Swift action prevented Covid-induced recession from being three times worse, IMF says

Officials urged to press on with reforms in tandem with monetary and fiscal support to accelerate recovery and build sustainable economies

A man with a mask pushes a cart with a sign reading ‘corpse cartte’ at Times Square in Manhattan in New York City, March 17, 2020. AFP

The estimated cost of the Covid-19 pandemic on the global economy in lost output over the 2020-24 period relative to pre-pandemic projections is $15 trillion and last year's recession, which was the deepest since the 1930s, could have been three times worse had policymakers globally not acted swiftly, according to the International Monetary Fund.

The Washington-based lender called on decision makers to strengthen their economies with growth-oriented reforms for the future to accelerate their economic recovery.

“We know that some pro-growth reforms were deferred, if not reversed, and some economic scarring has occurred,” Geoffrey Okamoto, the fund’s first deputy managing director, wrote in a blog post. “The same energy that is being put into vaccination and plans for recovery spending also needs to be put into growth measures to make up for this lost output.”

Globally, governments have spent $16tn in providing fiscal support while central banks have increased their balance sheets by a combined $7.5tn, according to fund estimates.

“Deficits are the highest they have been since World War II and central banks have provided more liquidity in the past year than in the past 10 years combined,” Mr Okamoto said.

Last year’s downturn saddled countries, especially emerging market and developing nations, with more debt and limited their capacity to address rising poverty and inequality levels. Public debt is now more than 100 per cent of global gross domestic product and has surpassed the record level it reached at the end of the Second World War, according to the fund.

.

Moving forward, decision makers should capitalise on reforms that can boost growth.

Debt restructuring, stronger active labour market policies and improved competition frameworks in tandem with ongoing monetary and fiscal stimulus can help chart a more sustainable future and produce a stronger economy, Mr Okamoto said.

Changes in product, labour, and financial markets could raise annual growth in GDP per capita by over one percentage point in emerging market and developing economies in the next decade, according to the fund.

“Seizing the opportunity could deliver years of solid post Covid-19 growth and progress in living standards,” Mr Okamoto said.

“These countries would be able to double their speed of convergence to advanced economies’ living standards relative to the pre-pandemic years,” he added.

.

Reforms can help emerging market countries boost investor confidence even as financial conditions tighten and if inflation persists in advanced economies, Mr Okamoto said.

“For low income countries who have depleted their policy space, the returns on growth-oriented reforms can be high enough to avoid harsh fiscal austerity, allowing them to protect social and health spending in the short-run while boosting their capacity to invest in their people in the long run,” he said.

“It doesn’t all have to be done at once. Recovery from this crisis will take years for most countries. Inspiring the next generation to rebuild a brighter future is the primary challenge for this generation of policymakers,” Mr Okamoto added.

“Pairing growth reforms with recovery spending will deliver the prosperity that we have promised our citizens, making our own fate in a post Covid-19 world.”