The financial response to COVID-19 so far - and a call for inclusivity and sustainability

Connected society 2 July 2020 Simon Kennedy

With over $2.3 trillion pledged by major financial institutions, the financial response to COVID-19 is being mobilised emphatically and at pace. Simon Kennedy argues that more can and should be done to make it inclusive and sustainable.

Expert columns

The sheer scale, severity and far-reaching consequences of the COVID-19 pandemic has created an immense financing gap, with most countries only able to close it by accessing significant financial support. The financial support mobilised to date has been immediate and emphatic, with over $2.3 trillion pledged by a selection of the most prominent DFIs (Development Finance Institutions) and regional banks to its member states and businesses. 

This is encouraging, particularly given that these funds are being mobilised at a faster rate than that seen during the global financial crisis of 2007-08. However, the road to recovery is set to be long and hard, and important decisions for the future need to be made today. Fiscal support needs to be equitable and inclusive. While no country is shielded from the risk of infection, developing nations will be hardest hit.

Beyond the critical role of DFIs in this regard, the rise of fintech (Finance Technology) in connecting the unbanked and underserved to financial services indicates that it can be a powerful source of fiscal stimulus for developing nations. But perhaps most importantly, the financial response needs to be sustainable. The imperative to fundamentally decarbonise our economies is clear, and it has long been said that meeting this imperative would require restructuring entire economies and injecting trillions of dollars in public funding. Now that we are injecting trillions, we have a once-in-a-lifetime opportunity to fund the transition to a sustainable future while relaunching the economy. Attaching green strings to financing recovery plans emerges as a potential way to facilitate such a transition. In this way, the COVID-19 pandemic presents a unique window of opportunity that did not exist previously. This opportunity must be captured, least that we lose it. 

Moving through the emergency health response and into economic recovery

In our globalised world, the COVID-19 pandemic is proving to be as contagious economically as it is medically. In addition to its devastating health impact, the pandemic has brought economies to a standstill. Millions of workers have been made unemployed, and trade, investment and financial markets have stalled. The economic ripple effect of such a slowdown will be felt for decades. 

To say that we find ourselves in an ‘unprecedented moment’ has been often repeated. What is less clear, however, is where our societies go from here.

For national governments, the road ahead in overcoming COVID-19 can be characterised by responding to three prioritised needs (Figure 1). 

Figure 1. Financial response requirements to COVID-19

Addressing these needs to effectively contain the health burden and stimulate the economy is an immense task for governments. While some countries exhibit different approaches to responding to these three needs, what is common is the fact that the essential ingredient is financial stimulus – deep, broad and rapidly acting. 

Countries are mobilising rapidly to identify and unlock the required financial resources within their national fiscus’ with which to respond. For many nations, directing national finances to meet the challenge means redirecting funds from other key development needs as they become deemed less essential in the shadow of a global health pandemic. For others, these financial resources simply do not exist. What this means, then, is that the scale, severity and complexity of COVID-19 has created a financing gap, and most countries will only be able to close it by accessing significant and rapidly acting financial support.

“The scale, severity and complexity of COVID-19 has created a financing gap, and most countries will only be able to close it by accessing significant and rapidly-acting financial support.”

How have financial institutions responded?

Table 1 presents the financial response to COVID-19 made by major financial institutions (DFIs and regional banks).

Table 1. Financial response to COVID-19 pledged by a selection of major financial institutions (as of 1 June 2020)

Table 1 highlights a hopeful start in closing the financial stimulus gap – with over $1.2 trillion being made available, in addition to the $1.1 trillion from the European Commission, the financial stimulus response has been immediate and emphatic. Almost all major financial institutions have recognised the scale of the crisis and have mobilised to offer immense sums of financial stimulus support to its member states and businesses affected by the pandemic. As most national healthcare systems begin to pass the critical infection phase and ‘lower the curve’, the majority of these support packages are of the economic ‘rescue’ or ‘triage’ typology, and include significant worker and business compensation schemes, emergency liquidity and working capital, and credit creation, in order to defend livelihoods and restart the economy. Encouragingly, many institutions are also offering schemes that target economic resuscitation and stimulus for the longer term. 

Considering the Asian Development Bank (ADB) as an example, to date the total package extended to its developing members equals 8.2% of these members’ combined GDP in 2019. 43% of this financial support has been allocated to government support to income, followed by support to the normal functioning of money markets with a 19% allocation.

“Almost all major financial institutions have recognised the scale of the crisis and have mobilised to offer immense sums of financial stimulus support to its member states and businesses affected by the pandemic.”

