The impact of the flu-like coronavirus (COVID-19) pandemic is unprecedented in the modern era. Equally unprecedented is the escalation of the response around the world.
Even for countries without an outbreak, spillovers from the global pandemic and social distancing measures locally would likely deal a severe blow to economic activity this year.
Social distancing and containment and their severe impact on economic growth
Before cases of COVID-19 were confirmed in Africa, the consequences of manufacturing and shipping disruptions in China already had an impact on the continent. Transportation, trade, tourism, hospitality, and manufacturing were among the first sectors to suffer.
The confirmation of the first cases of the virus has triggered strong measures by several governments. Such measures have proved vital to addressing uncontrolled diffusion of the virus. But, restrictions on travel, gatherings, and public activities tend to exacerbate the damage to economic growth.
In addition, a protracted health crisis will have an impact beyond this year. Firms might be forced to postpone important investment decisions, for example in extractive industries. Firms that rely on global supply chains may be unable to get the parts they need.
Thus, one may expect delays in major projects, especially those with large foreign investment components.
Finally, for energy exporters, uncertainty from the direct impact of the pandemic is compounded by the likely decrease in oil export revenues because of the recent strong fall in oil prices.
Targeted economic policies are needed, with focus on mitigation
The top priority for public policy at this stage is to prevent people from contracting the disease and to cure those who do get infected. Given limited capacity everywhere to handle the peak in cases, governments must try their utmost to prevent health systems from becoming overwhelmed.
This means health spending must go ahead regardless of how much room there is in the budget.
The next priority is to protect people from the economic impact of this global health crisis.
Those who are hit the hardest should not go bankrupt and lose their livelihood. Depending on fiscal space and governments’ administrative capacity, people, firms, and banks can be helped in several ways. For instance, national authorities would be advised to:
* Spend money to prevent, detect, control, treat, and contain the virus, and to provide basic services to people that must be quarantined and to the businesses affected. Spending opportunities that also have lasting impact on the capacity of the health system should not be lost.
* Provide timely, targeted, and temporary cash flow relief to the people and firms that are most affected, until the emergency abates. Subsidize wages to people and firms to help curb contagion, offer tax relief for people and businesses who can’t afford to pay, in the most vulnerable sectors, including transportation, tourism, and hotels.
* For banks, consider allowing a prudent and targeted renegotiation of loan terms without lowering loan classification and provisioning standards. In principle, banks should use their capital buffers first to deal with losses.
Toward an emergency budget?
While some of these measures can occur through administrative means, others may require an emergency budget.
The emergency budget would take stock of the overall fiscal cost deriving from the priority of “saving lives and safeguarding livelihoods”, especially in a new scenario with lower global and domestic growth, and completely different commodity prices.
The fiscal cost is expected to be sizeable while mirroring an equally large financing gap because of falling tax revenues (oil receipts, custom duties) and tight financial conditions. The so-called “automatic stabilizers” would also kick in to weather the shock, including drawing down on sovereign wealth fund and the likes.
It would also be good practice to communicate to the public deviations from planned budgets to signal commitment to fiscal sustainability. Furthermore, even if this is an emergency, the government should avoid permanent distortion of the overall public spending envelope.
IMF emergency support and policy advice for affected countries
The IMF has ramped up its support to member countries and is working closely with its development partners—including World Bank, World Health Organization, and other multilateral institutions—to provide financial support, policy advice, and technical assistance.
A key aspect of Fund support right now is rapid concessional financial assistance to support preparedness, response, and recovery from this unprecedented crisis.
For policymakers, business, and families, this is the time to activate business continuity plans. We continue to hope for the best, yet we prepare for the worst