Unconventional Monetary Policies Necessary to Address the Impact of COVID-19

Central Banks in the COMESA region have been implementing new policy instruments and made changes to their monetary policy frameworks in order to address low growth and increase in unemployment resulting from the negative impact of COVID-19.

According to  a special report published by the Director of the COMESA Monetary Institute (CMI), Ibrahim Zeidy, most of the banks in the region and beyond are applying different combinations of what have been labelled as Unconventional Monetary Policy Tools (UMPTs) and adapted their operations to the circumstances in their jurisdictions.

In view of this, the CMI has come up with key recommendations of possible tools for the Central Banks to consider in addition to the UMPTs during this time of the coronavirus pandemic.

These include the need to provide funding to market segments where liquidity has dried up.

The possible tool to consider is providing funding for Lending Schemes whereby Central Banks provide collateralized long-term funding to banks to aid monetary transmission through the banking system and to support provision of new credit to bridge financing needs of specific sectors,” Zeidy states

However, before implementing such tools, he notes, careful consideration should be given to the potential financial risks to Central Bank balance sheets, the operational readiness of such tools, potential distortions and spill overs and the importance of transparency and accountability in the use of such instruments.

“Central Banks should consider lowering the interest rate to increase loans to businesses (and decrease their cost) and provide commercial banks with more liquidity to support business activities,” the director says.

He adds that a temporary use of capital flow management measures can help prevent a free fall of the exchange rate. This is in addition to Capital flow management including a wide range of measures, such as restrictions on resident investments and transfers abroad, caps and other limitations on non-resident transfers abroad etc.

He however cautions that such measures should be implemented with due regard to countries international obligation, in a transparent manner, be temporary and lifted once crisis conditions decreases.

Other proposals made include the need for countries to initiate fiscal stimulus packages to minimize the impact of the Coronavirus pandemic on the national economies; fiscal stimulus to taxpayers impacted by COVID-19 and tax suspension, waiver of tax payments in critical sectors and encouraging local sourcing by the public sector to support Small and Medium Enterprises (SMEs) and other businesses.

Zeidy proposes that governments through Central Bank can also renegotiate external debt payment plans, and conditions to ensure smooth servicing of the debt, including suspension of interest rates payments during the time of the crisis.