IMF Urge Governments To Back Pandemic Hit Firms Via ‘Equity-Like’ Support

The damaging impact of the novel coronavirus pandemic on companies has been prolonged and therefore the government support focused on loans needs to be shifted to “equity-like” support from the government, urged the Chief Economist at the International Monetary Fund, Gita Gopinath.

More companies are slated to turn insolvent as they suffer lower revenues for many months which reflected the massive scale of the shock of the pandemic on business, Gopinath said.

She said that such companies that are already short of cash could be thrown under a burden of huge debt because of government support in the form of loans. That under such a situation, the repayments against the debts would become like a tax that will make it difficult for such cash strapped companies to stage a turnaround from the crisis, she reasoned.

“Because there’s a bigger insolvency issue here, government support would have to shift more towards being equity-like as opposed to debt-like. Otherwise, you would end up with a lot of firms that exit this crisis with a huge amount of debt over-hang,” she said.

“If the lending takes form more like equity … then that’s less onus on the firms. That will make it easier for firms to recover from the crisis,” Gopinath said in a webinar co-hosted by the IMF and the University of Tokyo on Friday.

She however did not discuss further about the functionality of such financing support.

During its domestic banking crisis in the late 1990s, Japan injected capital into firms via schemes where state-affiliated bodies bought preferred shares issued by these firms.

Gopinath urged the governments of countries to continue deploying aggressive fiscal and monetary stimulus measures to keep supporting their economies because, she reasoned, any recovery of the global economy for the current crisis because of the pandemic will be “highly uneven and highly uncertain”.

Gopinath said that on the overall, consumer inflation will likely stay low in most parts of the world because of job losses and wage curbing, even though there can be some amount of food price inflation in some countries.

“We have more concerns of inflation going too low, rather than inflation going too high,” she said.

According to the IMF, the current recession across the world caused by the pandemic is the worst since the 1930s Great Depression.

According to the latest projections of the IMF on the global economic forecast as published in June, there will be a shrinking of 4.9 per cent in the global output in 2020 in comparison to its forecast of a 3.0 per cent contraction as announced in earlier in April.

(Adapted from BusinessWorld.com)



Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability, Uncategorized

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: