Global Finance vs. COVID-19: Strategies for Economic Stability

Earlier this month, G7 finance ministers and central bank governors vowed to use “all appropriate policy tools” to contain the economic threat posed by the coronavirus. However, the question left unanswered is what is appropriate and what will work. This article explores the measures taken so far and the potential impacts on the global and Iraqi economy.

Central Bank Rate Cuts: A Swift Yet Limited Response

The immediate response to the coronavirus threat came in the form of central bank rate cuts, with the US Federal Reserve being the first to act. While central banks can move quickly, the effectiveness of these measures is questionable, especially since interest rates are already at rock-bottom levels, as demonstrated by the European Central Bank (ECB).

Yields on long-term U.S. government debt fell to all-time lows, signalling a looming recession that could come more quickly than many experts feared. Almost all major stock markets around the world have entered bear territory, reflecting widespread investor anxiety.

Understanding COVID-19: The Disease and Its Spread

Coronaviruses are a large group of viruses that can cause illnesses as minor as a cold. The novel coronavirus, initially described as a new strain of pneumonia, was later confirmed as COVID-19 by the World Health Organization (WHO) on February 11. Over 140,000 people have tested positive globally, and more than 5,000 have died.

China, where the virus first broke out, seems to have passed the peak of its crisis, with economic activity slowly returning. However, other major economies, including the United States, are experiencing a significant spike in cases, affecting trade, travel, and manufacturing.

The Interconnected World and Economic Vulnerabilities

The rapid spread of the coronavirus in a deeply interconnected world is alarming. Many countries have not accounted for Black Swan events—low probability, high impact—in their budget assumptions, making it challenging to respond effectively.

Impact on Banks: Navigating Financial Turbulence

The coronavirus is a significant economic shock, and banks must be prepared to continue financing households and businesses facing temporary difficulties. Companies are struggling with lower demand for products and services as consumers reduce shopping and supply chain disruptions due to factory suspensions in China.

Affected businesses may need financial assistance, providing an opportunity for banks to establish long-term relationships with new customers. Banks should apply sound underwriting standards, maintain adequate policies for non-performing exposures, and conduct robust capital and liquidity planning. Reviewing business continuity plans to enhance preparedness is also crucial.

The Iraqi Economy: Facing Dual Crises

According to the World Bank, Iraq’s security situation improved after the defeat of ISIS in 2017, but recovery has been slow. Higher oil prices had offered Iraq a chance to rebuild and address longstanding issues, with GDP growth estimated at 4.8% in 2019 and projected at 5.1% in 2020.

However, crude futures plunged over 20% after Saudi Arabia announced increased production and discounts on oil, exacerbated by reduced demand due to the coronavirus. Goldman Sachs Group Inc. warned that prices could drop to near $20 a barrel, posing a significant challenge for Iraq.

Trade Disruptions and Economic Outlook

Turkey’s closure of its only border crossing with Iraq amid a spike in coronavirus cases has disrupted a major trade route. Iraq’s trade with Turkey and Iran, both critical for its economy, has been severely affected. Additionally, the closure of Najaf province to non-residents impacts religious tourism, a vital revenue source.

Fiscal Deficits and Economic Vulnerabilities

Higher spending combined with lower oil prices is projected to result in a fiscal deficit of around 3-4% of GDP in 2020 and 2021. The lack of a financial cushion to cope with a sharp drop in exports and oil prices leaves Iraq vulnerable. The country, as the second-largest oil producer in OPEC, faces significant operational and infrastructure challenges in ramping up production quickly.

Moving Forward: Hopes for Containment and Normalcy

As the world grapples with the coronavirus, there is hope that its spread will be contained soon and normalcy will return. In the meantime, adopting measures like the Indian greeting of Namaste—derived from Sanskrit words meaning “I honour the spirit in you which is also in me”—is gaining popularity as a COVID-19-proof alternative to handshakes.

Final Thoughts

Stay safe, be a responsible citizen, and follow the basic protective measures advised by WHO. The economic challenges posed by the coronavirus are significant, but with coordinated efforts and appropriate policies, there is hope for recovery.

Stay safe, be a responsible citizen, and follow basic protective measures advised by WHO.