increase supervisory intensity and reprioritize supervisory workplans.
  - Require banks to collect information on interest income accrued but not received.
  - Press banks to understand borrower condition and asset quality.
  - Monitor and challenge banks’ triage of borrowers into: viable; viable with restructuring; and non-viable.
  - Ensure supervisors oversee and challenge restructuring processes; promote loan-by-loan tailored restructurings and avoid blanket evergreening.
- Reporting and transparency:
  - Restore modified asset classifications and provisioning rules as soon as possible to ensure accurate, transparent reporting of asset quality and bank capital.
  - Consider dual supervisory reporting: (i) loan impairment recorded in real time; (ii) reporting reflecting moratoria/relief measures.
- NPLs and stress testing:
  - Assess how much pandemic-affected portfolios will become distressed and ultimately non-performing.
  - Require banks with high NPLs to develop NPL management capabilities, plans, and tools.
  - Run scenario analyses and stress testing to estimate potential levels of NPLs and contingency planning for systemic distress.

### Bank capital, buffers, and resolution
- Capital restoration:
  - Where minimum requirements breached, require timely restoration plans.
  - Where buffers depleted, allow a measured, steady restoration of buffers over time.
  - Consider restricting dividend distributions or extending restrictions to support rebuilding of buffers.
- Macroprudential buffers:
  - Rebuilding buffers such as the CCyB should be prioritized only after COVID-19 shock impact becomes clearer and recovery is firmly underway.
  - Return to steady-state levels should be gradual to avoid procyclical effects and downward pressures on lending.
- Resolution and contingency planning:
  - Avoid initiating bank resolutions while pandemic restrictions (e.g., on-site visit difficulties) apply; focus on preparatory work.
  - Strengthen the financial safety net elements falling below international good practice.
  - Apply corrective action frameworks, prepare bank resolution plans, and maintain up-to-date contingency plans to respond to potential systemic crises.
  - Enhance insolvency frameworks and distressed asset markets where possible.

### Monetary policy — timing, calibration, and communication
- Role of data and communication in monetary policy decisions.
- Central bank pandemic responses in MCD region:
  - Lowered policy rates and provided liquidity to banking systems.
  - Most MCD central banks eased stress in short-term funding markets; intervention in securities markets limited to one central bank (Egypt).
  - Some central banks intervened in FX markets and provided FX funding (Morocco).
  - Broadened collateral frameworks in some cases (e.g., credit claims in Morocco); decreased haircuts on government debt securities in Algeria.
- Unwinding collateral and liquidity measures:
  - Decisions on unwinding collateral-framework adjustments should reflect risks to the central bank’s balance sheet.
  - 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).
  - Unwinding should consider market resilience to avoid reemergence of liquidity stress and market dysfunction.
- Interaction with fiscal policy:
  - Fiscal space and debt sustainability judgments impact central bank policy freedom.
  - 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.
- Risks from global developments:
  - Early monetary policy normalization in the U.S. and asynchronous global recovery could intensify depreciation pressures, higher commodity prices, and portfolio outflows.
  - These pressures could complicate timing and calibration of tightening without provoking market stress and financial stability risks.
- Exchange rate and balance-sheet considerations:
  - Central banks must assess risks from depreciation and capital outflows, including adverse balance-sheet effects.
  - Exchange rate regimes in MCD: 30% fixed (notably the GCC countries); 40% flexible; and 30% managed.
- Prohibition on monetary financing:
  - Central banks should refrain from engaging in monetary financing despite governments’ financing needs, to protect credibility, inflation expectations, and exchange-rate stability.
- Communication:
  - 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.

### Country-specific observations and challenges
- Algeria:
  - BdA measures: reserve requirement ratio decreased from 10% to 2%; decreased haircuts on government debt securities; one-month refinancing operation introduced.
  - Inflation still below the 4%-5% objective defined by the Council of Currency and Credit (CMC).
  - 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.
- Lebanon:
  - Immediate priority: formation of a government and engagement toward structural reforms.
  - Supervisory prudential buffers released; broad forbearance persists, especially on sovereign and FX exposures.
  - 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%.
  - 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.
- Pakistan:
  - SBP cut rates from 13.25% to 7%; inflation is around 9%.
  - 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.
  - NPLs increased by 1% in 2020 H1; NPLs unlikely to rise substantially once COVID policy expires in 2021.
  - Banks benefited from large revaluation gains on government bond holdings and a surge of precautionary savings.
  - Market expects interest rate hikes within three months, while SBP forward guidance indicated otherwise; financial conditions tightened as the yield curve steepened significantly.
- Tajikistan:
  - 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.
  - 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.
- Tunisia:
  - Key central bank questions: how to unwind support to the financial sector and prepare for an increase in NPLs.
  - Concerns on central bank independence after a monetary financing operation; pressure to renew could emerge given heavy gross refinancing needs in 2021.
  - Risks from increased public debt on the bank-sovereign nexus and increased cross-exposure between weak SOEs and SOBs.
- UAE:
  - UAE recorded the second highest vaccination rate globally on a per capita basis.
  - Policies amounting to around 23 percent of GDP helped alleviate crisis impacts on hard-hit sectors.
  - Domestic activity slowed with containment measures and negative effects from oil price declines and OPEC+ production cuts in 2020.
  - Financial sector resilient so far, but weakening asset quality and potential scarring in tourism, real estate, and hospitality could slow recovery.

*International Monetary Fund*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2021/04/06/sp040621-unwinding-from-the-pandemic_