Spillover Effects from global Developments may still lead to faltering Economic Activities in Countries without Presence of Coronavirus

March 13, 2020 12:30 PM

 

 

Individuals infected by the coronavirus potentially face a blow to their health and personal and economic well-being.

Similarly, countries hit by a sudden and unexpected public health emergency—as coronavirus is proving to be—can see their economies slow and their budgets squeezed as they spend more to counter the impact of the virus. At the same time, they may experience a drop in revenue from falling economic activity. Countries could also face lower export revenues due to falling tourism receipts or a decline in commodity prices. A sudden halt in capital inflows could exacerbate the situation further. Together, this can result in an urgent balance-of-payments need to counter the mismatch between foreign exchange inflows and outflows.

Even if an individual country is fortunate enough to escape widespread viral contagion, the spillover effects from global developments or broken supply chains may still lead to faltering economic activity.

Timely financial assistance

While the physical impact of the virus will be tackled by health professionals, the IMF can help mitigate the economic fallout from the coronavirus. In addition to policy and technical advice, the greatest support the IMF can provide in such emergencies is through timely financial assistance.

The IMF has a long history and extensive expertise in responding to natural disasters, epidemics, and post-conflict situations. Emergency financial assistance, on average, accounts for 20 percent of IMF members’ requests for support. Swift financing can be essential to replenish international reserves, obtain critical imports, or boost budgets.

When the Ebola virus devastated parts of Africa—and Guinea, Liberia, and Sierra Leone suffered significant humanitarian and economic hardship—the IMF provided concessional emergency assistance of US$378 million to these three countries, a total of 2.3 percent of their combined GDP.

The IMF also provided relief to reduce their debt burden using funds from the IMF’s Catastrophic Containment and Relief Trust, which is being boosted by a US$150 million contribution from the United Kingdom.

Two emergency financing instruments

Under the IMF’s two emergency financing instruments—the Rapid Credit Facility and the Rapid Financing Instrument—member countries can receive financing to respond to shocks, including large natural and health disasters. The benefits of these two lending vehicles are their size, their speed, and their flexibility. After Cyclone Idai swept through Mozambique, the Fund responded quickly to provide emergency support.

In contrast to Fund programs that provide financing over time, disbursements under these two instruments are one-off payments meant to cover an urgent balance-of-payments need and not subject to traditional IMF conditions. The country has only to demonstrate that its debt is sustainable and make a commitment to economic policies that help overcome the emergency.

Adding up the numbers

In the event of a severe downturn triggered by the coronavirus, we estimate the Fund could provide up to US$50 billion in emergency financing to fund emerging and developing countries’ initial response. Low-income countries could benefit from about US$10 billion of this amount, largely on concessional terms.

Beyond the immediate emergency, members can also request a new loan—drawing on the IMF’s war chest of around US$1 trillion in quota and borrowed resources—and current borrowers can top up their ongoing lending arrangements.

As we watch the unfolding health emergency, like the rest of the global community, the IMF is hoping for the best. But, through its emergency financing, we are prepared for the worst so that, in the words of the American writer Maya Angelou, we can try to be unsurprised by anything in between.

 

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