Following the outbreak of the novel coronavirus pandemic in Wuhan, China, its devastating impact has wrecked every aspect of human life across the world. Many lives have been lost and many nations have also been affect by the COVID-19.

As at today, more than 1.4 million people have been affected and more than 84,000 human lives have been lost across the world. Governments have put in various mitigation measures including social distancing and lockdowns of hard hit areas, to contain the spread of the virus, and more importantly, flatten the curve of infections.

These measures have led to a closure of schools, religious centres, entertainment centres, sporting activities, hospitality business, and transportation business thereby restraining growth drivers of production, distribution and consumption of goods and services across the world.

This wave of global economic contraction is not as a result of lack of demand as it was the case for many economic downturns in the past, but it is due to the inevitable mitigation measures rolled out to limit the rapid spread of the COVID-19 and invariably sustain the healthcare system.

The global economy has witnessed a sharp decline and growth projections have been revised downwards in the light of the COVID-19 pandemic. As an exporter of oil, Ghana’s economy also suffers significantly by the huge fall in oil prices.

It appears to be the early views of many researchers and the IMF that, the disruptive impact on the global economy could lead to economic recession albeit, there is still high level of uncertainty to the extent and magnitude of the impact of the COVID-19.

Due to the high uncertainty about the outlook of the global financial markets, there is a sharp rise in equity market risk (hence, volatility) and equity shares plummeted across most markets.

High uncertainty about the global market outlook further leads to widening of credit spreads arising from investors diversifying away from risky assets to safer assets.

Emerging and frontier markets that mostly have risky assets with high yielding returns turn to suffer from this capital flight as investors exit from these markets. Again, pressure on the local currency as investors exit the domestic market will further cause it to deteriorate.

As the coronavirus continues to paralyze the health of the global financial system, leaders at central banks are scratching their heads and gnashing their teeth to find the right monetary policies to complement the fiscal policies of government in addressing the potential risks to the financial system of the economy. What is revealing among the recent interventions is that the injection of liquidity and reduction in interest rates are reminiscent of monetary policy interventions in the wake of previous financial crisis.

Monetary Policy Response

European Central Bank : To counter the potential downside risks arising from the COVID-19 pandemic, On 18 March 2020, the ECB launched a new Pandemic Emergency Purchase Program (PEEP) which has a total corpus of €750billion allowing for purchases of all eligible private and public assets until end-2020. With this initiative, the ECB will provide private and public companies access to additional financing source to absorb the augment their working capital. Banks are asked not buy back shares during this period or pay dividend for the financial years, 2019 and 2020.

Federal Reserve: In response to the disruptive impact of the COVID-19 outbreak to US economy, Fed launched a barrage of aggressive monetary policy measures including cutting the interest rates by 150 basis point to near zero between (0% and 0.25%) in March 15, 2020; purchases of treasury and agency securities to any amount so needed and expanding short and term repos. A further liquidity support of US$1.5 trillion was made avail to the financial system.

Bank of England: The Bank of England rolled out some key interventions including interest rate cut from 0.75% to 0.1%; offer an additional £200 billion for purchase of government and non- financial corporate bonds and required banks not to increase dividends or other bonuses like bonuses during this period.

Bank of China: The People’s Bank of China provided an amount of (RMB 350 billion) credit extension to SMEs and a further liquidity support of RMB 20 billion in March 2020 after RMB 3 trillion injection into the banking system, in February 2020.

Bank of Nigeria: The Central Bank of Nigeria announced an amount of N50billion (US$139million) credit relief support for households, SMEs and others businesses that are hard hit by the COVID-19 pandemic. Interest rate has also witnessed a reduction from 9% to 5% starting March 1, 2020 and offering a one year moratorium on CNB intervention loans.  

Bank of Ghana: On March 18, 2020, the Bank of Ghana through its MPC, reduced the policy rate from 16 to 14.5%; reduction in capital conservation buffer by 100% from 3% to 1.5%, and lowering the primary reserve ratio from 10% to 8% among other measures to mitigate the risks of the COVID-19 pandemic.

Recommendations for the Central Bank

Central banks are running various monetary policy response simulations and scenarios from their toolkits on how to maintain the health and soundness of the global financial system amid the potential risks posed by thee COVID-19 pandemic.

Some of the interventions that the central bank could consider in efforts to limit any further tightening in financial conditions and providing financial reliefs to affected households, and businesses include:

• Loan restructuring- To the extent permitted by banks risk management principles, existing loans should be restructured by postponement of loan payment, extension of loan tenors, providing principal moratoriums, maintain existing debtor credit ratings  simplification of approval process for existing and new credits  for affected SMEs, sectors, and households as appropriate.

• Like ECB supervised banks, banks should be estopped from paying dividends for the financial years 2019 and 2020 or buy back shares during COVID-19 pandemic, from which the conserved capital should be used to support households, small businesses and corporate borrowers and/or to absorb losses on existing exposures to such borrowers.

• Central Banks should exercise tolerance for higher non-performing loans for loans by hard hit sectors and SMEs
• Banks should be encouraged to reduce rates of overnight and term repos

Every nation’s circumstance and monetary framework is different and so must the policy response. Again, each country’s central bank is not in isolation and therefore must work closely with its global partners including the Basel Committee on Banking Supervision, in a coordinated approach as echoed by the Federal Reserve chairman, Jerome Powell, in order to mitigate any potential strain on the global financial system.

The risks arising from the coronavirus pandemic is a multifaceted one and would require a multifaceted response from the management of the fiscal, monetary and health authorities.

The speed at which the economy will rebound will largely depend on the severity of the pandemic, the size of the country’s resource envelope and efficacy of policies that are being rolled out during and after the pandemic.

Developing countries with relatively low resources envelope and hard hit with the COVID-19, would require a longer period of time to recuperate unless there is significant financial bailout from the international financial community.