Saturday, May 9, 2020

Stimulus Packages to Tackle the Slowdown in the Economy

Relief Measures to Tackle the Covid19 Crisis
THE GLOBAL ECONOMY is facing an unprecedented crisis from the spread of Covid-19 throughout almost the entire world. The RBI noted that global economic activity has come to a near standstill as COVID-19 related lockdowns and social distancing are imposed across a widening swathe of affected countries. Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed. The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. There is a rising probability that large parts of the global economy will slip into recession. Even as scientists and doctors fight the battle with the unprecedented calamity, fiscal and monetary will have to take care of saving livelihoods and incomes. Below we outline some of the initial measures undertaken by some major central  banks and governments.
•       Fed funds rate at 0-0.25%. FOMC announced emergency rate cuts on March 3 and March 15, lowering the policy rate by -150 bps in total. The Fed funds rate range has returned to the lowest level after the global financial crisis in 2007/08.
•       Donald Trump signed the largest stimulus package in US history on Friday, a $2 trillion bill intended to rescue the coronavirus-battered economy. The package provides roughly $500 billion in loans and other assistance for major companies
•       The bill sets aside $350 billion for small business loans up to $10 million, with priority given to women-owned businesses, new businesses and those run by anyone “socially and economically disadvantaged.
•       The bill also sets aside $100 billion for hospitals and health providers as they struggle to meet the challenge of COVID-19 amid widespread shortages of personal protective equipment and depleted staffs.
•       The bill also includes a substantial additional $600 per week on top of existing state benefits to help the jobless navigate the crisis. Nearly one in five Americans had lost work as of mid-March — a number that’s likely going up.
•       The stimulus will include direct cash payments of $1,200 for adults and $500 for children in a move likely to include up to 94% of all tax filers.
•       The Fed has also revived the Term Asset-Backed Securities Loan Facility that focuses on small businesses and households. It provides direct funding to those willing to invest in financial instrument securitisations
•       On March 22, the U.S. Fed announced the Primary Market Corporate Credit Facility and a Secondary Market Corporate Credit Facility, that will support access to credit for large employers via the purchase of corporate debt.
At the March meeting, ECB left the deposit rate unchanged at -0.5%.
On March 18, the European Central Bank announced its Pandemic Emergency Purchase Programme. The significance of the PEPP is not just its massive corpus of €750 billion, but the fact that it has extended the list of eligible securities to all commercial paper of financial and non-financial companies. Thus, the European Central Bank would, in effect, be a direct lender to companies to meet their working capital needs.
The ECB has relaxed capital requirements for the sector — providing an estimated €120bn of capital relief that could fund €1.8tn of new loans. T
ECB launched new LTROs until June 2020 to fund banks’ liquidity needs. It also improved TLTRO-III by relaxing loan eligibility and increasing incentive rate, effective June 2020.
he ECB also said banks “should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020”. It added that they should “refrain from share buybacks aimed at remunerating shareholders”.  The freeze on distributing capital to investors was to “boost banks’ capacity by about 30 billion Euros to absorb losses and support lending to households, small businesses and corporates during the pandemic.
Bank of England Policymakers lowered the Bank rate by -65 bps in two emergency cuts this month, taking the policy rate to 0.1%, the lowest level on record.
Boosting the size of asset purchase by +200B pound, BOE has pledged to buy a total of 645 billion pound.
BOE also introduced a COVID-19 Corporate Financing Facility (CCFF) under which the central bank can directly purchases commercial paper issued by credit-worthy non-financial corporate who make “a material contribution to the UK economy”

Japan compiled a record $1.1 trillion economic stimulus package in April that focused on cash payouts to households and loans to small businesses hurt by the pandemic.

