Covid-19 pandemic validates the need for multilateral institutions, IMF chief economist says

The coronavirus pandemic validates the need for multilateral institutions, as governments try to buttress their economies and take a more active role in introducing emergency measures for crises, the chief economist of the International Monetary Fund said. "This crisis completely brings to light the importance of having international institutions – the IMF, the World Bank and many others," Gita Gopinath told The National after the release of the World Economic Outlook report on Tuesday. “This a truly global crisis. It’s not possible that we can have advanced economies coming out of it whole if emerging markets and developing countries still have the virus pandemic playing through their economies,” she said. “It is quite a truly global effort. At the IMF, we are stepping up in many ways to provide exactly that kind of support in terms of rapid financing facilities and debt service relief for our poorer members.” Populist movements that have emerged in different countries in recent years have attacked multilateral institutions, free trade and globalisation. But the coronavirus pandemic, which has infected nearly 2 million people worldwide and killed about 125,000 so far, necessitates the co-operation of countries and international organisations now and in the future to cushion the effect on economies, people’s health and livelihoods, Ms Gopinath said. The outbreak is the biggest challenge to the global economy since the Great Depression, plunging it into a deep recession with growth set to contract by 3 per cent this year. Covid-19 has rattled investors, wiped out about $17 trillion (Dh62.4tn) from stock markets worldwide and led to millions of people losing their jobs as countries impose lockdowns. Governments worldwide have stepped up with $8tn in stimulus packages backed by monetary support from central banks. This intervention raises the question of whether governments will play a more active role in economies in the future, increasing spending and lowering taxes to stimulate demand and pull the global economy out of this pandemic or future crises. “Whenever you have a crisis of this kind, the public sector role becomes that much bigger and this will be no different in that sense,” Ms Gopinath said. “We will come out of this crisis with a much bigger role of the public in the economy and of course afterwards there tends to be a scaling down, but there will certainly be this period.” For policymakers, “speed is really of the essence", in easing the effects of the crisis on their economies, she said. The silver lining from such deep downturns is that more safety nets will be put in place to protect countries in the future. “There will be a demand for more kinds of what we call automatic stabilisers, which is, when there is a downturn when people are losing jobs and income, there are automatic mechanisms that provide them with support,” Ms Gopinath said. “For countries that don’t have those kinds of automatic systems in place and existing infrastructures, this crisis is particularly challenging because how do you reach all the people that you need to reach in a very short period of time? "This crisis will enhance the importance of these kinds of automatic social security mechanisms so that next time a crisis happens, people get protection much more quickly.” The fund is projecting global public and private debt to increase significantly, by “several percentage points”, Ms Gopinath said. Global debt reached $188tn or 226 per cent of GDP in 2018, according to IMF data. “This is a crisis that calls for a very large response of this kind,” Ms Gopinath said. “It’s an exogenous shock. The point is that when you have a crisis of this kind and you’re in a deep downturn, policies should be stepping up, so that’s the right thing to do.” Although debt levels will rise during the pandemic, they will then stabilise because of the prevailing low interest rate environment and when a recovery sets in, increased revenues and taxes will help reduce debt levels, she said. “As long as interest rates stay low, at least for advanced economies in the world, that will slowly bring their debt levels down,” Ms Gopinath said. “There will be countries for whom debt sustainability issues will come up. Many of the discussions that are being had now about debt moratoria, debt restructuring and debt service relief I think will continue into the recovery phase.” Looking ahead, more work needs to be done on the international front to address emerging markets, developing and poorer countries, which have limited fiscal space to deal with the impact of the pandemic. “Those countries are dealing with very large reversals in capital flows," Ms Gopinath said. "There is a need for an international response here. There will be a need for concessional financing, there will be need for aid, there will be need for debt relief for many poor countries in the world." Helping countries to recover also means that when therapies and vaccines are found, they should be made available at scale for all countries and are affordable, she said. Ensuring sufficient international liquidity will also be critical. Of the IMF's 189 members, 100 countries have approached it for emergency financing. “That’s the kind of support that will be needed,” Ms Gopinath said.