COVID CRISIS COMING - IMF

▪IMF predicts a more devastating Covid-19 outbreak the pandemic will lead to increased bankrupties

THE International Monetary Fund (IMF) has predicted a second major global Covid-19 outbreak next year which will cause more damage to economies, including Zambia’s.

According to IMF, the pandemic will lead to increased bankruptcies, especially in emerging markets. It said disruptions to domestic economic activity in each country in 2021, would be roughly one-half the size of what was already in the baseline for this year.

This is contained in the

June 2020 IMF World Economic Outlook Update under the theme “A Crisis Like No Other, An Uncertain Recovery.”

As a result of the second outbreak, the IMF said, there would be additional tightening in financial conditions in 2021, relative to the baseline.

“The additional tightening is about one-half of the increase in sovereign and corporate spreads seen since the beginning of the pandemic.

“With advanced economies facing, on average, relatively limited tightening, especially in sovereign premiums, and emerging markets facing larger increases in spreads on both sovereign and corporate debt,” the IMF said.

Regarding the fiscal policy response, the IMF said, it was assumed that governments implement additional discretionary measures above and beyond automatic stabilisers.

“While the baseline does not rule out a possible resurgence in cases in some countries, the first scenario assumes instead that a second major global outbreak takes place early in 2021,” the IMF said.

It said as a result, the overall spending response to the decline in output is twice as strong as the response under typical business cycle fluctuations.

The IMF warned that despite the policy response, the outbreak was assumed to cause further longer-lived damage to the supply side of economies (scarring) starting in 2022.

It explained that this would increase bankruptcies leading to capital destruction, temporary slowing in productivity growth, and a temporary increase in trend unemployment.

“The additional scarring is assumed to be about one- half the size of what is already in the baseline, with emerging markets experiencing greater, longer-lived damage than advanced economies, given the more limited policy space to support incomes in those countries,” the IMF said.