While the human costs of the disease continue to climb, the coronavirus has also ravaged financial systems as businesses respond to shortages and investors panic amid increasing uncertainty. To ease conditions, central banks need to offer a helping hand, according to the International Monetary Fund (IMF).
“Central banks should be ready to provide ample liquidity to banks and non-bank finance companies, particularly to those lending to small and medium-sized enterprises, which may be less prepared to withstand a sharp disruption,” said Gita Gopinath, IMF chief economist.
“Governments could offer temporary and targeted credit guarantees for the near-term liquidity needs of these firms. For example, Korea has expanded lending for business operations and loan guarantees for affected small and medium-sized enterprises. Financial market regulators and supervisors could also encourage, on a temporary and time-bound basis, extensions of loan maturities.”
Ms Gopinath stressed that responses needed to be targeted to provide the most relief to households and businesses. Italy has extended tax deadlines for companies in affected areas, while China has temporarily waived social security contributions for businesses.
And while broader monetary stimulus such as policy rate cuts or asset purchases can also lift confidence and support financial markets, especially if there is a risk of a “sizeable tightening in financial conditions”, broad-based fiscal stimulus packages would be more effective when business operations begin to normalise.
“This health crisis will have a significant economic fallout, reflecting shocks to supply and demand different from past crises,” Ms Gopinath said.
“Substantial targeted policies are needed to support the economy through the epidemic, 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.”
