Washington DC [USA]: Substantial targeted policies are needed to support the global economy through coronavirus epidemic as the health crisis will have a significant economic fallout, reflecting shocks to supply and demand different from past crises, the International Monetary Fund (IMF) has said.
The goal is to prevent a temporary crisis from permanently harming people and firms through job losses and bankruptcies, said Gita Gopinath, Economic Counsellor and Director of the Research Department at IMF.
"Substantial targeted policies are needed to support the economy through the epidemic, keeping intact the web of economic and financial relationships between workers and businesses, lenders and borrowers, and suppliers and end-users for an activity to recover once the outbreak fades," she wrote in a blog post on Monday (local time).
The first priority is clearly to keep people as healthy and as safe as possible. Countries can help by spending more to boost their health systems, including on personal protective equipment, screening, diagnostic tests, and additional hospital beds.
Without a vaccine to stop the virus, countries have taken measures to limit its spread, like travel restrictions, temporary school closures, and quarantines. Such measures also buy valuable time to avoid overwhelming health systems.
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 2008 global financial crisis, the decline in services appears larger this time -- reflecting the large impact of social distancing.
Gopinath said the coronavirus epidemic involves both supply and demand shocks. Business disruptions have lowered production, creating shocks to supply. And consumers' and businesses' reluctance to spend has lowered demand.
When these shocks are synchronised across many countries, the effects can be further amplified through international trade and financial linkages, dampening global activity and pushing commodity prices down.
Oil prices have fallen dramatically in recent weeks and are about 30 per cent below their levels at the start of the year.
Countries reliant on external financing could find themselves at risk of sudden stops and disorderly market conditions, possibly requiring foreign exchange intervention or temporary capital flow measures, wrote Gopinath.
"Considering that the economic fallout reflects particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to help affected households and businesses," she said.
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, said Gopinath adding that financial market regulators and supervisors could also encourage, on a temporary and time-bound basis, extensions of loan maturities.