Targeted, global coordination key to coronavirus response, says IMF

Economies around the world have some tough choices to make in the face of the Covid-19 coronavirus pandemic, if the experience of China is anything to go by, the International Monetary Fund (IMF) said on Friday.

The IMF said that China’s experience thus far showed that “the right policies” did make a difference in fighting the disease and mitigating its impact, but they came with “difficult” economic tradeoffs.

In a blog post published on its website, the IMF’s Helge Berger, Kenneth Kang, and Changyong Rhee said success in containing the virus came at the price of slowing economic activity, no matter whether social distancing and reduced mobility was being implemented voluntarily or through enforcement.

“In China’s case, policymakers implemented strict mobility constraints, both at the national and local level - for example, at the height of the outbreak, many cities enforced strict curfews on their citizens,” they wrote.

“But the tradeoff was nowhere as devastating as in Hubei province, which, despite much help from the rest of China, suffered heavily while helping to slow down the spread of the disease across the nation.”

That, they said, made it clear that as the pandemic continued to spread and grow, the hardest hit areas both within countries and across them, would need support to help contain the virus and delay its spread to others.

In China, the trio wrote that what started as a series of sudden stops in economic activity rapidly cascaded through the economy, becoming a full-blown shock which impeded both supply and demand, evidenced by the “very weak” January and February readings of industrial production and retail sales.

“The coronavirus shock is severe even compared to the Great Financial Crisis in 2007–2008, as it hit households, businesses, financial institutions, and markets all at the same time, first in China and now globally.”

Looking at the economic mitigation, the IMF noted that Chinese policymakers had targeted vulnerable households and looked for new ways to reach smaller firms, by doing things such as waiving social security fees, utility bills, and channeling credit through fintech companies.

Other policies could also help, they said, adding that authorities quickly arranged subsidised credit to support the scaling up of medical equipment production and other critical activities.

“Safeguarding financial stability requires assertive and well-communicated action,” they wrote.

“The past weeks have shown how a health crisis, however temporary, can turn into an economic shock where liquidity shortages and market disruptions can amplify and perpetuate.”

In China, authorities stepped in early to backstop interbank markets and provide financial support to firms under pressure, while letting the renminbi adjust to external pressures.

That included guiding banks to work with borrowers affected by the outbreak, incentivising banks to lend to smaller firms via special funding from the People’s Bank, and providing targeted cuts to reserve requirements for banks.

Larger firms, including state-owned enterprises, enjoyed “relatively stable” credit access throughout, in large part because China’s large state banks continued to lend generously.

But some of those tools come with problems as well, they said, noting that allowing a broad range of debtors more time to meet their financial obligations could undermine financial soundness later on if it was not aimed at the problem at hand and time-limited.

Subsidised credit could also be misallocated, and keeping already non-viable firms alive could hold back productivity growth later.

The IMF said that wherever possible, using “well-targeted” instruments was the way to go.

“While there are reassuring signs of economic normalization in China - most larger firms have reported reopening their doors and many local employees are back at their jobs - stark risks remain.”

That included new infections rising again, but even in the absence of another outbreak in China, the ongoing pandemic was still creating economic risks.

“For example, as more countries face outbreaks and global financial markets gyrate, consumers and firms may remain wary, depressing global demand for Chinese goods just as the economy is getting back to work.

“Therefore, Chinese policymakers will have to be ready to support growth and financial stability if needed.

“Given the global nature of the outbreak, many of these efforts will be most effective if coordinated internationally.”