Path to Economic Recovery In Response To The COVID-19 Pandemic

During any crisis such as a financial crisis, a pandemic, etc., a country is expected to increase its expenditure, cut taxes, control inflation, and maintain reasonable currency value to help the country recover from the loss. The smooth implementation of this ideal plan is feasible for a developed country with surplus funds available. However, when it comes to emerging markets, who usually run in deficit, implementing the ideal plan becomes a worrisome decision, mainly due to the lack of funds. For example, India, so far, has spent 6.9% of the GDP as a stimulus for COVID-19 recovery, according to Statista. Though it may seem to be a significant amount of spending for recovery, it may not be enough to complement the challenges of mass job losses, growing poverty, etc. that are underway. Note, India is among the world’s fastest-growing markets. Other emerging markets, such as the African countries, do not possess adequate resources necessary for COVID recovery. All the emerging markets, including India, need International support for an efficient and speedy recovery.

At such times, the role of international organizations like the IMF and the UN become increasingly important to encourage global co-operation and bridge the gap between the developed and the emerging markets. In the context of acquiring funds to alleviate the aftermath of the pandemic, the IMF provides its member countries an option to avail the SDR (Special Drawing Right – a reserve asset created to provide liquidity to the member countries during a global crisis) in the proportion of their quota (percentage of the SDR reserve). In response to the pandemic, the IMF proposed to expand the SDRs by $500 billion which alters the quota holdings of the countries. Expanding the SDRs means expansion of the quota holding of emerging markets. That sounds like good news for emerging markets such as India. However, alongside the US who fears losing its veto power, India too opposed the IMF’s expansion of SDRs, one possible reason at the geopolitical level could be the increased influence of China. However, India as well as other emerging markets need these SDRs for recovery and also to avoid nationwide bankruptcies.

(India’s forex reserve currently has 18% funds in SDRs, and its quota for SDR in the IMF is $13114.4 million.)

The concern at the moment is skewed towards the economic recovery over geopolitical issues. At the global macroeconomic level, experts suggest global co-operation in terms of bridging the gap between the developed and the developing countries, is the way forward. Prof. David Vines of Balliol College, through his contribution to the CAMA working paper 68/2020 titled ‘Global macroeconomic cooperation in response to the COVID-19 pandemic: a roadmap for the G20 and the IMF’, suggests an agreement between the developed and emerging markets would enable more balanced global fiscal expansion (where more fiscal stimulus is provided to the emerging markets) and would reduce the global risk premia (the risk of countries defaulting in repayments). He further believes that global co-operation is difficult, but not impossible, in a world with no single strong body governing the countries. He is of the opinion that the SDRs by the IMF must be raised even further for a smooth and speedy recovery. His argument to build global co-operation stronger is based on prioritizing macroeconomic changes before focusing on the trade disputes between the countries. Prof. Cameron of Smith School of Enterprise and Environment (in his research with the Nobel Prize winner Prof. Joseph Stiglitz), on the other hand, suggests a green recovery route. He argues that longer-term recovery could be achieved in the emerging markets by aligning the economy and its relief packages with sustainability and the environment. His argument is based on shifting the focus of investment by the government towards the potentially profitable industries of the future, a more microeconomic approach.

If the world is able to implement the suggestions given out by the the experts above, COVID-19 recovery would speed up and the new world would be more aligned bringing higher level of peace and complementing globalisation’ true essence of free trade. However, every international organisation and every country has its own limitations and only time will show how the world manages to come out of this crisis.

MSc Finance graduate from the London School of Economics and Political Science (LSE)
Avatar for Ria Vaghela

Ria V Vaghela is an M&A Executive at RSM UK and an MSc Finance graduate from the London School of Economics and Political Science (LSE). She has worked at Jefferies, Dial Partners and 7i Capital prior to RSM UK gaining an experience of about 1.5 years. She has also worked as an Editor and Content Writer for The Representative Media. Apart from finance, she is interested in reading books on psychology and economics and also likes to paint and play lawn tennis

Leave a Reply

Your email address will not be published. Required fields are marked *