Studies of fiscal responses during the Global Financial Crisis (GFC) suggest that the economic success of fiscal stimulus is strongly affected by two attributes: the speed at which the stimulus delivers real-world impact; and the short- and long-run economic multiplier, or return for every dollar of expenditure (Freedman et al., 2009, Coenen et al., 2012, Ramey, 2019). Evidence to date suggests that many countries, such as those in the G20, have responded quicker to COVID-19 than to the GFC, and since financial stimulus support is being allocated across all sectors of the economy (since few sectors are shielded from the effects of the pandemic), its real-world impact will arguably result in strong multiplier effects.

Most of these financial institutions have indicated that they have mobilised these response funds by unlocking their reserves, while others by reallocating from other ongoing projects. Encouragingly, there is also some evidence to suggest that DFIs are coordinating their responses and are in communication with each other, demonstrating that financial powerhouses can come together when faced with a single global challenge. 

However, the financial response has also been constrained. In addition to the overwhelming severity of the crisis (the financial gap is simply too large), there is a lack of information (characterised by uncertainty and an ever-changing statistical picture), field work restrictions, and the fact that trying to spend a lot of money quickly doesn’t leave much time for rigorous analysis of wise spending. 

The road ahead for fiscal stimulus support

That financial support to the COVID-19 pandemic is being mobilised is encouraging, but not the end of the story. How financial support is being carried out, and, perhaps most importantly, to what end, is a critical dimension that demands to be at the forefront of the COVID-19 discussion. Two key considerations – inclusivity and sustainability – are explored:

a. Financing an inclusive recovery

Like any other disaster, the impacts and implications of COVID-19 will not be distributed equally. While no country is shielded from the risk of infection, developing nations will be hardest hit, since:

- their governments typically struggle with high debt burdens*, poverty and poor healthcare systems;

- their economies are often highly dependent on commodities for export, and are therefore vulnerable to collapsing global demand;

- their already-struggling workers don’t have the benefit of social safety nets and stimulus packages, making the economic costs of social distancing even higher; and

- poor individuals, households and small and medium-sized enterprises (SMEs) typically struggle to access financial services.

*Even before the COVID-19 crisis began, nearly half of all lower-income economies were judged by the International Monetary Fund (IMF) to be at high risk of ‘debt distress’. The sheer scale of the pandemic will likely push many developing nations into severe debt problems. Even if widespread debt standstills can be agreed, a large number will not emerge unless some of their debt is cancelled.

 

In this light, for developing and emerging nations, the financial stimulus gap is greater, elevating the importance – indeed, the necessity - of financial support from DFIs in closing it. 

However, there is another source of financial support with immense potential to assist developing nations address the impacts of COVID-19 in the context of their existing development challenges. Financial technology, or ‘fintech’, provides specialised digital banking services and micro-finance (such as mobile payments, microcredit and savings accounts) via business-to-consumer and business-to-business debit and credit to vulnerable groups and SMEs that are typically unbanked or underserved by traditional financial institutions. According to a recent ADB study, digital financial solutions can address about 40% of unmet demand for payment services and about 20% of credit requirements of poor households and small businesses in Asia.
 
The nimble and efficient ‘mobile’ nature of fintech means that these financial services can be mobilised more quickly than traditional financing services, and its potential to innovate suggests a greater variety of services and products that can be offered. For example, in India, a financial transactions platform, ’Eko’, is trying to create “human ATMs” out of anyone with a mobile phone and a little cash. 

In this way, fintech enhances financial inclusion and economic resilience, and broadens access to financial services for those with the most immediate and pressing financial needs. Therefore, the COVID-19 crisis presents an opportunity to further expand and extend the role of fintech in developing economies. Moreover, there is the added benefit that digital financial services – being nimble, flexible and contactless – encourage and facilitate social distancing. 

b. Financing a sustainable recovery

Recovering and rebuilding from the pandemic requires sustainability to be at its core. The imperative is clear – we need to fundamentally decarbonise our current economic systems in order to avoid the 1.5-degree threshold and its resulting environmental, social and economic implications. Recovering at all costs and at the expense of the environmental agenda cannot be effective or resilient simply because any attempt at high-carbon growth will self-destruct though the hostile physical environment it will create. And some have argued that a return to normal is a return to the unsustainable conditions that created the coronavirus in the first place.

A recent paper from the Oxford Smith School of Enterprise and the Environment estimates that around 4% of national COVID response policies implemented to date are ‘green’ (with potential to reduce long-run GHG emissions), 4% are ‘brown’ (likely to increase net GHG emissions beyond the base case), and 92% are ‘colourless’ (meaning that they maintain the status quo) **. Clearly, there is much scope to embed sustainability into the financial response to this pandemic.

