“From an Economic Perspective, the key issue is not just the number of cases of Covid-19, but the level of disruption to economies from containment measures”.

Ben May, head of Global Macro Research at Oxford Economics, said in a report this week,

“Widespread lockdowns such as those imposed by China have been enacted in some hotspots ,” he said, adding that such measures if taken disproportionately ,– could induce panic and weaken the global economy even more.

Fears of the corona virus impact on the global economy have rocked markets worldwide, plunging stock prices and bond yields.

World Economies

World Bank adds $2 Billion to funds available for Covid-19 response- The World Bank said it had increased to $14 billion the amount of fast track financing available to members to respond to the global Corona virus pandemic, adding $2 billion to the initial package.

The change will give the World Bank’s International Financing Corporation a total of $8 billion to support private companies and their employees, hurt by economic impact of the virus, the bank said.

IFC said that funding would be used to help existing clients in Tourism, Manufacturing and other heavily affected sectors keep paying their bills, while aiding the healthcare industry as it races to meet surging demand for services, equipment and drugs.

World Bank President David Malpass said that  bank was committed to provide a fast and flexible response based on the needs of developing countries. Malpass said “ It’s essential that we shorten the time to recovery,”. “Support operations are already underway, and the expanded funding tools approved will help sustain economies, companies and jobs.

The new component offers funding from IFC’S Global Trade Liquidity Program and its critical commodities Finance Program, both of which provide support to local banks so they can continue to finance companies in emerging markets. IFC is the largest global development institution focused on the private sector in emerging markets and works with 2000 businesses worldwide.

International Monetary Fund On Coronavirus:-  The International Monetary Fund said it stands ready to use its $1 trillion in lending capacity to help countries around the world that are struggling with the humanitarian and impact of novel coronavirus. IMF Managing Director Kristalina Georgieva said in a statement that “ As a first line of defense, the fund can deploy its flexible and rapid disbursing emergency response toolkit to help countries with urgent balance – of – payment needs.

The Fund already has 40 ongoing arrangements both disbursing and precautionary- with combined commitments of about $200 billion. In many cases, these arrangements can provide another vehicle for rapid disbursement of crisis financing. Further, IMF provided that Lending could be used to aid its members, especially emerging and developing countries. IMF managing director, said the fund’s catastrophe containment and relief trust can help the poorest countries with immediate debt relief, which will free up vital resources for health spending, containment and mitigation.

Bank of America On Covid 19:-  The Federal reserve’s February rate cut likely kick started an extensive policy strategy for curbing the corona virus‘s  economic impact. The central bank can turn to monetary policy tools and liquidity injections to protect against recession, the firm analyst said. The corona virus has already strangled global supply through factory shutdowns and supply chain disruptions and growing number of quarantines now threatens demand.

These are the four tools which are likely to be used by Federal Bank Of America:-

1. Interest rates at zero.

2. Forward Guidance.

3. Treasury “ Twists”

4. Quantitative Easing.

1. Interest rates at zero:- The Federal Reserve took emergency action to help the economy withstand the Corona virus by slashing its bench mark interest rate to near zero and it would buy $700 billion in Treasury and Mortgage Bonds. The Fed’s surprise announcement signaled its concern that the viral outbreak will depress economic growth in the coming months and it is prepared to do whatever it can counter the risks. It said it would keep its key rate range between zero and 0.25% until it feels confident that the economy can survive whats become a sudden near shutdown of economic activity in the United States.

The Central bank will buy $500 billion of Treasury securities and $200 billion of mortgage backed securities- an effort to smooth over market disruption that have made it hard for banks and large investors sell treasuries as well as to keep longer term borrowing rates down. By aggressively slashing its benchmark short term rate near zero and pumping hundreds of billions of dollars into the financial system, some of the Fed’s new steps are intended to free up money for banks to lend. As businesses across the country see their revenues dwindle as consumer stay home, they will seek short term loans to maintain their payrolls. The Fed said it has dropped its normal requirement that banks hold cash equal to 10% of its customers deposits, allowing banks to lend these funds.

2. Forward Guidance:- Forward guidance is a tool that central banks use ti provide communication to the public about the likely future course of monetary policy. When central banks provide forward guidance. Individuals and businesses will use this information in making decisions about spending and investments. Thus, Forward Guidance about future policy can influence financial and economic conditions today. Using a tool honed during the Great recession of 2007-2009, the Fed offered Forward Guidance on the future path of its key interest rate, signaling that rates will likely remain low as Powell Said, “ Until we are confident that the economy has weathered recent event and is on track to achieve our maximum employment and price stability goals. Such Forward Guidance on the overnight rate put downward pressure on longer term rates.