In India, fiscal policy makers have taken the first step of ensuring that the basic needs of most-vulnerable sections of the population are met during the lock-down:

·         1. Pradhan Mantri Gareeb Kalyan Anna Yojana: 800 million poor people in the country to get 5 kg of rice/wheat per month free of cost, in addition to the 5 kg they already get. Additionally, each household to get 1 kg of preferred dal for free for the next three months
·         2. Cash transfer scheme: Nine sub-parts
·         Farmers: First instalment of the PM-KISAN payment of Rs 2,000 to be frontloaded; move to benefit 87 million
·         MGNREGS: Wage increased from Rs 182 to Rs 202 per day. Wage increase to benefit 50 million families, as there will be about 2000 increase in their income
·         Poor widows, aged, and divyang: Ex-gratia of Rs 1,000 for the next three months, in two instalments. 30 million people to benefit. transfers to be done through direct benefits transfer (DBT)
·         Women with Jan Dhan Yojana accounts: 200 million to benefit from Rs 500 ex-gratia for the next 3 months
·         Beneficiaries of the Ujjwala scheme: 80 million households benefitted from the gas cylinders provided under the scheme. These beneficiaries will get free cylinders for three months in view of the disruption the coronavirus lockdown will cause.
·         Women in self-help groups: 6.3 million SHGs get up to Rs 10 lakh collateral-free loans under the Deen Dayal Upadhyaya National Rural Mission scheme. The cap has been doubled to Rs 20 lakh. The move will benefit 70 million households
·         Organised sector workers: Two parts to this. First, the Government of India will pay the EPF contribution of both employee and employer for the next three months. This will be for all those establishments which have up to 100 employees, 90 per cent of whom earn less than Rs 15,000 a month
·         And second, in what will benefit 8 million employees and 400,000 establishments, the EPFO regulation will be amended to allow the withdrawal of up to 75 per cent of their corpus as non-refundable advance, or three months' salary, whichever is less
·         Construction workers: States to be directed to utilise the Rs 31,000 crore welfare fund for building and construction workers for the benefit of 35 million workers in the midst of the coronavirus crisis
·         District medical fund: State govts to be urged to utilise this fund for medical screening, medical testing and providing health care services in the wake of the coronavirus crisis

The government is giving shape to a stimulus package that will be followed by a raft of reforms meant to help India capture opportunities. Business leaders and experts have sought a ₹10 trillion package to tide over a severe liquidity crisis caused by the lockdown imposed to battle covid-19 and provide funds to the poor for a recovery in demand for goods and services.

The Reserve Bank’s actions are to be regarded as a comprehensive package with force multipliers. The developmental and regulatory policies can be broadly delineated under four categories: (1) measures to expand liquidity in the system sizeably to ensure that financial markets and institutions are able to function normally in the face of COVID-19 related dislocations; (2) steps to reinforce monetary transmission so that bank credit flows on easier terms are sustained to all those who have been affected by the pandemic; (3) efforts to ease financial stress caused by COVID-19 disruptions by relaxing repayment pressures and improving access to working capital; and (4) endeavor to improve the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic.

MPC has agreed to reduce the policy repo rate by 75 basis points to 4.4 per cent. Policy rate corridor widened from 50 basis points to 65 bps. The fixed rate reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, was reduced by 90 basis points to 4.0 per cent, thus creating an asymmetrical corridor. The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy.  On April 15, the amount absorbed under reverse repo operations was ₹6.9 lakh crore. In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0 per cent to 3.75 per cent with immediate effect. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the Bank Rate remain unchanged at 4.65 per cent.

As announced on March 27, the RBI undertook three auctions of targeted long term repo operations (TLTRO), injecting cumulatively ₹75,041 crore to ease liquidity constraints in the banking system and de-stress financial markets. Another TLTRO auction of ₹25,000 crore will be conducted on April 17. In response to these auctions, financial conditions have eased considerably, as reflected in the spreads on money and bond market instruments. Moreover, activity in the corporate bond market has picked up appreciably, with several corporates making new issuances. There are also indications that redemption pressures faced by mutual funds have moderated. It has been decided to conduct TLTRO 2.0 for an aggregate amount of ₹50,000 crore, to begin with, in tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. it has been decided to provide special refinance facilities for a total amount of ₹50,000 crore to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.

It has now been decided to increase the WMA limit of states by 60 per cent over and above the level as on March 31, 2020 to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts, and to plan their market borrowing programmes better. The increased limit will be available till September 30, 2020.

Consistent with the globally coordinated action committed to by the Basel Committee on Banking Supervision to alleviate the impact of Covid-19 on the global banking system, additional regulatory measures are being announced. 

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