Question

Discuss how countries decided to respond to the adverse impact of coronavirus pandemic on their economies. Give examples of policy measures that the following countries have been introducing to help the economies to avoid deep recession. Please discuss both fiscal and monetary policies introduced and their potential effects on the components of GDP, unemployment, inflation and other macroeconomic indicators

: A. USA

B. Any country in Asia you choose

C. Any country in Europe you choose

) D. Uzbekistan

Answer 1

Ans:The corona virus is throttling the global economy. In a matter of weeks, threaten disease has pushed the world to the brink of a recession more severe than the financial crisis.Thus ,adverse impact of coronavirus pandemic USA,GERMANY(country in Europe),CHINA (country in Asia) AND UZBEKISTAN economies with Fiscal and Monetary policies are as follows:

United States of America

The United States is facing a widening outbreak of COVID-19 that, as of April 2, 2020, has claimed the lives of 4,800 Americans and infected more than 213,000 persons across all 50 states. In response, the United States has implemented a range of measures including travel restrictions, social distancing, declaration of states of emergency, closure of schools, bars and restaurants, and increased testing.

FISCAL POLICY

US$2.3 trillion (around 11% of GDP) Corona virus Aid, Relief and Economy Security Act.

The Act includes:

(i) US$250 billion to provide one-time tax rebates to individuals;

(ii) US$250 billion to expand unemployment benefits;

(iii) US$24 billion to provide a food safety net for the most vulnerable;

(iv) US$510 billion to prevent corporate bankruptcy by providing loans, guarantees, and backstopping Federal Reserve 13(3) program;

(v) US349 billion in forgivable Small Business Administration loans and guarantees to help small businesses that retain workers;

(vi) US$100 billion for hospitals; and

(vii) US$150 billion in transfers to state and local governments. US$8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act and US$104 billion Families First Corona virus Response Act which together provide 0.5 percent GDP for health care, sick leave, small business loans, and international assistance. Federal student loan obligations have been suspended for 60 days and tax filing deadlines have been delayed.

MONETARY POLICY:

Federal funds rate lowered by 150bp to 0-0.25bp. Purchase of Treasury and agency securities in the amount as needed. Expanded overnight and term repos. Lowered cost of discount window lending. Reduced existing cost of swap lines with major central banks and extended the maturity of FX operations; broadened U.S. dollar swap lines to more central banks.

Federal Reserve also introduced facilities to support the flow of credit, in some cases backed by resources from the Exchange Stabilization Fund. The facilities are:

(i) Commercial Paper Funding Facility to facilitate the issuance of commercial paper by companies and municipal issuers;

(ii) Primary Dealer Credit Facility to provide financing to primary dealers collateralized by a wide range of investment grade securities;

(iii) Money Market Mutual Fund Liquidity Facility to provide loans to depository institutions to purchase assets from prime money market funds (covering highly rated asset backed commercial paper and municipal debt);

(iv) Primary Market Corporate Credit Facility to purchase new bonds and loans from companies;

(v) Secondary Market Corporate Credit Facility to provide liquidity for already-issued corporate bonds;

(vi) Term Asset-Backed Securities Loan Facility (TALF) to support the issuance of asset-backed securities backed by student, auto, credit card, and small business loans.

Regulatory agencies indicated their support for banking organizations that use their capital and liquidity buffers to lend and undertake other actions to provide support to households and businesses. Fannie Mae / Freddie Mac have indicated 60-day suspension of foreclosures / evictions and a plan to reduce/suspend mortgage payments for up to 12 months for those affected by Covid-19.

CHINA (ONE COUNTRY OF ASIA)

China has been hit hard by the outbreak with over 81,589 confirmed COVID-19 cases and 3,318 deaths as of April 1, 2020 (mainland). The government imposed strict containment measures, including the extension of the national Lunar New Year holiday (ending on Feb 2 extended from Jan 30), the lockdown of Hubei province, large-scale mobility restrictions at the national level, social distancing, and a 14-day quarantine period for returning migrant workers. There have been very low local infections reported recently.

FISCAL POLCY

· An estimated RMB 1.3 trillion (or 1.2 percent of GDP) of fiscal measures have been approved and are being implemented. Key measures include:

·(i) Increased spending on epidemic prevention and control.

·(ii) Production of medical equipment.

·(iii) Accelerated disbursement of unemployment insurance.

· (iv) Tax relief and waived social security contributions.

· The overall fiscal expansion is expected to be significantly higher, reflecting the effect of already announced additional measures—including higher infrastructure investment and improvements of the national public health emergency management system—and automatic stabilizers.

MONETARY POLICY

·The PBC provided monetary policy support and acted to safeguard financial stability. Key measures include:

(i) liquidity injection into the banking system, including RMB 3 trillion in the first half of February and 20 billion in end-March,

(ii) expansion of re-lending and re-discounting facilities by RMB 1.8 trillion to support manufacturers of medical supplies and daily necessities micro-, small- and medium-sized firms and the agricultural sector at low interest rates,

(iii) reduction of the 7-day and 14-day reverse repo rates by 30 and 10 bps, respectively, as well as the 1-year medium-term lending facility rate by 10 bps,

(iv) targeted RRR cuts by 50-100 bps for banks that meet inclusive financing criteria which benefit smaller firms and an additional 100 bps for eligible joint-stock banks to support private SMEs, and

(v) policy banks’ credit extension to micro- and small enterprises (RMB 350 billion).

