May 22, 2024

IMF’s Kristalina Georgieva calls for ‘constant contact’ and ‘close coordination’ to secure global economy amid COVID-19 ‘social distancing’ and ‘quarantine’

The Managing Director of the International Monetary Fund (IMF) Ms. Kristalina Georgieva argued in a policy statement on Monday that “while quarantining and social distancing is the right prescription to combat COVID-19’s public health impact, the exact opposite is needed when it comes to securing the global economy”.

The Centers for Disease Control and Prevention is recommending social distancing, isolation and quarantine to stem the spread of the coronavirus, and Ms. Georgieva was in agreement with that prescription, but she said when it comes to the economy, “constant contact and close coordination are the best medicine to ensure that the economic pain inflicted by the virus is relatively short-lived”.

Ms. Georgieve said she was encouraged by steps already taken by many governments, including “yesterday’s bold, coordinated moves on monetary policy”.

“But clearly, even more needs to be done. As the virus spreads, increased coordinated action will be key to boosting confidence and providing stability to the global economy,” she said.

In its policy statement published on earlier in the day, Ms. Georgieva warned of difficult days ahead and recommended three action areas for the global economy as the world battles to end the spread of a virus that has killed thousands of people around the world.

According to Georgieva, governments should first recognize that additional fiscal stimulus will be necessary to prevent long-lasting economic damage from the virus.

“Fiscal measures already announced are being deployed on a range of policies which
immediately prioritize health spending and those in need. We know that comprehensive
containment measures — combined with early monitoring — will slow the rate of infection and the spread of the virus. Governments should continue and expand these efforts to reach the most affected people and businesses — with policies including increased paid sick leave and targeted tax relief,” she said of the first area of focus.

“Beyond these positive individual country actions, as the virus spreads, the case for a coordinated and synchronized global fiscal stimulus is becoming stronger by the hour. During the Global Financial Crisis (GFC), for example, fiscal stimulus by the G20 amounted to about 2 percent of GDP, or over $900 billion in today’s money, in 2009 alone. So, there is a lot more work to do”.

The second area of focus should be on the monetary side, Ms. Kristalina added.

“In advanced economies, central banks should continue to support demand and boost confidence by easing financial conditions and ensuring the flow of credit to the real economy. For example, the US Federal Reserve just announced further interest rate cuts, asset purchases, forward guidance and a drop in reserve requirements.

“Policy steps that we know have worked before — including during the GFC — are on the
table. Yesterday, major central banks took decisive coordinated action on monetary easing and opening of swap lines to lessen global financial market stresses. Going forward, there may be a need for swap lines to emerging market economies. As the Institute for International Finance (IIF) said last week, investors have removed nearly $42 billion from emerging markets since the beginning of the crisis. This is the largest outflow they have ever recorded.

“So central banks’ policy action in emerging market and developing economies will need to
balance the especially difficult challenge of addressing capital flow reversals and commodity shocks. In times of crisis such as at present, foreign exchange interventions and capital flow management measures can usefully complement interest rate and other monetary policy actions,” she added.

The IMF boss said the third area of focus should be the regulatory response.

“Financial system supervisors should aim to maintain the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.
This crisis will stress test whether the changes made in the wake of the financial crisis will 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 also be
essential for markets to function properly in the period ahead.”

she added that moving from monetary to fiscal to regulatory is most effective when done

“Indeed, IMF staff research shows that changes in spending, for example, have a multiplier
effect when countries act together”.

What the IMF Can Do?

Ms. Georgieva reiterated an earlier pledge the IMF was “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,” she said.

She added that 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 the rapid disbursement of crisis financing. We also have received interest from about 20 more countries and will be following up with them in the coming days”.

“n addition, the Fund’s Catastrophe Containment and Relief Trust (CCRT) can help the
poorest countries with immediate debt relief which will free up vital resources for health
spending, containment, and mitigation. In this regard, I commend United Kingdom’s recent pledge of $195 million, which means the CCRT now has about $400 million available for potential debt relief. Our aim, with the help of other donors, is to boost it to $1 billion.

In this way, the IMF can serve its 189 member countries and demonstrate the value o international cooperation. Because in the end, our answers to this crisis will not come from one method, one region, or one country in isolation. Only through sharing, coordination, and cooperation will we able to stabilize the global economy and return it to full health”

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