3. Treasury Twists:- Treasury Twist or Operation twist is a name given to a type of Monetary Policy operation performed by the federal measure bank. It involves buying and selling government bonds is an effort to provide monetary easing for the economy although it’s not quite as aggressive as another type of monetary policy called Quantitative Easing.

Why Treasury Twist?  The idea is that by purchasing longer term bonds, the Fed can help drive prices up and yields down. (Since prices and Yields move in opposite directions. At the same time, selling shorter term bonds should cause their yield to go up. (Since their price will fall). In combination, these two actions “twist” the shape of the yield curve.

4. Quantitative Easing:- The Fed announced its fourth round of quantitative easing. In addition to cutting the benchmark interest rate to zero, the Fed will purchase $700 billion worth of Treasuries and Mortgage backed securities with two aims.

(i) Boosting liquidity in the Financial system.

(ii) Increasing aggregate demand by expanding the money supply.

Under the Chairman Ben Bernanke, the Fed initiated its first round of Quantitative Easing in December of 2008 and followed up with two subsequent rounds until suspending asset purchase in December 2014.

The Role of Unconventional Tools:-

When a Central Bank hits the Zero lower bound, it has to turn to Unconventional tools or risk letting the economy fall into an uncontrolled recession. Unconventional tools include Quantitative Easing, as well as Forward Guidance ( Forecasting future interest rate changes), negative interest rates ( Charging banks to hold reserves at the central Bank), and “ Helicopter Money” ( transferring money directly to consumers). While the Fed has limited its unconventional tools to quantitative easing and forward guidance.

People’s Republic of China- corona-virus affect:-

With the Corona-virus severely hurting the economy and businesses, a report has suggested that around 2.47 lakh companies in the country have declared bankruptcy during the first two months of 2020. Several reports have recently said that many Chinese companies, especially small businesses, are feeling the heat as the pandemic brought consumer activity to a halt. Almost 36 percent of the private- owned firms that responded to a survey conducted by Tsinghna university in February said that they were hammered by the economic fallout from the outbreak and did not expect to survive after a month. In another survey released in February more than 60 percent of the small and medium sized enterprises in Shandong said that they could only hold out for a maximum of three months under current situations. Around 55 percent of the companies that have gone bankrupt were startups with a lifetime of below three years.

The Corona-virus likely halved China’s economic growth in the current quarter compared with the previous three months, more severe than thought just three weeks ago and triggering expectations for earlier rate cuts, a Reuters poll found.

The people’s Bank of China is now forecast to reduce the one year Loan prime rate(LPR) CNYLPR1Y=CFXS, the benchmark lending gauge, it introduced in August 2018, to 3.85 % from the current 4.05% by the middle of the year. Previously it was not expected to fall that for until first quarter of 2021.

China’s Cabinet called for a further reduction in the amount of cash some lenders are required to part at the central bank, as the Government seeks to ease monetary conditions to support the economy amid the impact of Corona-virus. The State Council meeting chaired by premier Li Kiqiang called for reserve requirement to cut soon for banks participating in a program to secure funding for Small And Medium Sized companies. According to a statement released by the government. Additional cuts in the reserve ratios for Joint Stock Banks were also pledged at the meeting.

Both measures aimed at supplying long term cheap funding to banks to encourage them to lower the financial costs of enterprises, especially for smaller companies hit by the Corona-virus. The upcoming RRR cuts will release at least 300 billion Yuan ($43.1 Billion) into the banking system,while the window for a benchmark deposit rate cut will only open in the second quarter.

Other Measures Pledged are:-

  • Li also called for a shortening of the so called “Negative List” that marks areas foreign companies are forbidden from entering.
  • China will actively prepare for the Canton Fair, slated to open this Spring.
  • Strengthening International Cooperation to facilitate the smooth operation of global supply chains, including adding International Cargo Flights.
  • Encouraging Financial Institutions to provide more Credit Export oriented companies.

Japanese Response on Covid-19:-

Japan mulling additional corona-virus economic rescue measures. A third leg incentives are being formulated to ease the economic fallout of the pandemic on Japan’s deteriorating economy. As  global travel restrictions coupled with voluntary shutdown and self isolation advice grip society, Japan’s restaurants, hotels, and taxi operators, those on the frontline of declining tourism face a sense of crisis.

