As the Coronavirus pandemic continues to ravage the globe, shutting down most economies, leaving stakeholders confused, especially given that no one knows when its end would be, the International Monetary Fund (IMF) says it is making available the sum of $1tr to actively support its member countries.
According to the latest edition of its Global Financial Stability Reports published on Tuesday, the IMF says policymakers must at this time “maintain a balance between safeguarding financial stability and supporting economic activity.”
It wants banks to utilize their existing capital and liquidity buffers to absorb losses and funding pressures arising from the pandemic’s impact.
Where such impact is, however, sizable or longer-lasting and their capital adequacy is affected, it urged bank supervisors to “take targeted actions, including asking banks to submit credible capital restoration plans.”
There may be the need, according to the report, for fiscal support by way of direct subsidies or tax reliefs to help borrowers “repay their loans and finance their operations, or provide credit guarantees to banks.”
The report also urged central banks to encourage banks to prudently negotiate temporary adjustments to loan terms for companies and households as they struggle to service their debts.
Also, the GSR called for prudent management of liquidity risks associated with large outflows, while regulators should encourage them “to make full use of the available liquidity tools where it would be in the interests of unitholders to do so.”
Continuing, the report called for the promotion of market resilience “through well-calibrated, clearly defined, and appropriately communicated measures, such as circuit breakers.”
With many emerging market economies already facing volatile market conditions, the IMF called for management of such “pressures through exchange rate flexibility, where feasible.
“For countries with adequate reserves, exchange rate intervention can lean against market illiquidity and thus play a role in muting excessive volatility,” warning however that interventions should not prevent necessary adjustments in the exchange rate.
“In the face of an imminent crisis, capital flow management measures could be part of a broad policy package, but they cannot substitute for warranted macroeconomic adjustment.
“Sovereign debt managers should prepare for longer-term funding disruptions by putting contingency plans in place to deal with limited access to external financing.
Multilateral cooperation is essential to help reduce the intensity of the COVID-19 shock and its damage to the global economy and financial system.
“Countries confronting the twin crises of health and external funding shocks—for example, those reliant on external financing or commodity exporters dealing with the plunge in commodity prices—may additionally need bilateral or multilateral assistance to ensure that health spending is not compromised in their difficult adjustment process.”
The report recalled a call by the IMF’s Managing Director and the World Bank President on official bilateral creditors “to suspend debt payments from countries below the International Development Association’s operational threshold that request forbearance while they battle the pandemic.”
Continuing further, the Global Financial Stability Report notes that although central banks globally have taken bold and decisive steps to maintain the flow of credit to the economy, they may also consider further measures to support the economy during these challenging times.
Today, it added, “banks have more capital and liquidity than in the past, they have been subject to stress tests, and central bank liquidity support has helped mitigate funding risks, putting them in a better position than at the onset of the global financial crisis.
“The resilience of banks, however, may be tested in some countries in the face of large market and credit losses, and this may cause them to cut back their lending to the economy, amplifying the slowdown in activity.”
This historic challenge, it stressed, requires what it calls “forceful policy response whose “priority is to save lives and to implement appropriate containment measures to avoid overwhelming health systems.”
The situation it believes requires policymakers to support individuals and corporates “most affected by the virus outbreak, as discussed in the April 2020 World Economic Outlook.”