Central banks and COVID-19 (Part 2)

In the previous blog, we read about the approach of the US and Indiato the Covid-19-led economic and financial slowdown. In this blog, we will look at two Asian countries, South Korea, and China, as well as the European Union and list out their policies to cope with the economic crisis.

South Korea – Bank of Korea

Today, South Korea is one of the wealthiest countries in Asia, and a lot of the credit goes to its strong financial and monetary policies. Last year, South Korea left behind its developing country status to join the list of the wealthiest countries of the world. Unlike most other countries, when faced with the Covid-19 pandemic, South Korea chose to apply only select restrictions, and took a more tech-based approach to combat the virus. Disinfecting public transport, enforcing social distancing measures, and mandating protective masks and gloves have beensome of South Korea’s measures to stop the spread of the coronavirus.

Despite strong measures, the South Korean economy took a massive hit. South Korea’s central bank downgraded its 2020 economic projection by 0.2 percent,down from the previously forecasted 2.1 percent growth.Oh Suk-tae from SG Securities in Seoul said, “The decline in exports and manufacturing production will outweigh the likely rebound in consumption and service production, so we will likely end up with negative quarter-on-quarter GDP growth in the second quarter.”

In tandem, the Bank of Korea announced financial support of 5 trillion Won (INR 31,000 crore) to enhance financial accessibility for small business owners who struggled through the lockdown. Further, the Bank of Korea cut interest rates to a record low—the lowest since 1999.But with a second wave of the pandemiclooming in South Korea, experts doubt if this will be sufficient.

China – People’s Bank of China

China suffered a lot in the initial stages of the pandemic. Covid-19 caused a depression in the Chinese economy due to a negative supply shock as firms forcefully shut down, and manufacturing units remained locked for months. This in turn caused a demand-driven recession. As the world economy relies heavily on Chinese goods and services, it seemed like everything would grind to a halt.

To counter this, the People’s Bank of China injected 500 billion Yuan (INR 53 lakh crore) into the banking sector through reverse repo operations. The Bank of China alsojoined other government bodies to effect a deferment on loan and interest payments. The government did not, however, institute a moratorium.

It is important to note that the Chinese government seems firm on not changing too much of its fiscal policy to make room for Covid-19-related crises. Sun Guofeng, the head of the monetary policy department at the People’s Bank of China said that China is determined to maintain a normal monetary policy.

Europe Union – European Central Bank

Many European countries stood on top of the global list of countries most affected by the virus—Italy, the UK, and Spain. To face the inevitable economic slowdown, the European Central Bank took measures such as making 3 million Euros available in liquidity, reducing interest rates to the lowest ever —0.75 percent,and by supporting lending capacity by freeing up 120 billion Euros of extra bank capital.

The European Central Bank also introduced a new Pandemic Emergency Purchase Program, a temporary envelope of 750 billion Euros in addition to the 120 billion Euros that was allocated to this program in March. It is designed to address the monetary crisis that theEUfaces and provides relief to banks by boosting loans to businesses and households to support production and employment.

Christine Lagarde, the president of the European Central Bank took to Twitter to say, “Extraordinary times require extraordinary action. There are no limits to our commitment to the Euro. We are determined to use the full potential of our tools within our mandate.”

As government actionsaim at the boosting of economies, the only way to achieve it is to effect measures to support and hasten lending activities by banks and other financial institutions. Until the vaccine is made available for the masses and the virus is put to rest, every country should effect policies to keep the engines of the economy running to survive, so that we may rise again, together, and stronger.