The government has also taken multiple steps to limit tightening in financial conditions, including measured forbearance to provide financial relief to affected households, corporate, and regions facing repayment difficulties. Key measures include

(i) delay of loan payments and other credit support measures for eligible SMEs and households,

(ii) tolerance for higher NPLs for loans by epidemic-hit sectors and SMEs,

(iii) support bond issuance by financial institutions to finance SME lending,

(iv) additional financing support for corporate via increased bond issuance by corporate,

(v) Increased fiscal support for credit guarantees,

(vi) flexibility in the implementation of the asset management reform, and

(vii) Easing of housing policies by local governments.

GERMANY COUNTRY OF EUROPE

Germany is totaling 84,600 COVID-19 cases as of April 2, 2020. While the outbreak has claimed 1,097 lives. The government has responded with a range of measures to contain the spread of virus through travel restrictions, closure of schools and non-essential businesses, and a ban on public gatherings.

FISCAL POLICY

In addition to running down accumulated reserves, the federal government adopted a supplementary budget of €156 billion (4.9 percent of GDP) which includes:

1. spending on healthcare equipment, hospital capacity and R&D (vaccine),

2.expanded access to short-term work (“Kurzarbeit”) subsidy to preserve jobs and workers’ incomes, expanded childcare benefits for low-income parents and easier access to basic income support for the self-employed,

3.€50 billion in grants to small business owners and self-employed persons severely affected by the Covid-19 outbreak in addition to interest-free tax deferrals until year-end.

4. At the same time, through the newly created economic stabilization fund (WSF) and the public development bank KFW, the government is expanding the volume and access to public loan guarantees for firms of different sizes, with an allocation of at least €825billion (25 percent of GDP). In addition to the federal government’s fiscal package, many state governments (Lander) have announced own measures to support their economies, amounting to €48 billion in direct support and €63bn in state-level loan guarantees.

MONETARY POLICY

The ECB decided to provide monetary policy support through

(i) additional asset purchases of €120 billion until end-2020 under the existing program (APP),

(ii) providing temporarily additional auctions of the full-allotment, fixed rate temporary liquidity facility at the deposit facility rate and more favorable terms on existing targeted longer-term refinancing operations (TLTRO-III) starting between June 2020 and June 2021.

(iii) Further measures included an additional €750 billion asset purchase program of private and public sector securities (Pandemic Emergency Purchase Program, PEPP) until end-2020, an expanded range of eligible assets under the corporate sector purchase program (CSPP), and relaxation of collateral standards for Euro system refinancing operations (MROs, LTROs, TLTROs).

The ECB Banking Supervision allowed significant institutions to operate temporarily below the Pillar 2 Guidance, the capital conservation buffer, and the liquidity coverage ratio (LCR). In addition, new rules on the composition of capital to meet Pillar 2 Requirement (P2R) were front-loaded to release additional capital. The ECB considers that the appropriate release of the countercyclical capital buffer by the national macroprudential authorities will enhance its capital relief measures. The ECB Banking Supervision further decided to exercise – on a temporary basis – flexibility in the classification requirements and expectations on loss provisioning for non-performing loans (NPLs) that are covered by public guarantees and COVID-19 related public moratoria; it also recommended that banks avoid pro-cyclical assumptions for the determination of loss provisions and opt for the IFRS9 transitional rules. More recently, ECB Banking Supervision asked banks to not pay dividends for the financial years 2019 and 2020 or buy back shares during COVID-19 pandemic, from which the conserved capital should be used to support households, small businesses and corporate borrowers and/or to absorb losses on existing exposures to such borrowers.

The authorities extended all ECB-issued regulatory and operational relief to German banks under national supervision. In addition to measures at the euro area level:

(i) release of the countercyclical capital buffer for banks from 0.25 percent to zero;

(ii) additional €100 billion to refinance expanded short-term liquidity provision to companies through the public development bank KFW, in partnership with commercial banks; and

(iii) following the structure of the former Financial Stabilization Fund, €100 billion is allocated within the WSF to directly acquire equity of larger affected companies and strengthen their capital position.

Uzbekistan

Uzbekistan has reported 173 cases of COVID-19 (2 deaths) as of April 1, 2020. The economy is facing lower commodity prices, weaker trading partner demand, and the risk of weaker remittances from Uzbekistan citizens abroad. The authorities have implemented extensive measures to prevent the spread of the virus including: restricting travel (including international flights, domestic public transportation, and movement by car), closing borders (except for trade), closing schools and universities and all stores except grocery stores and pharmacies, and cancelling public events and religious gatherings. Government employees have been asked to stay home.

FISCAL POLICY:

1.expand funding for healthcare, including for medicines, the costs of quarantines, and a salary supplement for medical employees;

2. Increase the number of low-income families receiving social benefits;

3. provides assistance to affected businesses via interest subsidies; and

4. Finance public works in different regions to improve infrastructure and support employment.

5.The authorities also announced the temporary reduction of social contributions for individual entrepreneurs, postponing surcharges on tourism, property tax, and land tax, extending the moratorium on tax audits, and delaying tax declarations for 2019 income taxes (until August). The central government also asked local governments to reduce taxes by 30 percent and provide a 6-month grace period on paying property tax.

MONETARY POLICY:

The central bank suggested banks defer loan payments for firms in sectors affected by COVID-19.

Consequently, state-owned banks are extending maturities of loan repayments for the affected sectors, including for the national air carrier. The central bank is monitoring financial conditions but has not changed the policy rate or requirements for regulatory capital or liquidity.

The corona virus is throttling the global economy. In a matter of weeks, threaten disease has pushed the world to the brink of a recession more severe than the financial crisis