The International Monetary Fund(IMF), organised a session, “Pandemic Policies for People” as part of their “COVID-19 Pandemic in Developing Countries Conference”, bringing together a panel of experts to discuss the impact of the Covid19 crisis on low income countries and middle income emerging markets given that these country groups are facing increasingly similar challenges. The session was moderated by Adva Saldinger, who is an associate editor at Devex, where she covers the intersection of business and international development as well as U.S. foreign aid policy. YOU CAN WATCH THE WHOLE SESSION HERE
The session’s panel consisted of prominent policy makers and experts including, Dr Reza Baqir (Governor of State Bank of Pakistan), Dr Rachel Glennerster (Chief Economist at the The Foreign, Commonwealth & Development Office, FCDO) , Ricardo Hausmann (Director of the Growth Lab at Harvard's Center for International Development and the Rafik Hariri Professor of the Practice of International Political Economy at Harvard Kennedy School) and Dr Patrick Ngugi Njoroge (Governor of the Central Bank of Kenya).
Dr Reza Baqir
While expressing his thoughts about the veracity of the COVID-19 pandemic, the Governor SBP, Dr Reza Baqir said that everything came to a grinding halt. According to him there were three challenges upfront which needed to be tackled
The first one was to ensure the balance between the lives and livelihoods. According to him, Pakistan is the world’s fifth largest country and according to an estimate by the World Bank, a quarter of the country’s population live below the poverty line Impact and the biggest fear was the toll this pandemic would take on the poor.
He further added that the biggest role in response to this pandemic came from the public health agencies. However the Central Bank had a huge responsibility as well which was that they had to ensure that solvent businesses remain afloat and the economic impact of the pandemic is minimized.
According to Dr Baqir, the main objective of the central bank’s reaction was to try its best to keep businesses away from bankruptcy and achieving this objective would be a huge achievement. Taking his conversation further, the Governor talked about the initiatives taken by the State Bank of Pakistan such as deferring principle loan repayments and various other historical measures.
According to the Governor, the central bank provided a support in the form of liquidity of around USD 5.4 Billion which equates to 2% of Pakistan’s GDP. He shared that the results of these measures were very positive as the country saw very little increase in the non performing loans and bankruptcies.
While answering a question on Pakistan’s Pre-Covid situation, the Governor said told that COVID-19 struck as soon as Pakistan started the IMF restructuring program which was very painful in the beginning like all reform programs and Pakistan was unlucky in the sense that the pandemic struck at the time when the country had just started to see the reforms pay off.
Dr Baqir also spoke about the importance of avoiding a recession and said that if the country had a deep recession, all support among domestic stakeholders could’ve been lost.
While speaking about the ongoing reform program, the Governor said that the country will need to come back to the ongoing reform program as soon the ongoing crisis gets better in order to address the fiscal sustainability of the country. While speaking about the salient features of the country’s reform program, Dr Baqir said told that Pakistan had just switched to a flexible exchange rate regime from a pegged exchange rate regime and the new mechanism was thought as a new born baby. The biggest concern was that would this survive the largest crises since the World War 2. According to him, in the beginning of the pandemic , the policy makers didn’t know what would transpire in regards to the market determined exchange rate regime but thankfully it was able to survive.
While speaking on the issue of debt suspension, the Governor said that core of the issue is market access as countries fear that excessive use of debt suspension will lead to them loosing market access and according to him none of the countries want to compromise on their market access.
While referring to the International financial architecture the Governor said that countries with high level of debts will continue to suffer as high levels of debts will further impede growth.
Dr Reza Baqir further added in regards to the issue of debt restructuring, that if we look into the history of debt restructuring, the response has always been too little too late.
Coming on to the role of central banks during this crisis, the Governor said that the ongoing crisis has blurred the lines between monetary and fiscal authorities. In Pakistan’s case, there is limit fiscal space so the policy makers didn’t want government to undo the fiscal reforms by borrowing from central bank etc. Furthermore while talking about the mandate and tools of central bank,he said that it is not good for a central bank to have a narrow mandate because if the central bank works purely on inflation targeting, it will never be able to help so much as it did in Pakistan’s case. While speaking on the central bank’s tools the Governor said that reducing interest rates is only one of the tools a central bank should use and if the State Bank of Pakistan didn’t have other tools to inject liquidity, it would’ve been unable to inject more liquidity and according to him this is why a central bank’s mandate should be broad.
Dr Patrick Ngugi Njoroge
While expressing his views, Dr Patrick Ngugi Njoroge, the Governor of Kenya’s Central Bank said that Kenya’s concerns are no different from Pakistan.
According to him, while reacting to the pandemic, the first concern was to reduce the health risk in Kenya. He also said that the ongoing Pandemic’s recovery plan was completely different that all the other disaster recovery plans and guidelines.
He then spoke about the steps taken by the Central Bank of Kenya in the midst of the pandemic in order to decrease the health risk. According to Dr Patrick, since the pandemic was about people, within three weeks they had to enforce and plan steps in banks in order to save the lives of people and bank employees.
