In the latest World Economic Outlook (April 2020), the IMF projected global growth to contract sharply to -3% in 2020. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined. For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. It argues that many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices.
Under the assumption that the pandemic and required containment peaks in the second quarter for most countries in the world, and recedes in the second half of this year, in the April World Economic Outlook the IMF projects global growth in 2020 to fall to -3 percent. This is a downgrade of 6.3 percentage points from January 2020. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.
Assuming the pandemic fades in the second half of 2020 and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, the IMF projects global growth in 2021 to rebound to 5.8 percent.
In an adverse scenario, the pandemic may not recede in the second half of this year, leading to longer durations of containment, worsening financial conditions, and further breakdowns of global supply chains. This could mean even greater fall in global GDP: an additional 3 percent in 2020 (below the baseline in 2002) if the pandemic is more protracted this year, while, if the pandemic continues into 2021, it may fall next year by an additional 8 percent compared to our baseline scenario.
The IMF recommends that countries continue to spend generously on their health systems, perform widespread testing, and refrain from trade restrictions on medical supplies. It also recommends continued support to households and businesses throughout the containment period: credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief. During the recovery phase, policies should shift to supporting demand, incentivizing firm hiring, and repairing balance sheets in private and public sector. It recommends moratoria on debt repayments and debt restructuring to be continued during the recovery phase too.
Substantial targeted fiscal, monetary, and financial measures to maintain the economic ties between workers and firms and lenders and borrowers is required to keep intact the economic and financial infrastructure of society. Meanwhile, broad-based stimulus and liquidity facilities to reduce systemic stress in the financial system can lift confidence and prevent an even deeper contraction in demand by limiting the amplification of the shock through the financial system and bolstering expectations for the eventual economic recovery.
INDIA:
- The IMF has projected India’s economy to grow at 4.2% in 2019/20, 1.9% in 2020/21 and then quickly recover to 7.4% in 2021/22.
- Inflation is projected to remain low at 3.3% in 2020/21 and 3.6% in 2021/22.
- Current account balance is projected to narrow to -0.6% of GDP in 2020/21 and then increase to -1.4% of GDP in 2021/22.
NEPAL:
- The IMF has projected Nepal's economy to grow at 2.5% in 2019/20 and 5% in 2020/21.
- Inflation is projected to remain at 6.7% in FY2020 and FY2021.
- Current account balance is projected to be -6.5% in FY2020 and -6.2% in FY2021.
Policy measures for the immediate-term:
- Sizable, specific, temporary, and targeted fiscal measures to cushion the impact on the most affected households and businesses, and to preserve economic relationships (by reducing firm closures). Digital payments may improve the delivery of targeted transfers to the informally employed.
- Central banks can provide ample liquidity to banks and nonbank finance companies, and credit guarantee on loans to SMEs. It could also encourage banks to renegotiate loan terms for distressed borrowers without lowering loan classification and provisioning standards. Beyond conventional interest rate cuts, expanded asset purchase programs may be helpful.
- Broad-based fiscal stimulus such as public infrastructure investment or across-the-board tax cuts can help to boost confidence, stimulate aggregate demand, reduce bankruptcies and avert an even-deeper downturn.
- Flexible exchange rates should be allowed to adjust as needed. Temporary capital flow measures on outflows could be useful.
Policy measures for the recovery phase:
- Secure swift recovery as even after the containment phase, uncertainty about contagion could subdue consumer demand. Firms will hire staff and utilize capacity gradually. Hiring subsidies may be required and worker retraining programs may alleviate labor market friction. Scaling back targeted, temporary measures may be warranted.
- Balance sheet repair and debt restructuring may be required. Banks and regulators should encourage early and proactive recognition of nonperforming loans. Steps to strengthen the insolvency and debt enforcement framework, and measures to facilitate the development of a distressed debt market could be helpful.
- Strong multilateral cooperation is a must, especially on international trade and multilateral assistance.
