Question

In: Economics

The World would not be same again. In the last 15 Pandemic events from the 14th...

The World would not be same again. In the last 15 Pandemic events from the 14th century, the world has never remain the same and Covid-19 would not be an exception. The long term economic hangover is just beginning to birth. Though monetary and fiscal measures have been ramped up to ease the short term effect historical trend suggest the long term adverse economic distributional effects could persist for a generation or more. Covid-19 has created huge financing gaps reflecting dwarf domestic mobilisation and elevated health related and economic stimulus intervention.

The International Monetary Fund (IMF) (2020) states “more than ever, Sub-Saharan African countries also need large-scale external financing. The International Monetary Fund and the World Bank estimate that the region faces a government financing gap (assuming a modestly supportive fiscal stance) of at least $114 billion in 2020. African governments cannot mobilize this amount domestically”. The World Bank and the African Development Bank (AfDB) despite the uncertainty surrounding the AfDB presidency have been stepping up financing. Recently, G20 announced an important initiative to suspend debt-service payments until the end of 2020 for poor countries that request relief though some countries have expressed reservations and their unwillingness to sign up for this initiative.

Here in Ghana, the macro-fiscal impact of Covid-19 is well documented reflecting in the projected GDP decelerating from 6.8% in the 2020 budget to worst scenario of 1.5% given the partial lockdown and the fiscal deficit escalating to GHS 30.2 billion from GHS 18.9 billion. Bank of Ghana has in response to the impact of Covid-19 given the elevated fiscal deficit adopted Asset Purchase arrangement under a Quantitative Easing (QE). The Central Bank indicated it stands ready to support government with GHS 10 billion in the wake of the coronavirus pandemic. Out of this, the Bank has already purchased a Government of Ghana COVID-19 relief bond with a face value of GH¢5.5 billion at the Monetary Policy Rate with a 10-year tenor and a moratorium of two (2) years (principal and interest). Ghana like many other countries is in the second stage of the Covid-19 where we have decided to live with the virus unlike the first stage where the focus was on containment and the last stage when vaccine is developed hopefully.

Kindly Attempt the following questions

  1. Critically examine why some countries are unwilling to take advantage of the G20 Sponsored Debt Relief Arrangement
  2. Given the fiscal and monetary policy response to covid-19 and the global outlook presented recently by IMF, Critically discuss the outlook price development with particular reference to exchange rate for the rest of the year and the first quarter of 2021
  3. Discuss the implications of the widespread disruptions to global, regional supply for Ghana’s Balance of Payments

Solutions

Expert Solution

( a ) Even though taking advantage of the G-20 sponsored debt relief arrangement would free up a massive amount of capital, or resources, and help the least developed countries to use those resources towards improving health infrastructure and preparedness to fight Covid-19 pandemic, some of the nations have been wary of the debt relief arrangement.

The main reason behind unwillingness of some countries to take advantage of the G20 sponsored debt relief arrangement is that the arrangement is voluntary in nature, and therefore countries are free to either keep servicing their debts, or voluntarily default on their debt payments. However, voluntarily defaulting would bring down their sovereign credit rating which would make it costlier and difficult for these countries to find creditors in future. This is why there have been unwillingness on the part of some of the nations to use the debt relief arrangement.

( b ) Unprecedented recession has forced the countries to use expansionary fiscal and monetary policy to revive aggregate demand and keep the economy floating. IMF has also agreed to use its vast reserve to help support least developed countries monetarily, with affordable credit support packages. Such prompt measures by world bank and IMF is going to help the exchange rate from falling too low. It is expected that the exchange rate may remain 30%-40% below the exchange rate level before the pandemic, throughout this year and in the first quarter of 2021.

( c ) Given the widespread disruption in economic activities across the countries and a steep fall in aggregate demand, exports are expected to remain lower whereas imports may also fall down. Ghana's balance of payments are expected to remain under downward pressure or in deficit. Government must take proactive measures to address measures to rationalize imports and increase exports to contain downward pressure on the current account balance.


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