IMF Expects Worst Economic Fallout Since Great Depression

Group proposes four-point plan for ‘bridge to recovery,’ saying many emerging countries will need a reallocation of their limited public resources and an increase in the world’s flow of resources to them.

The International Monetary Fund (IMF) has warned that it expects the coronavirus pandemic will cause “the worst economic fallout since the Great Depression,” and now projects that more than 170 countries will have negative per capita income growth this year. To help mitigate the economic stress, the organization has proposed a four-point economic recovery plan.

“COVID-19 has disrupted our social and economic order at lightning speed and on a scale that we have not seen in living memory,” IMF Managing Director Kristalina Georgieva said in a speech posted on the IMF’s website. “The virus is causing tragic loss of life, and the lockdown needed to fight it has affected billions of people.”

Georgieva said “it is already clear” that global growth will turn sharply negative in 2020, which the IMF will report in its World Economic Outlook this week. She said that just three months ago. the IMF expected positive per capita income growth in more than 160 of its member countries this year. However, “that number has been turned on its head” as the IMF now forecasts that more than 170 countries will experience negative per capita income growth this year.

“The bleak outlook applies to advanced and developing economies alike,” she said. “This crisis knows no boundaries. Everybody hurts.” However, she added that the economic crisis is expected to hit vulnerable countries the hardest.

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“Emerging markets and low-income nations—across Africa, Latin America, and much of Asia—are at high risk,” Georgieva said. “With fewer resources to begin with, they are dangerously exposed to the ongoing demand and supply shocks, drastic tightening in financial conditions, and some may face an unsustainable debt burden.”

Georgieva said that over the past two months, there has been approximately $100 billion in portfolio outflows from emerging markets, which is more than three times larger than for the same period during the global financial crisis.

“We estimate the gross external financing needs for emerging market and developing countries to be in the trillions of dollars,” she said, “and they can cover only a portion of that on their own, leaving residual gaps in the hundreds of billions of dollars. They urgently need help.”

Despite the economic turmoil caused by the pandemic, Georgieva said she has been encouraged by the quick actions of governments to pass economic relief packages. She said the IMF’s fiscal monitor to be released this week will show that countries around the world have taken fiscal actions amounting to approximately $8 trillion. This in addition to “massive monetary measures” from the G20 and others.

The IMF’s baseline assumption is for a partial recovery in 2021, but that’s only if the pandemic fades in the second half of the year and allows for a gradual lifting of containment measures and reopening of the economy.

“I stress there is tremendous uncertainty around the outlook,” Georgieva said. “It could get worse depending on many variable factors, including the duration of the pandemic. And, crucially, everything depends on the policy actions we take now.”

The IMF has $1 trillion in lending capacity and its executive board has recently agreed to double access to its emergency facilities, which will allow it to meet the expected demand of about $100 billion in financing. To help build a “bridge to recovery” the IMF is proposing a plan with four main priorities.

The first priority is to continue with essential containment measures and support for health systems. Georgieva said the purported trade-off between saving lives and saving jobs is a false dilemma.

“Given this is a pandemic crisis, defeating the virus and defending people’s health are necessary for economic recovery,” she said. “So the message is clear: Prioritize health spending for testing and medical equipment; pay doctors and nurses; make sure hospitals and makeshift clinics can function.”

For many countries, particularly in the emerging and developing world, this requires carefully reallocating limited public resources. Georgieva said it also means increasing the flow of resources to these countries.

“We must minimize disruptions to supply chains and, with immediate effect, refrain from export controls on medical supplies and food,” she said.

The second priority is to shield affected people and firms with large, timely, targeted fiscal and financial sector measures. This would vary according to country circumstances, but would include tax deferrals, wage subsidies, and cash transfers to the most vulnerable. It also includes extending unemployment insurance and social assistance, as well as temporarily adjusting credit guarantees and loan terms.

Georgieva also said it’s important to prevent liquidity pressures from turning into solvency problems in order to avoid a “scarring of the economy” that would make the recovery much more difficult.

The third priority would be to reduce stress to the financial system and avoid contagion. Georgieva noted that banks have built up more capital and liquidity over the past decade and said their resilience will be tested.

“The financial system is facing significant pressures, and monetary stimulus and liquidity facilities play an indispensable role,” she said. “Enhancing liquidity for a broader range of emerging economies would provide further relief. Importantly, it would also lift confidence.”

And the fourth priority is a plan for recovery, which Georgieva said requires careful consideration as to when to gradually ease restriction, and should be based on clear evidence that the epidemic is receding.

“As measures to stabilize the economy take hold and business starts to normalize, we will need to move swiftly to boost demand. Coordinated fiscal stimulus will be essential,” she said. “Where inflation remains low and well-anchored, monetary policy should remain accommodative. Those with greater resources and policy space will need to do more; others, with limited resources will need more support.”