While development banks may have typically prioritised economic development over climate change, the environmental mandate demands that these no longer be mutually exclusive. Sustainable development is proving to be possible and, if implemented effectively, attractive from the point of view of financial returns for development banks. To realise a sustainable recovery, the financial response needs to be forward-looking, and not aimed at restoring the pre-crisis status quo.

It has long been said that meeting the sustainability imperative would require restructuring entire economies and injecting trillions of dollars in public funding. Now that we are injecting trillions, we have a once-in-a-lifetime opportunity to fund the transition to a sustainable future while relaunching the economy. In this way, the COVID-19 pandemic presents a unique window of opportunity that did not exist previously.

Realising such an opportunity is possible. What we’re seeing right now with the immense response from financial institutions and governments to the COVID-19 pandemic is what’s possible when we recognise we’re in an emergency. The extraordinary scale of the financial response is setting a precedent for similar measures to be rolled out to tackle the climate crisis and illustrates what financial institutions might be able to do when they put their full weight behind the climate crisis.

**Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and Zenghelis, D. (2020). ‘Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?’, Smith School Working Paper 20-02.

“It has long been said that meeting the sustainability imperative would require restructuring entire economies and injecting trillions of dollars in public funding.

Now that we are injecting trillions, we have a once-in-a-lifetime opportunity to fund the transition to a sustainable future while relaunching the economy. In this way, the COVID-19 pandemic presents a unique window of opportunity that did not exist previously.”

c. How to finance an inclusive, sustainable recovery

To ensure the financial response to COVID-19 leads to an inclusive and sustainable recovery, the following principles are suggested (Figure 2):

Figure 2. Principles to finance an inclusive and sustainable recovery

Equitable support

- A considerable amount of financing should be directed to counter the disproportionally acute impacts of the pandemic on developing nations.

- A simple financial response may be to offer debt relief (debt standstills, restructurings and cancellation). This debt relief can be directed towards pandemic funding (payments that otherwise would have gone to creditors can be used for emergency funding related to the pandemic).

- In April, G20 leaders agreed to suspend debt repayments for 76 of the world’s poorest countries until the end of the year, while the IMF cancelled debt repayments for a smaller group of 25 countries for up to two years. The money freed up - $20 billion in the case of the G20 and $213 million for the IMF – will provide some of the necessary finance for those countries to boost healthcare systems and shoulder the economic fallout (source link). 

- Promising signs are emerging that African countries are beginning to provide strong leadership in negotiating with creditors. 

- Fintech offers significant potential in extending efficient financial support services to the unbanked and under-served groups.

Holistic, integrated and coordinated response

- While the COVID-19 pandemic is first and foremost a health crisis, with saving lives being paramount, responding effectively necessitates a holistic and integrated response. For instance, in a developing context, a barrier to accessing healthcare is a lack of reliable electricity. Moreover, it is timely to remember that human health depends not just on protection from a virus, but access to a sufficient and nutritious diet. The financial response needs to encompass the complexity of the challenge. 

- Information and communications technology (ICT) can be used to relieve pressure on government functions and enable better targeting and delivery of services as part of addressing COVID-29 impacts. 

Attach green strings to recovery plans

- Governments and financial institutions are under growing pressure to make economic bailouts designed to counter the pandemic dependent on climate action in the longer term. For example, an automotive company could be bailed out on condition it accelerates electrification of its fleet when the immediate crisis passes. In this way, financial stimulus can help governments and companies move away from increasingly risky fossil fuel investments in a controlled manner. 

- Currently, there is misalignment in the financial response in Europe: the EU Commission’s Green Deal and the European Central Bank’s $965 billion Emergency Bond-Buying Programme are at odds – with the bond-buying scheme having no conditionality, fossil fuel companies can free-ride on support measures to gain even cheaper financing to maintain their activities. 

- While immediate economic stabilisation is the priority, such financing measures should be consistent with climate goals.

Long-term view

- The financial response needs to take a long-term view of the issues that make us all unnecessarily vulnerable to crises to help countries be fit for the future. 

Summary

The overall impact of the COVID-19 pandemic will be determined by each country’s financial response and investment decisions. While the emergency health imperative of saving lives is, quite rightly, the priority of government decisions, it is important to remember that the imminent recovery decisions made today will shape the economy in the long-term and determine the quality of life of future generations. Given that the climate crisis represents the greatest threat to welfare and livelihoods (and is inextricably linked to the adverse health and economic impacts of COVID-19), the radical financial investment decisions being made today in response to this pandemic represents an unmissable opportunity to embed sustainability into our society.

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