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IMF chief economist calls for targeted policies to limit COVID-19 economic fallout

(Xinhua)    09:06, March 10, 2020

WASHINGTON, March 9 (Xinhua) -- The COVID-19 outbreak will have "a significant economic fallout," and "substantial targeted policies" are thus needed to support the economy through the epidemic, International Monetary Fund (IMF) chief economist Gita Gopinath said Monday.

"This health crisis will have a significant economic fallout, reflecting shocks to supply and demand different from past crises," Gopinath wrote in a blog. "Business disruptions have lowered production, creating shocks to supply. And consumers' and businesses' reluctance to spend has lowered demand."

The IMF chief economist said substantial targeted policies should be adopted, "keeping intact the web of economic and financial relationships between workers and businesses, lenders and borrowers, and suppliers and end-users for activity to recover once the outbreak fades."

"The goal is to prevent a temporary crisis from permanently harming people and firms through job losses and bankruptcies," she said.

Noting that oil prices have fallen dramatically in recent weeks and are about 30 percent below their levels at the start of the year, the IMF chief economist said 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.

"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," Gopinath said.

Households and businesses hit by supply disruptions and a drop in demand could be targeted to receive cash transfers, wage subsidies, and tax relief, helping people to meet their needs and businesses to stay afloat, 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, she said, while noting that governments could offer temporary and targeted credit guarantees for the near-term liquidity needs of these firms.

Broader monetary stimulus such as policy rate cuts or asset purchases can lift confidence and support financial markets if there is a marked risk of a sizable tightening in financial conditions, and broad-based fiscal stimulus consistent with available fiscal space can help lift aggregate demand but would most likely be more effective when business operations begin to normalize, she said.

"Considering the epidemic's broad reach across many countries, the extensive cross-border economic linkages, as well as the large confidence effects impacting economic activity and financial and commodity markets, the argument for a coordinated, international response is clear," she added.

The IMF is making available about 50 billion U.S. dollars through its rapid-disbursing emergency financing facilities for low-income and emerging market countries, and 10 billion dollars of that is intended to support the poorest members at zero interest, the multilateral lender said last week.

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