Covid-19 scars on economy will take time to heal: IMF's Gita Gopinath

The Covid-19 pandemic will leave scars well into the medium term as labour markets take time to heal, investment is held back by uncertainty and balance sheet problems, and lost schooling impairs human capital, Gita Gopinath, economic counsellor and research department director of International Monetary Fund (IMF) said.

Gopinath told Fortune India that to mitigate household income losses, governments should provide income support through well-targeted cash transfers, wage subsidies and unemployment insurance. “To prevent large scale bankruptcies and ensure workers can return to productive jobs, we have recommended support for vulnerable but viable firms through tax deferrals, moratoria on debt service, and equity-like injections”, she said.

Countries—especially among advanced economies—have indeed provided unprecedented fiscal and monetary support, as well as many of the measures mentioned to limit economic damage, she added. However, emerging market and developing economies had to manage it with fewer resources, as many are constrained by elevated debt and higher borrowing costs, Gopinath observed. “We have recommended spending prioritisation to create room to meet the crisis spending needs. As a result, we are expecting advanced economies to already reach their pre-pandemic output trend by 2022. Emerging markets and developing economies still fall short, however, with limited access to vaccination and lower policy support”, she added.

The near-term future is also riddled with a lot of uncertainties. “We see several downside risks for global growth. The emergence of more transmissible and deadlier SARS-CoV-2 variants could further reenergise the pandemic’s spread and intensity, prolonging the pandemic and precipitating pullbacks of economic activity. Pandemic-induced supply-demand mismatches could persist longer than expected, leading to sustained price pressures and rising inflation expectations. In response, a faster-than-anticipated monetary normalisation in advanced economies could lead to a sudden tightening of global financial conditions”, Gopinath pointed out.

On the upside, she said that large amounts of new vaccine supplies are expected to come online and there are promising anti-viral therapies in the pipeline that could help hasten the end to the health crisis. “A faster pace of vaccinations than what is assumed in the baseline projections would have a direct positive effect on economic activity. It could also boost the confidence of consumers and firms, triggering a rise in spending and investment that would strengthen the economic recovery”.