For world economies to get back up on their feet after this crisis, globally coordinated monetary policies become very crucial. Trade barriers and geo-political rivalries must be done away with
The finance ministries and monetary authorities of some of the heavyweight nations, members of G20, were still battling the consequences of the 2008 economic downturn and other financial emergencies caused by its aftershocks — like the Euro financial crisis of 2010-2012 — when the Coronavirus pandemic hit the world. They were absorbing the lessons, assessing and understanding the impacts and side-effects, trying to redevelop strategies and policies to create a resilient financial sector but then their coordinates changed. Due to the unprecedented worldwide spread of the virus, all these designs have stopped dead in their tracks. Consequently, the focus of the G-20 countries has shifted from creating strong and buoyant but routine financial policies and mechanisms to firefight and embrace exceptional and extraordinary actions to fight the damage unleashed by this contagion.
Since no country is in this pandemic alone, and almost all of humanity is hit, it is essential for the world to act in coordination and cooperation, with the G-20 playing a major role here. These unusual and unexpected times require exceptional management and a strategy to create policies, interdependent monetary, fiscal and prudent strategies to sail through and be ever-ready for any future uncertainties.
The economic aftermath will far outlive the health consequences, forcing governments to develop a strong anti-Covid long-term strategy, which should be more permanent in nature than just a knee-jerk reaction to the present situation, knowing that most of the world’s economies have been pushed back by more than a decade.
Nonetheless, some of the lessons of the last few decades can come in handy while creating new strategies, getting around earlier oversights, reducing the risk of financial uncertainties and enabling a steady transition into the “new normal” after ascertaining the damages caused by Covid-19. Therefore, taking into consideration the experiences of major countries, and the requirements of handling these enormous jolts, monetary policy strategies should be narrowed down. The G20 should step up and help develop these conceptual points and implement them as practical measures.
A monetary policy, conventionally, has been used by governments around the world to control the money supply in the economy, which, in turn is used for adjusting inflation and stabilising prices. During an economic slowdown or recession, there is a substantial decline in consumer spending. The production levels dip due to general fall in demand and low capital expenditure by companies, unemployment increases as firms lay off the existing workforce to save costs and stop any fresh recruitments, and foreign investments dry up. So, there is an overall downturn in the economy in terms of new investments and consumption. Governments have to respond to this situation through policy changes that have the responsibility to reverse the prevalent situation.
So, a monetary policy, which is essentially counter-cyclical and expansionary in nature, helps in increasing the money supply and boosting the demand for products, building confidence and credibility and ensuring overall stability. However, for a monetary policy to work effectively, the central bank has to be independent of the elected Government. In addition, to the monetary policy, the fiscal policy — public expenditure and taxation — is another tool for governments to try and come out of an economic crisis.
Immediate actions to face the shock: In the first stage, the interplay between demand and supply and any imbalance between them can lead to major concerns. Supply shocks, caused globally during this pandemic, due to production delays caused by major lockdowns worldwide and interruptions in supply chain and logistics, have a domino effect and initiate demand shocks, in turn leading to disruptions to cash flow and the entire payment cycle. Some companies unable to face this short-term disruption will face financial distress and as result, rise in unemployment is expected.
To help firms and people tide over this period, the central banks should infuse liquidity into the economy by creating policies to drive commercial banks to provide loans to businesses and households alike. Liquidity is needed for the securities market, too, which is feeling the heat due to the turn of events during the outbreak. Additional support by a slew of supplementary measures, like decline in interest rates and an extensive credit support for SMEs, should be provided by governments.
The monetary policies should be well-supported by fiscal and prudential policies. Bad loans is one such area and governments should make provisions for such requirements in their budgets. To escape any financial meltdown, central banks should also step in to buy bonds and commercial paper. Since this pandemic is unprecedented and the extent of it is still unclear, international cooperation and the role of the G20 is very crucial here in providing liquidity to global economies. This could be achieved through swap arrangements under the auspices of the International Monetary Fund (IMF) as a dedicated alternative financing arrangement for Covid-19 emergency, especially for Emerging Market Economies (EMEs) and Least Developed Countries (LDCs). An action that is lacking or is wrong could spark a financial crisis that could have ramifications that are graver than the repercussions of the global financial crisis.
Long-term strategy for healing: The impact of the shocks faced by the global economies is expected to linger, both in the financial and other sectors of economies. There will be dampness in investment, consumption and growth due to still existing uncertainties, disparity in resource allocation due to unemployment and firm closures. Therefore, this second stage should focus on helping individuals, companies and countries resume normalcy in their operations and any hope for growth. This stage will be longer than the first stage.
Here, fiscal policies take the lead from monetary policies and would take charge but with sustained support from monetary policies. Several measures like public expenditure, transfers, tax reliefs will play a major role in this stage. The monetary policy must play a supporting role at this stage by keeping a close watch on liquidity and keeping the interest rates low.
Sole reliance on monetary policies can be untenable, unproductive and very serious, with one of the grave problems being excessive inflation. In addition, political frictions and trade barriers can create disruptions. One of the key roles of the G20 is to help resumption of economic integration among various countries. The G20 can help by overseeing the coordination by central banks of different countries, leading to stable exchange rates and reducing any potential currency wars.
The new normal: This third stage will be post the Covid crisis and a revamp of the regular policies followed for decades would require a hard rethink. All the policies of a country — monetary, fiscal and prudential — will have to work in full coordination.
The role of the monetary policy should be two-pronged and should include macro-financial stability and not just price stability.
The final step is to gradually de-leverage the global economy by reducing the debts and increasing the interest rates in a phased manner. This will be, by far, the most difficult step for any country. It should be an important and coordinated effort to increase the interest rates but at the same time ensuring that the liquidity does not dry up. Prudential policies, at the same time, should focus on capital and leverage ratios. Clear fiscal measures should slowly reduce public debt and reverse any excessive tax incentives. All these measures should be implemented, keeping a definite finger on the pulse of the nation’s economic condition.
Therefore, it can be inferred that for the global economies as a single unit, the following strategies can be crucial to help them revive economically from the Covid-19 pandemic.
First, the monetary, fiscal and prudential policies must work in a coordinated manner with the aim to achieve financial stability. Second, at the global level, the indebtedness, which was already at the higher side before the commencement of the pandemic, would have further increased during stage two. So, financial instabilities will be here to stay for a long term and governments have to be very careful in reducing leverages in future, in stage three.
For global economies to get back up on their feet after this pandemic, internationally coordinated monetary policies become very crucial. Trade barriers, geo-political rivalries and hostilities must be done away with. Although economic instability appears similar around the world, it is, in reality, dissimilar, in nature due to different structural aspects of each nation. Therefore, the role of international bodies like the G20 becomes very important here.
(The writer is Associate Professor, Amity University, Noida)