A number of countries have taken measures to limit the spread of the novel coronavirus (COVID-19), including travel restrictions, temporary school closures, and quarantines, which buy valuable time to avoid overwhelming national health systems in the absence of a COVID-19 vaccine, Gita Gopinath, Economic Counsellor and Director of the Research Department at the International Monetary Fund (IMF) said, on Monday.
The first priority is clearly to keep people as healthy and safe as possible, Gopinath added over a paper entitled “Limiting the economic fallout of the Coronavirus with large targeted policies”, noting that countries can help by increasing their spending to boost their health systems, with funding directed towards personal protective equipment, screening, diagnostic tests, and additional hospital beds.
Borrowing costs can rise and financial conditions tighten, as banks suspect consumers and firms may be unable to repay their loans on a timely basis. Higher borrowing costs can expose financial vulnerabilities that have accumulated during years of low interest rates, leading to a heightened risk financial institutions inability to roll over debt.
A reduction of credit could amplify the downturn arising from supply and demand shocks, Gopinath said, adding that central banks should be ready to provide ample liquidity to banks and nonbank finance companies, particularly to those lending to small- and medium-sized enterprises, which may be less prepared to withstand a sharp disruption.
Governments could offer temporary and targeted credit guarantees for the near-term liquidity needs of these firms. For example, South Korea has expanded lending for business operations and loan guarantees for affected small- and medium-sized enterprises.
Financial market regulators and supervisors could also encourage, on a temporary
and time-bound basis, extensions of loan maturities, suggests Gopinath. Broader monetary stimulus such as policy rate cuts or asset purchases can lift confidence and support financial markets if there is a marked risk of a sizable tightening in financial conditions.
Broad-based fiscal stimulus consistent with available fiscal space can help lift aggregate demand, but would most likely be more effective when business operations begin to normalise, Gopinath added.
Considering the epidemic’s broad reach across many countries, the extensive cross -border economic linkages, as well as the large confidence effects impacting economic activity and financial and commodity markets, the argument for a coordinated, international response is clear. The international community must help countries with limited health capacity avert a humanitarian disaster.
The economic impact is already visible in the countries most affected by the outbreak. For example, in China, manufacturing and service sector activity declined dramatically in February. While the drop in manufacturing is comparable to the start of the global financial crisis, the decline in services appears larger this time, reflecting the large impact of social distancing.
The IMF stands ready to support vulnerable countries with different lending facilities, such as rapid-disbursing emergency financing, which could amount up to $50bn for low-income and emerging markets.