In February, the number of foreign tourists entering pummeled by 5 percent to 1.09 million, the lowest figure recorded since the 2011 great east Japan earthquake when tourist arrivals fall 62.5 percent. Widespread domestic and international flight cancellations have forced Japan based airlines to brace for a projected revenue loss of $2.8 billion between February and April.

The Japanese Government will lay the groundwork for an additional economic stimulus package after forming a panel of economists and business leader to help mitigate the economic impact of the corona-virus pandemic. Prime Minister Shinzo Abe said the gorverment’s priority is maintaining employment and business continuity, promising to take “drastic measures to put the Japanese economy back on a steady growth path.

In Mid-February the first phase of emergency measures featured 500 billion Yen( $4.5 Billion) in Low Interest Collateral free emergency loans aimed toward struggling small to medium size businesses in the tourism industry. The second round of stimulus, announced on March10, expanding financing support to other virus hit sectors such as hospitality and manufacturing. The Corona-virus pandemic has caught the world’s third largest economy as it struggles to bounce back from an unpopular 2 percent Typhoon Hagibis- the strongest typhoon to strike Japan in decades.  Abe has also pledged support to parents taking a break from work to look after their children during school closure, offering a daily subsidy of 4100 yen while also calling for utility payment to be deferred for one month for low income households. According to SMBC Mikko securities , if the outbreak is not brought under control, cancelling the Olympics would reduce Japan’s annual GDP by an estimated 1.4 percent, totaling 7.8 trillion YEN.

Alternatively hosting the Olympics with no spectators would also amount to losing 4.8 Million tickets, which have already been sold.

India’s response to the Corona-virus:-

It could include cash transfers to the informal economy. India is working on a set of policy measures to combat the economic impact of the fast spreading corona-virus and that may include some cash transfers to the workers in the informal sector, the country’s top economic advisor said. Health officials worldwide have urged countries to step up measures that can keep the daily number of reported cases at a level manageable for health-care systems, a concept known as “flattening the curve”.

Economic trade-off:- 

There is actually an essential trade-off between flattening the curve, from the health policy perspective, and the consequent impact of that in the economy, “ Krishnamurthy Subramanian, Chief Economic advisor to the Indian Government. He explained that India anticipates possible disruptions to the supply chain and a decrease in demand that could, in turn affect businesses. As such, the government is working on both fiscal and monetary measures.

Mix of both Fiscal and Monetary policy needed to Salvage the Economy:

A combination of Monetary as well as Fiscal Policy measures are called for to salvage the economy from the collateral damage from the fallout of the spread of Corona-virus disease Covid-19. On the Monetary side, besides maintaining a proactive liquidity regime as well as facilitating stability in financial markets through unconventional measures, the research report makes a case for a rate cut  by the Central Bank to accommodate the possible surge in Liquidity demand and shock related price increase. The output in the economy is expected to slow down  on account of both demand side and supply side factores. On the demand inoperatibility analysis for three sectors namely Transport, Tourism and Hotels show significant impact on demand and hence output.

On the supply side China is an important source of critical inputs for many sectors. Supply shock is akin to higher price of inputs which in turn affects the price of all the commodities up the supply chain. A simultaneous demand and supply shock to the economy will also have implications for the banking sector.

Analysis of Global Response towards Corona-virus (COVID-19):

  • With the Corona-virus (COVID-19) casting its shadow on the global economy, most Governments and Central Banks have initiated a strong policy response to battle the pandemic. Analysts at Edelweiss securities, however, suggested that India has not done enough compared to its global  peers to combat the situation.
  • “Against this macroeconomic backdrop and the fresh shock arising out of the global pandemic, India’s Macroeconomic Policy response has been slow to say the least, even though the Government is acting aggressively to prevent the spread of Covid-19- Wrote Aditya Narain, head of research for institutional equities at Edelweiss Securities.
  • Reserve bank of India has decided to conduct Open Market Operations on March 20, in the form of purchase of an aggregate amount of rupees 10000 crore of Government Securities through a Multi Security Action using Multiple Price Method. At the global level, the European Central Bank launched new Bond Purchase worth 750 Billion Euros.
  • What the United States FED has done, Market has not reacted positively as it is believed that rate cuts and liquidity cannot really change the situation. Yet Central Banks all over the World have gone ahead with these two measures.


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