The IMF has a note on policy steps to address the COVID-19 crisis. It underscores the critical role of monitoring and containment measures to slowdown the spread of the virus and to lower the load on health systems. It calls for decisive and coordinated policy action to ensure global economic and financial stability.
Monitoring and containment measures
- Ensuring sufficient paid sick leave will help to curb contagion
- Targeting health interventions to reach informal sectors
- Systematic testing is essential along with ramping up public health expenditure
- Coordinated industrial response to medical supplies production and to reduce negative cross-border spillovers from excessive hoarding
Monetary policy
- Ease liquidity and funding stress through rate cuts, OMOs, expanded term lending, outright purchases and repo facilities (to also reduce borrowing costs for households and firms)
- Forward guidance about expected path of monetary policy, and expansion of asset purchases (including risky assets)
- Temporary targeted measures to support hardest hit sectors
- Balance cushioning growth with tackling external pressures, including commodity price shocks and capital flow reversals, in emerging and developing economies. Capital flow measures may need to be deployed for a temporary period.
Fiscal policy
- Provide sizable support for affected people and firms. These include wage subsidies for businesses to prevent bankruptcies and massive layoffs, and cash transfers to low-income households
- Broad-based fiscal stimulus to support aggregate demand. These include boosting investment and economy-wide tax cuts (depending on fiscal space). Impact of broad fiscal stimulus may be small until the COVID-19 outbreak fades because of large supply disruptions.
- A coordinated and synchronized global fiscal stimulus to enhance confidence as low-income countries with limited domestic policy options depend critically on global growth. Some LICs face multiple shocks on external demand, terms-of-trade, and financing conditions. Also, they are constrained by high debt and limited monetary or exchange rate flexibility. This calls for growth-friendly spending adjustments and financial support (especially timely concessional financing).
Regulatory and supervisory regime
- These should be geared to maintaining the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.
- Borrowers’ capacity to service loans will get affected, and banks will see earning plummet. Renegotiation of loans for stressed borrowers may be appropriate. But, easing of loan classification and provisioning rules will affect measurement of NPLs and potential losses.
- Transparent risk disclosure and clear communication of supervisory expectations on dealing with the implications of the outbreak will be important.
- Banks should draw upon existing buffers to absorb cost of restructuring. Enhanced supervisory reporting could be introduced to monitor liquidity strains.
- Subsidies and tax relief aimed at smaller borrowers, and credit guarantees and asset purchases programs are useful. It can be done through capital injections and broad deposit guarantees.
Global coordination and cooperation
- Determined and coordinated actions by those with greater policy strength will serve as a public good for all others
- Policy responses need to be tailored to existing administrative systems and capacity, including more attention to delivering assistance to hard-to-reach regions and communities.
