3 policies to set Asia on road to recovery

Close coordination between monetary and fiscal policy, resource allocation and addressing inequalities are key for COVID-19 recovery.
By: | July 2, 2020

Heavily dependent on global supply chains that have been severely disrupted because of the COVID-19 pandemic, Asia’s growth is expected to contract by 1.6% in 2020, a downgrade to the April projection of zero growth.

Chang Yong Rhee, director of the International Monetary Fund’s (IMF) Asia and Pacific department, said, “Projections for 2020 have been revised down for most of the countries in the region due to weaker global conditions and more protracted containment measures in several emerging economies.”

As lockdown measures continue to be eased in the region, Chang called for policies to be geared towards supporting the nascent recovery, including close coordination between monetary and fiscal policy.

“Monetary policy should help ensure the flow of credit to households and business,” he elaborated. “Countries facing higher fiscal constraints could also use the central bank’s balance sheet more flexibly, aggressively and transparently to support bank lending to smaller firms.”

A robust recovery will hinge on exiting the current phase of support and transitioning to new policies that help ensure resources are reallocated appropriately beyond the initial focus on preventing bankruptcies of incumbent firm, and thereby strengthen the solvency of firms.

Chang added, “For example, flattening the bankruptcy curve by streamlining the restructuring and insolvency frameworks; ensuring that banks are adequately capitalised; and facilitating equity injections into viable firms and risk capital for new firms.”

Finally, he also highlighted the importance of broadening access to health and basic services, finance and the digital economy. To further address inequalities, social safety nets should be expanded to extend unemployment insurance coverage to informal workers.

“Addressing pervasive informality will also require comprehensive labour and product market reforms to improve the business environment and removing onerous legal and regulatory obstacles (especially for startups), and policies to rationale the tax system,” Chang concluded.