Sound economic policy is crucial for a speedy economic recovery, IMF says

The fund cautioned that ‘excessive' disruption’ should be prevented by providing state aid to companies

(FILES) In this file photo taken on June 30, 2015 a logo is seen outside the headquarters of the International Monetary Fund in Washington, DC.  The International Monetary Fund on July 3, 2019 approved a $6 billion, three-year loan for Pakistan to try to right the South Asian nation's economy. With the IMF board's approval, the fund released $1 billion to Pakistan immediately and said in a statement the program aims to "support the authorities' economic reform program" and to help "reduce economic vulnerabilities and generate sustainable and balanced growth."
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The economic policies undertaken by countries will be crucial to making sure they recover quickly from the impact of the coronavirus pandemic, the International Monetary Fund (IMF) said on Wednesday.

The Washington DC-based organisation cautioned that excessive economic disruption should be prevented, and said extreme measures such as selective nationalisation of distressed private companies should be among the measures considered.

“The success of the pace of recovery will depend crucially on policies undertaken during the crisis,” IMF economists including Giovanni Dell’Ariccia, Paolo Mauro, Antonio Spilimbergo and Jeromin Zettelmeyer, said.

“If policies ensure that workers do not lose their jobs, renters and homeowners are not evicted, companies avoid bankruptcy, and business and trade networks are preserved, the recovery will occur sooner and more smoothly.”

Countries should focus on guaranteeing the functioning of essential sectors as well as providing enough resources for people hit by the crisis.

“Resources for Covid-19 testing and treatment must be boosted. Regular health care, food production and distribution, essential infrastructure and utilities must be maintained,” the lender said.

“It may even involve intrusive actions by the government to provide key supplies through recourse to wartime powers with prioritisation of public contracts for critical inputs and final goods, conversion of industries, or selective nationalisations.”

France’s early seizing of medical masks and the activation of the Defense Production Act in the US to ensure the production of medical equipment illustrate this, it added.

Governments should provide enough resources for people hit by the crisis, including expansion of unemployment benefits and cash transfers, the fund said.

Company closures would cause loss of organisational know-how and the termination of productive long-term projects, according to the IMF.

“Disruptions in the financial sector would also amplify economic distress. Governments need to provide exceptional support to private firms, including wage subsidies, with appropriate conditions.”

Large programmes of loans and guarantees have already been put in place and the European Union has facilitated direct capital injections into companies by relaxing its state aid rules during the crisis. But the fund warned that certain conditions need to be in place for such aid to be effective.

“If transfers or subsidised loans are given to a large corporation, they should be conditional on preserving jobs and limiting CEO compensation, dividends, and stock repurchases.”

Policies in support of households, businesses, and the financial sector will involve a mix of liquidity measures including provision of credit, postponement of financial obligations and solvency measures.

“Bankruptcy would ensure that equity holders share some of the costs, but would also cause significant economic dislocation. An intermediate option is for the government to take an equity stake in the firm.”

“When liquidity is the problem, credit by the central bank, through asset purchase programs or other government-controlled financial intermediaries (through loans and guarantees) has proven effective in previous crises.”

Limiting the movement of people is necessary for containment but countries must resist the instinct of shutting down trade, especially for health care items and the free exchange of scientific information, the IMF said.

The coronavirus pandemic is the biggest challenge to the global economy since the 2008 financial crisis. The outbreak has disrupted trade, the travel industry and rattled investors, wiping about $20 trillion (Dh73.4tn) from stock markets globally