For that purpose, the Kenyan Central Bank worked to minimize physical interaction in banks by working on the IT systems. They hardened the IT systems in order to minimize the risks of hacking,one of the major focus was on reducing the usage of cash and for this purpose they encouraged the increase in the usage of mobile wallets. For this purpose, they reduced costs for transactions(waived off all costs on transactions up to 10 Dollars) and increased the limit per transactions. According to Dr Patrick, these moves paid huge dividends as there was an increase in the number of transactions that were done via digital platforms and reduced human traffic in banks.
The Governor of Kenya’s central bank also spoke about the future outlook and said that he is very hopeful in terms of the promise of vaccines. While speaking on the impact of the pandemic, Dr Patrick said that in terms of potential shock, the lockdown was very hard on the tourism and services sectors however Kenya’s agricultural sector wasn’t effected, in fact it grew by 3-4% and is one of the factors that is helping the economy to rebound due to the significant growth compared to average or previous years.
Dr Patrick further added that Kenya’s real focus is on the country’s fiscal issues. According to him the principle concern is the treatment of private lenders and for those countries that have over borrowed from capital markets and debt suspension can potentially threaten the access to those markets which is too high a cost to abandon.
According to the Kenyan Governor, time is of the essence and more create fiscal space needs to be created and that can only happen if the developed countries and multilateral institutions react quickly because the developing world can’t afford a late debt restructuring move in the midst of the pandemic because it has set itself ten years back on the Social Development Goals due to the COVID-19 pandemic.
While speaking on the informal economy in Kenya, Governor Patrick said that the informal sector especially the small medium enterprises are the buck of Kenyan economy. During such a crisis, they need financing in order to help the economy to rebound and not just financing but extra support in the form of programs such as technical support is needed as well and the main aim is to strengthen the digitalization so that the process of getting financing is easier.
Dr Rachel Glennerster
While expressing her views on the COVID-19 pandemic, Dr Rachel Glennerster, Chief Economist at FCDO said that this is the time of extraordinarily tough decisions and really difficult choices. She said that in the early phase and second phase of the pandemic, the opportunity costs of any money has been really high.
She said that FCDO’s first priority was to do anything that can limit the underline causes of sufferings.
The second was to mitigate the effects of the pandemic in those areas that will have long term impacts. She also told that despite the pandemic things FCDO ensured that climate change funding would not shut down.
Dr Rachel added that there is even further need of multilateral and bilateral support needed in the form of debt relief and that too immediately to countries suffering the most. She further added that it is very important for the health situation to improve so that economies can open which will hopefully have dividends.
She also told that FCDO is focusing a lot on putting in money in R&D and in vaccine making since the less time it takes for vaccines to come, the quicker will the economies open up.
She also stressed on the importance of having a strong emphasis of not just time but money as well in the process of vaccine making.
Dr Rachel also spoke about FCDO’s initiatives to support countries in making policies by providing information and getting data to countries. She gave the example of Pakistan as FCDO helped the Government of Pakistan in deciding to impose a smart lockdown instead of a blanket lockdown.
She also talked about debt being an important issue and said that countries facing a short term problem where they need short term debt suspension or restructuring for countries that have unsustainable levels of debt, there is nervousness among those countries to explore options because of the fear of losing access to the markets. However, in reality countries managed to return to markets very quickly after debt suspension so this shows that it is very important to do restructuring.
According to Dr Rachel, the real danger of this pandemic is the long term impact on human capital as this will reduce the productivity of this generation by a significant margin and in order to mitigate the impact the entire world needs to be working together as the world has always worked much better whenever there is uniformity between all the countries. According to her the main priority of working together should be on trade and for building a common framework on debt.
Dr Ricardo Hausmann
Dr Ricardo Hausmann who is the Director of the Growth Lab at Harvard's Center for International Development said that middle income and low income countries will face even more difficulties ahead. He labeled the COVID-19 pandemic as a rich country disease since it requires a huge amount of resources. He also told that amongst the top ten countries in terms of death rates in regards to the COVID-19 is Latin America.
He said that this pandemic is so confusing that while severe lockdowns have helped a large number of countries to contain the virus, similar or maybe even more severe lockdowns in Latin America have failed to contain the disease.
He also said that the fiscal policy has generally been aggressive throughout the world and in the developed world, stimulus has been provided in excess of ten percent of gdp of those countries since they’ve increased their spending.
He also spoke about the glaring consequences of the pandemic and gold that the there has been collapse in the output that has resulted in the form of a worst recession in Latin America.
Dr Hausmann also stressed that countries need to work on maintaining a market access for all. He said that countries that are solvent and those have earlier debt can keep market access if official lending is available for them and according to him certain limits on IMF have to be lifted and the quotas have to be increased in order to ensure more funding for all.
Dr Hausmann further added that the recession is so deep that many companies are either shutting down or loosing equity. Same is the case with banks as they have little equity and that’ll slow down recovery. This has made monetary policy ineffective since borrowers and banks have little equity.
While answering a question on what should be a Government’s policies, Ricardo Hausmann said that there’ll be more peaks and that will most probably need further restrictions which will further depress the economic recovery and this will effect the poor so to safeguard the most vulnerable, more space needs to be created for social transfers and to keep companies alive.
He said that even when the vaccine gets used universally, the fiscal policy should be out of whack for the next couple of years, there needs to be more planning in advance and more official money needs to be put on the table. To anchor expectations the governments would need to increase spending but at the same time they would want tax base to pay for that in the future and for that aggressive and dynamic tax reforms are needed.