The International Monetary Fund, IMF, has warned of bankruptcies and closures of firms, unless policy makers adopt measures to keep businesses afloat, across the globe, in the face of the COVID-19 pandemic.
Mr. Malhar Nabar, who heads the team that produces the World Economic Outlook in the Research Department of the IMF said, in a podcast, that risks of failed businesses would persist ,as long as, the pandemic remained unabated, unless governments in various countries, and global bodies worked together to make firms liquid and keep workers on their jobs.
“There is a risk that we might see firms that are in illiquid situations, forced into closures, and we see a spike in the exit of firms,” he said, in the podcast moderated by Bruce Edwards.
Commenting on the WEO’s warning of scarring from increased debt, bankruptcies in the future from the pandemic, and rising poverty levels, with more than 95 million people already fallen into poverty during the pandemic, he said that the cost to mitigate the long-term effects of the crisis remained uncertain.
His words, “I think it’s important to acknowledge that there’s a lot of uncertainty about the recovery path, how long this will take. And therefore, the costs associated with the recovery are also uncertain. We have estimates on what it would take for low-income countries to fill financing gaps, the shortfalls that they have both in terms of combating the health crisis, but also then getting back onto the path of convergence that they were on before the pandemic.
“But all those estimates are subject to uncertainty because it really depends a lot on the nature of the recovery that we’ll see. What is important at this point really is to keep an eye on these channels of scarring and ensure that we don’t have persistent damages to our economies in the aftermath of this unprecedented health crisis.
“By that, I mean, two things: bankruptcies, that’s clearly a very important aspect of this. We’ve seen bankruptcies contained so far because of the extraordinary measures that were put in place, debt moratoria and the like, to forestall some of these developments that would typically have occurred in a deep recession.
“But as these emergency measures are scaled back, there is a risk that we might see firms that are in illiquid situations forced into closures and we see a spike in the exit of firms. “That’s one channel. The other channel is of course, the longer people stay out of employment, there’s a risk that it becomes harder for them to re-engage with the workforce, and so we see exit from the workforce and diminished labor force participation. That’s another channel of scarring.
“ And I want to emphasize one key aspect of this crisis, which is also unique and that is also going to have long lasting consequences, is the aftermath of all these school closures that we’ve had. We’ve had children staying home from school for many months in many countries, in low income developing countries, even more so than in advanced economies.
“And the substitutes by way of virtual learning have been far more limited in low income developing country contexts. What this means of course, is lost instruction time translates into weaker earnings prospects at the individual level. It translates into weaker productivity at the aggregate level, and that’s another key important channel of scarring that we have to watch.
“So policymakers need to address these aspects, remedial measures for the lost instruction time, ensuring that we don’t have a wave of bankruptcies and firm exits, and to deal with that in an orderly fashion. And also to ensure that workers remain engaged with the workforce, that we don’t see large exits from the labor force going forward.”
He described a strong recovery in advanced economies generally a good development for emerging market developing economies because that would help the exports but that it could be a problem for emerging market and developing countries that owed foreign debts.
Source: Vanguard