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The Covid-19 pandemic is unprecedented in its global outbreak causing significant slowdown in economic activities and reductions in income and triggering unemployment. The pandemic has posed formidable challenges to policymakers as it has created truly a global shock never experienced before involving disruptions in both supply and demand in a highly globalised world.
On the supply side, it has caused reductions in labour supply and productivity with lockdowns leading to business closures, and the associated disease mitigation measures also added to supply disruptions. On the demand side, the loss of income due to layoffs has caused reductions in household consumption and investment. Most governments around the world at the initial stage of the outbreak of the pandemic was uncertain about the path, duration and magnitude of the crisis, therefore were mostly reactive in their crisis response.
As it was anticipated that the disease outbreak was not likely to disappear in the short run and the virus was likely to continue disrupting economic activity negatively impacting manufacturing and services industries as well as financial markets, more proactive policy initiatives have been undertaken to deal with the reduced economic activity driven by the Covid-19 pandemic.
We have seen unprecedented measures taken both in terms of fiscal and monetary poliies. Fiscal policy support measures included direct support to families and businesses along with loan guarantees and debt rescheduling through the financial system. Monetary policy has been primarily geared to provide increased credit facilities using interest rates and further bolstering quantitative easing (QE) - buying longer dated second-hand government bonds with created money.
However, it must be noted that as the crisis has caused increased precautionary savings and dampened investment demand, it will continue to create downward pressures on interest rates until the spread of virus is brought under effective control. The interest rate channel can also be used by the central bank to influence economic activity when market interest rates fall because the central bank has reduced the repo rate ( the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds), thus lowering the financing costs for commercial banks and consequently lower lending rates. It is important to note that when the central bank manipulates interest rates to encourage or discourage borrowing and spending, it is knowingly distorting prices and behaviour in the financial markets.
Despite all such measures, there have been lingering question as to whether this unfolding crisis will have lasting structural impact on the global economy or short term economic and financial consequences. In either case, it is clearly evident that such a highly communicable disease can have the potential to cause serious economic disruptions to an individual country, regional and global economies. Also, the fragility of global supply chain on which billions of people depend for their livelihood in a globally fragmented chain of production was brought to the fore through shortages caused by the pandemic.
The crisis now also has raised even more fundamental questions relating to the current global economic system based on continuous growth model underpinned by the neoliberal doctrinaire view. The crisis, some argue, has exposed the inherent failings of the system..
But a crisis such as the covid-19 pandemic along with climate crisis will continue to make dents into the current global economic system as engineered by the World Bank (WB) and the International Monetary Fund (IMF) based on neoliberalism. Added to all these, the mounting debt crises, rising poverty levels and the role of US led regime changes need to be factored in contributing to the deepening of the systemic crisis of neoliberalism.
The New York Times ( April 7, 2021), quoting the WB and IMF sources, said that the combination of debt, climate change and environmental degradation "represents a systemic risk to the global economy that may trigger a cycle that depresses revenues, increases spending and exacerbates climate and natural vulnerabilities". Yet both the institutions are not only the major lenders along with rich countries, private banks and bond holder but they are also at the same time the enforcers of austerity measures on poor debtor countries to ensure that the global financial system does not face loan defaults to avoid any liquidity crisis.
According to the IMFBlog (April 7, 2021), the overall fiscal deficits as a share of GDP in 2000 reached 11.7 per cent for advanced economies, 9.8 per cent for emerging market economies, and 5.5 per cent for developing countries. The Blog then further adds that average public debt worldwide approached 97 per cent of GDP at the end of 2020 and is expected to stay just below 100 per cent of GDP over the medium term. It further also mentions that unemployment and extreme poverty have also increased significantly, with the pandemic risks leaving a deep scar.
The IMF then goes on to tell that fiscal policy will have to remain flexible and supportive ( read get more into debt) until the pandemic is brought under control. Then in the same breath it goes on to caution that policy makers will have to strike a balance between providing fiscal support now on the one hand, and keep debt at a manageable level on the other without giving any guidelines how that could be achieved. The IMF further goes on to suggest that some countries need to build fiscal buffer (read resort to austerity measures) to lessen the impact of future shocks without mentioning what those shocks might be like, but one may presume that one of those shocks most likely to be debt default.
It is interesting to note that the IMF Chief Economist Gita Gopinath in an answer to a question at her press conference said " We (IMF) have for long been in favour of a common global corporate minimum tax". That leaves the question who will pay for building up fiscal buffer as suggested by the IMF.
It is generally suggested that the IMF has long represented the interests of lenders, in particular larger banks and within that framework the IMF's concerns about debt default is understandable. It has also been pointed out that the IMF operates an integrated global system where banks make loans; a business decision, then the IMF ensures loans are repaid and to that end, if necessary, it forces economic reforms on countries that are likely to default. And that assures both repayment of money owed and future business for the banks.
On last Tuesday (April 6, 2021), the IMF in its latest World Economic Outlook report once again provided a further revised economic outlook for the global economy. The IMF report while recognises that high uncertainty surrounds the global economic outlook, yet the global economy, according to it, is now on firmer ground with divergent recoveries. Divergent economic recoveries across countries and sectors are reflective of variations in pandemic induced disruptions and the extent of policy support.
The global economy is projected to grow at 6 per cent this year moderating to 4.4 per cent in the next year. The current growth projections by the IMF for 2021 and 2022 are higher than the January 2021 projections which stood at 5.5 per cent and 4.2 per cent respectively for those two years. The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility.
While Covid-19 remains the pressing concern, the IMF constantly monitors other factors that can change the economic outlook. The key risk factors identified include the flaring up of trade tensions between countries and decelerating growth in Europe and China. On an optimistic note, IMF Chief Economist Gita Gopinath said, "Even with high uncertainty about the path of the pandemic, a way out of this health and economic crisis is increasingly visible".
Saying that things look optimistic or are moving in the right direction does not mean that they are good. Income inequality within countries is likely to rise, a further about 100 million people are estimated to have fallen below the threshold of extreme poverty. Also, unemployment still remains more widespread, with long term unemployment on the rise. Rising inflation will lead to rise in interest rates negatively impacting developing economies. But for billions of workers around the world, if there is an uptick in inflation, it is not clear that workers would be able to secure wage gains to offset higher prices in view of the currently depressed labour markets.
Uncertainty still persists over the path and duration of the pandemic with the new wave spreading around the world and technical hitches and supply bottlenecks experienced by vaccine suppliers. The magnitude of negative impact of the pandemic on the global economy remains high, with no country escaping unscathed. This warrants proactive international collective action to roll out vaccine equitably across the world as well as undertake preventive measures to stop the spread of the virus at the national and international levels to save lives and to protect economic wellbeing.