The International Monetary Fund (IMF) has predicted capital shortage for many commercial banks across the globe due to rise in bad loans induced by COVID-19 pandemic, its Financial Counsellor and Director, Monetary and Capital Markets Department, Tobias Andrian, has said.
Speaking yesterday at the ongoing World Bank/IMF virtual Annual Meetings in Washington DC, he linked the expected rise in non-performing loans to many firms and households not being able to repay their loans because of the negative impact of COVID-19 pandemic on their operations.
In its Global Economic Outlook released yesterday, the Fund also revised the global economy’s growth slightly upward for the year 2020 but warned of “long and unstable roadblocks to full economic recovery”.
It said the world economy is projected to fall by 4.4 per cent in the year, an upward guide from an earlier predicted rate of -4.9 per cent made in June and would also face a less severe recession.
“We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” the IMF’s Chief Economist, Gita Gopinath, said.
She added that the revision was driven by better-than-expected growth in advanced economies and China during the second quarter of the year and signs of a more rapid recovery in the third quarter.
Andrian said the banking sector entered the COVID-19 crisis with stronger capital and liquidity buffers than at the beginning of the Global Financial Crisis.
“The success of reforms undertaken over the past decade has allowed them to be part of the solution rather than part of the problem so far, as banks continued providing credit to businesses and households during the pandemic. Nonetheless, in an adverse macroeconomic scenario, our analysis shows that some banking systems may suffer significant capital shortfalls,” it said.
He said despite a global economic crisis comparable only to the Great Depression, near-term financial stability risks have been contained with the help of unprecedented monetary policy easing and massive fiscal support across the globe.
He said extraordinary policy measures have stabilised markets, boosted investors’ sentiment, and maintained the flow of credit to the global economy.
“Critically, these measures helped prevent a slowing economy and sliding financial markets from feeding on each other in a destructive vicious cycle. The rebound in asset prices and the easing in global financial conditions have benefited not only advanced economies, but also emerging markets. In addition, unlike in previous crises, emerging markets this time were also able to respond by cutting policy rates, injecting liquidity and, for the first time, employing asset purchase programmes,” he added.