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 International Monetary Fund (IMF) has said. Constant contact and close coordination are the best medicine to ensure that the economic pain inflicted by the virus is relatively short-lived. Many governments have already taken significant steps, with major measures being announced on a daily basis — including the recent 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,” said IMF Managing Director Kristalina Georgieva. Additional fiscal stimulus will be necessary to prevent long-lasting economic damage. “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 wrote in a blogpost on Monday (local time). Beyond these positive individual country actions, as the virus spreads, the case for a coordinated and synchronised global fiscal stimulus is becoming stronger by the hour. 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. Going forward, said Georgieva, there may be a need for swap lines to emerging market economies. 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. Besides, 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, said Georgieva. 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. Georgieva said the IMF stands ready to mobilise its one trillion dollar lending capacity to help its membership. As a first line of defence, the fund can deploy its flexible and rapid-disbursing emergency response toolkit to help countries with urgent balance-of-payment needs. These instruments can provide in the order of 50 billion dollars to emerging and developing economies. Up to 10 billion dollars can be made available to our low-income members through our concessional financing facilities, which carry zero interest rates.
