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FPI Coffee Hour | Innovative Remedies Needed: Meeting the Economic and Financial Challenges of COVID-19

April 9, 2020

John Lipsky, Senior Fellow, Foreign Policy Institute Johns Hopkins SAIS

The Foreign Policy Institute of the Johns Hopkins SAIS launched their “FPI Coffee Hour” series with a webinar to address the economic and financial challenges of the COVID-19 pandemic and how the world should work together to combat these devastating effects. FPI Senior Fellow Lipsky argues that the pandemic will cause countries to face unprecedented challenges at an unprecedented speed that has impressively elicited large scale responses. Lipsky describes the responses as unfamiliar because the world is dealing with challenges that are unfamiliar.

Lipsky anticipated that the economic downturn caused by the pandemic will be bigger than that of the 2008-2009 global financial crisis. Since the outbreak of COVID-19, the collapse in commodity prices and massive capital outflows from emerging markets has occurred on a scale never seen before in such a short span of time. The outflows from the emerging markets have already tripled the size that occurred during the global financial crisis indicating serious economic troubles ahead. Although central bank policies have prevented substantial credit problems, Lipsky expects a considerable increase in government debt relative to GDP. 

To address some of the economic and financial challenges many of the vulnerable countries will face, the IMF and the World Bank jointly announced their support of a debt standstill for International Development Association (IDA) eligible countries. From the humanitarian perspective, the question is raised of how can the IDA-eligible countries be supported and protected, especially those with generally weak healthcare systems. The other aspect is that for many of these countries, the largest lender is China either through official or private lenders or state banks. Lipsky anticipated that the Paris Club, a group of major creditor countries, will place immense pressure on China to: (1) be transparent about its lending; (2) agree on terms of equal treatment for debt relief. Given the uncertainty of the fundamentals of COVID-19, suspending debt payments is reasonable until lenders are more confident about the economic outlook.

In Lipksy’s account of his experience as a managing Director of the IMF during the global financial crisis, he described a sense of coherent, collective, and cooperative action that was present then but is absent in the current moment. Lipsky concluded by underscoring that much uncertainty is left in a context in which the notion of international cooperation, heretofore, has seemed radically reduced relative to what it was just a decade ago in the global financial crisis.