by Martin Muhleisen and Tobias Adrian

INDIVIDUALS infected by the coronavirus potentially face a blow to their health and personal and economic well-being.

Similarly, countries hit by a sudden and unexpected public health emergency – as the coronavirus is proving to be-can see their economies slow and their budgets squeezed as they spend more to counter the impact of the virus.

At the same time, they may experience a drop in revenue from a decline in economic activity. Countries could also face lower export revenues due to falling tourism receipts or a decline in commodity prices.

A sudden halt in capital inflows could exacerbate the situation further. Together, this can result in an urgent balance-of-payments need to counter the mismatch between foreign exchange inflows and outflows.

Even if an individual country is fortunate enough to escape widespread viral contagion, the spillover effects from global developments or broken supply chains may still lead to faltering economic activity.


While the physical impact of the virus will be tackled by health professionals, the International Monetary Fund (IMF) is also helping to mitigate the economic fallout from the coronavirus.

In addition to policy and technical advice, the great- est support the IMF can provide in such emergencies is through timely financial assistance.

The IMF has a long history and extensive expertise in responding to natural disasters, epidemics, and post-conflict situations. Emergency financial assistance, on average, accounts for 20% of IMF members’ requests for support. Swift financing can be essential to replenish international reserves, obtain critical imports, or boost budgets.

When the Ebola virus devastated parts of Africa – and Guinea, Liberia, and Sierra Leone suffered significant humanitarian and economic hardship – the IMF provided concessional emergency assistance of US$378 million to these three countries, a total of 2,3% of their combined GDP.


Quantifying the economic impact is complex, giving rise to significant uncertainty about the economic outlook and the associated downside risks.

Such an abrupt rise in uncertainty can put both economic growth and financial

stability at risk. In addition to targeted economic policies and fiscal measures, the right monetary and financial stability policies will be vital to help buttress the global economy.

Measures of economic uncertainty such as equity market volatility increased sharply in countries around the world. Stock markets in major economies, such as the United States, the eurozone, and Japan, all fell sharply and witnessed a surge in implied volatility as skittish investors tried to factor in the latest risks posed by the new virus.


As a result of this sharp increase of uncertainty, credit spreads have widened broadly across markets as investors are reallocating from relatively risky to safer assets.

High-yield and emerging market bonds are hit particularly hard by these reallocations. As a result, the spreads of emerging- and frontier-market bonds denominated in US dollars have widened sharply.

Financial conditions have tightened significantly in recent weeks, which means that companies are facing higher funding costs when they tap equity and bond markets.

Such a sudden, sharp

tightening in financial conditions acts as a drag on the economy, because firms postpone investment decisions and because individuals delay consumption as they feel less financially secure


The sharp tightening in financial conditions, along with expectations of low in- flation, means that monetary policy has a role to play at the current juncture.

Central banks can act quickly to help ease the tightening of financial conditions by injecting liquidity and cutting interest rates, thus preventing a possible credit crunch. In fact, markets have been anticipating aggressive easing by central banks, as reflected in the sharp fall in sovereign bond yields in many countries around the world.

Synchronised actions across countries increase the power of monetary policy. Therefore, global cooperation to synchronise monetary policy must be high on the agenda. Ample liquidity within countries, and across borders, is the prerequisite to the successful reversal of the rapid tightening in financial conditions.

In these unusual circumstances, if liquidity pressures threaten market functioning, central banks may need to step in and provide emergency liquidity.

he sharp decline in interest rates, combined with growing anxiety about the economic outlook, have also raised investor concerns about the health of banks. Banks’ share prices have fallen sharply, and bond prices of banks have also come under some pressure—likely reflecting fear of potential losses.

Overall, policymakers must act decisively and cooperate at the global level to preserve monetary and financial stability during this time of extraordinary challenges. The mantra of “hoping for the best, preparing for the worst” has long been successfully deployed. The IMF will act as needed to help its members face this extraordinary, but hopefully temporary, crisis.

As we watch the unfold- ing health emergency, like the rest of the global community, the IMF is hoping for the best.

But, through its emergency financing, we are prepared for the worst so that, in the words of the American writer Maya Angelou, we can try to be unsurprised by anything in between.

* Adopted from the IMF blog series on the coronavirus.

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