Washington: Countries around the world urgently need supportive monetary and fiscal policies until the deadly coronavirus pandemic is in check, a senior IMF official has said, as he advocated building buffers against fluctuations in external capital flows that could impact financial stability in nations like India.
Observing that the economies have been very negatively impacted by the coronavirus pandemic, Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department of the International Monetary Fund, said that in 2020 a vast majority of countries had sharp contractions in economic activities.
“Until the pandemic is in check, supportive monetary and fiscal policies remain urgently needed. That’s what we see in our membership around the world,” he told in an interview.
“The good thing on the economic policy front is that there has been a synchronised support that was deployed around the world that has helped to mitigate the fallout from this pandemic and so the hope is that this is a bridge to recovery,” Adrian said.
He said the pandemic triggered a great deal of stress in financial markets early last year.
Central banks, he said, stepped in very quickly to ease monetary policy, to provide liquidity backstops, and to really contain the fallout from the pandemic on financial markets.
That has been extremely effective, he said.
The second element that is very important is the stability of the banking system globally, he noted.
The IMF, he said, conducted a global bank stress test that covered 30 countries. It found that even in adverse scenarios banks in the aggregate globally seem to be well-capitalised.
And that’s really the payoff from 10 years of regulatory reforms at the international level, he observed.
The third element of the response to the crisis has been the fiscal response and countries around the world have undertaken large fiscal measures to provide support for the corporate sector and households.
India, Adrian said, went into this terrible pandemic with a number of issues in the financial sector. In the core banking system, there had been some weaknesses, related to a non-performing loan.
There is the non-bank sector as well in India that is very important, he said.
“The finance companies grew very rapidly and there was a sharp contraction of credit of these finance companies and that could have amplified some of the negative feedback loops that we observed,” he said.
“And so, already going into the pandemic, there was some of the deleveraging in the non-bank sector in the finance company sector in particular in India, that was going on. That was going hand in hand with some economic contraction and then of course the pandemic led to further lockdowns,” he said.
“But having said that, looking forward we have upgraded our outlook for India to some extent. We do hope that the stronger economic outlook will also help on the banking side to get to better outcomes. But certainly, the regulators in India are in the process of addressing those weaknesses,” he said.
The IMF on Tuesday projected an impressive 11.5 per cent growth rate for India in 2021, making the country the only major economy of the world to register the double-digit growth this year amidst the pandemic.
Responding to a question, Adrian said one of the very positive spillovers across economies in this episode is that monetary easing has been done around the world in a synchronised manner.
“So, monetary policy was eased at the same time as everybody was hit with this terrible temper dynamic at the same time. The easing of financial conditions — the lowering of interest rates, the narrowing of credit spreads and the recovery of equity markets, really has helped corporates, and sovereigns around the world to continue to access capital markets,” he said, describing it as a very positive spillover.
As a result, capital flows have returned to emerging markets.
“But of course, there’s some risk to that. So there could be further bad news, bad stocks in emerging markets, including in India, related to vaccines, ….for example, the effectiveness of vaccines, or there could be further adverse shocks coming to other sectors of India,” Adrian said.
“That could trigger a reversal of capital flows. Or there could be some, some global risk appetite shock where market sentiment outside …India turns. And so, the financial conditions that are external to India are certainly very important for financial stability, and for macroeconomic outcomes in India,” he said.
According to the IMF official, in terms of financial stability, building buffers is the first order prescription.
“When you’re hit with adverse shocks, and you have enough capital in the banking system enough liquidity in the banking system, when the nonbank financial sector is well regulated, to have buffers; and when your central bank has a foreign exchange reserves to buffer against fluctuations in external capital flows that is tremendously helpful,” he said.
As such, in good times and times of easy funding conditions, building buffers back up is certainly a first-order policy prescription, Adrian said.
The second element is to use monetary policy in a way to cushion shocks.
“That is only possible when you don’t have imbalances that are very large. Good policy in normal times in terms of growth, helps you build buffers that protects you in times of adverse shocks,” he said.