global-economic-output-to-contract-by-3-due-to-covid-19-imf

Context:

The COVID-19 pandemic is having a “severe” effect on the world economy and is expected to cause a -3% change (i.e., a contraction) in global output in 2020 as per the International Monetary Fund’s (IMF) World Economic Outlook (WEO). 

Background: 

  • A rare disaster, a coronavirus pandemic, has resulted in a tragically large number of human lives being lost. 
  • As countries implement necessary quarantines and social distancing practices to contain the pandemic, the world has been put in a Great Lockdown.
  • The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes.

Findings of Report:

  • Assuming that the pandemic fades in the second half of this year, with containment efforts gradually easing up, the world economy is projected to grow at 5.8% in 2020 as economic activity normalizes, aided by policy.
  • The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined.
  •  If the pandemic does not recede in the second half of 2020, global GDP would fall an additional 3% in 2020 and if the pandemic continues into 2021, global GDP may fall next year by an additional 8%.
  • Emerging Asia is projected to be the only region that grows in 2020, at a rate of 1.0%.
    • China is projected to grow at 1.2% in 2020 and 9.2% in 2021.
    • Indonesia is expected to grow at 0.5%, while others in the region experience contractions.
  •  For India the forecast is modest 1.9% growth in 2020, 
    • While for 2021 - 7.4% growth rate is forecasted for India.
  • Advance economies will have an output change of - 6.1% (i.e., a contraction) in 2020 followed by 4.5% in 2021. 
    • The U.S. is projected to contract by 5.9% this year and grow by 4.7% next year, while the Euro area, will contract by 7.5% this year and grow by 4.7% next year.

Analysis of Findings:

  • The global forecast is characterized by “extreme uncertainty” 
  • The economic impact of the disease depends on a number of factors and their unpredictable interaction, including 
    • the pandemic’s pathway, 
    • the intensity and effectiveness of containment efforts, 
    • supply chain disruptions, 
    • spending pattern changes, 
    • behavioural changes (for example - people visiting shopping malls and public transport use), 
    • significant tightening of global financial market conditions and so forth.
  • Necessary measures to reduce contagion and protect lives will take a short-term toll on economic activity but it should also be seen as an important investment in long-term human and economic health.

Impact of Covid - 19:

Way Ahead:

  • The IMF called on policymakers to make targeted fiscal, monetary and financial sector interventions to support impacted households and businesses. 
  • Fiscal measures should be two-fold, cushioning the impact on the most-exposed households and businesses, and reducing firm closures , i.e., preserving economic relationships. 
  • Fiscal support will need scaling up, if activity does not pick up sufficiently once restrictions are lifted or if economic activity stoppages are persistent.
  • Monetary stimulus by large central banks and liquidity facilities to reduce systemic stress would be required to limit the shock, positioning the economy for a better recovery.
  • Further Strong multilateral cooperation is essential to overcome the effects of the pandemic, including to help financially constrained countries facing twin health and funding shocks, and for channeling aid to countries with weak healthcare systems.

International Monetary Fund 

Established

  • It was conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, United States. 
  • The 44 countries in attendance sought to build a framework for international economic cooperation and avoid repeating the competitive currency devaluations that contributed to the Great Depression of the 1930s.
  • Headquartered in Washington D.C and has 189 members. 

Mission

The IMF's primary mission is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to transact with each other.

Surveillance 

  • In order to maintain stability and prevent crises in the international monetary system, the IMF monitors member country policies as well as national, regional, and global economic and financial developments through a formal system known as surveillance .
  • The IMF provides advice to member countries and promotes policies designed to foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards. 

Financial Assistance

  • Providing loans to member countries that are experiencing actual or potential balance-of-payments problems is a core responsibility of the IMF. 
  • Individual country adjustment programs are designed in close cooperation with the IMF and are supported by IMF financing, and ongoing financial support is dependent on effective implementation of these adjustments.

Capacity Development

  • The IMF provides technical assistance and training to help member countries build better economic institutions and strengthen related human capacities. 
  • This includes, for example, designing and implementing more effective policies for taxation and administration, expenditure management, monetary and exchange rate policies etc.

SDRs

  • The IMF issues an international reserve asset known as Special Drawing Rights , or SDRs, that can supplement the official reserves of member countries. 
  • Total global allocations are currently about SDR 204 billion (some $283 billion). 
  • IMF members can voluntarily exchange SDRs for currencies among themselves.
  • The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling

Resources

  • Member quotas are the primary source of IMF financial resources. 
    • A member’s quota broadly reflects its size and position in the world economy. 
    • The IMF regularly conducts general reviews of quotas. 
    • Latest review doubled quota resources to SDR 477 billion (about US$661 billion). 
  • In addition, credit arrangements between the IMF and a group of members and institutions provide supplementary resources of up to about SDR 182 billion ($253 billion), and are the main backstop to quotas. 
  • As a third line of defense, member countries have also committed resources to the IMF through bilateral borrowing agreements, totaling about SDR 317 billion ($440 billion).

Governance and Organisation 

  • At the top of its organizational structure is the Board of Governors , consisting of one governor and one alternate governor from each member country, usually the top officials from the central bank or finance ministry. 
    • The Board of Governors meets once a year at the IMF–World Bank Annual Meetings . 
  • Twenty-four of the governors serve on the International Monetary and Financial Committee, or IMFC, which advises the IMF's Executive Board on the supervision and management of the international monetary and financial system. 
  • The day-to-day work of the IMF is overseen by its 24-member Executive Board , which represents the entire membership and supported by IMF staff. 
  • The Managing Director is the head of the IMF staff and Chair of the Executive Board and is assisted by four Deputy Managing Directors.

Key Reports

It also provides periodic assessments -

  • Of global prospects in its World Economic Outlook
  • Of financial markets in its Global Financial Stability Report
  • Of public finance developments in its Fiscal Monitor
  • Of external positions of the largest economies in its External Sector Report

Source:

https://www.thehindu.com/business/Economy/coronavirus-imf-projects-19-growth-for-india-in-2020/article31340201.ece

Imaage Source: Bloomberg