Doing Whatever it Takes: Understanding the COVID-19 Stimulus Calculus

By Sasidaran Gopalan and Ramkishen S. Rajan
- 15 April 2020
Doing Whatever it Takes: Understanding the COVID-19 Stimulus Calculus

Sasidaran Gopalan and Ramkishen Rajan discuss global fiscal stimulus responses to ease the economic meltdown due to the rapidly evolving COVID-19 pandemic.

With each passing day, the COVID-19 outbreak has pushed the global economy towards an unprecedented and synchronized economic contraction. As global production grinds to a halt and international borders have effectively been shut, world trade and supply chains have been paralyzed. While the rapid and uneven spread of COVID-19 makes any growth forecasts unreliable and should be taken with a large dose of salt, the latest projections from the World Trade Organization (WTO) paints a very sobering picture. Even under an optimistic scenario, global growth is expected to hit -2.5 percent in 2020, with the corresponding decline in global trade growth touching -13 percent.

As would be expected, global uncertainty -- as measured by the World Uncertainty Index -- is at an all-time high (Figure 1). Policy makers across the world have been scrambling for ways to ease this pandemic-induced meltdown. Central banks have generally acted early and aggressively by easing interest rates. They still have a role to prevent credit markets from freezing and helping with firms’ cash flows while keeping an eye on currency markets given the extent of US dollar-denominated debt by their respective corporate sectors (in the case of emerging markets). However, given the depth of the crisis and the fact that businesses and households are heavily constrained in spending as they are faced with a ‘Great Lockdown’, expansionary fiscal policy is back in vogue with a bang.

Figure 1


The Stimulus Calculus

While well-targeted fiscal stimulus measures are the need of the hour to prevent countries from experiencing a protracted economic slowdown, there is growing recognition that there are two aspects at play when it comes to stimulating their economies.

The initial type of COVID-19 stimulus that has already been unleashed globally aims to serve three broad objectives. The first is to put cash in the hands of people to tide them over during this period of severe uncertainty. While a part of this fiscal relief is to offer a psychological reassurance, it is also meant to address genuine needs of the workforce, especially self-employed, low-income households and marginally attached workers (or those in the informal sector) who are particularly vulnerable in such times. The second is to attempt to minimize corporate bankruptcies as well as limit large-scale layoffs to ease the extent of unemployment. The third is to manage the dramatic escalation in health care costs to mitigate the pandemic. Governments globally have doled out cash transfers, offered or extended unemployment insurance, provided subsidies to businesses to try and maintain employment and offered deferrals on taxes, among other things.

While much has been said of the US stimulus package of US$2.2 trillion or 11 percent of GDP, to date other countries have also engaged in massive “disaster relief” packages (as a share of their economies’ GDP), including Japan, Malaysia and Singapore in Asia (Figure 2). The size of the stimulus across most countries appears to be broadly proportional to the fiscal space available to them. This is certainly true in the cases of India and Indonesia (Figure 3) where there have been active discussions on the need to relax legally imposed fiscal spending limits. More generally though, it is fair to say that the current bout of global stimulus measures will be inadequate, particularly if lockdowns are prolonged or tightened. In addition to humanitarian considerations, the aim of such fiscal relief packages is for governments to place a floor on the demand destruction induced by the mitigation efforts of the pandemic so that there is something to build from in the second stage on recovery and reconstruction.

Figure 2


Figure 3


Once the pandemic has been brought under control, the second heavy dose of stimulus will be needed to help restart the COVID-19 battered economies. Here is where an old-style stimulus would be required to effectively replace the decline in private sector economic activity. Of more controversy will be the possible government bailouts of specific firms/industries. Although it is too early to be able to estimate the magnitude of such additional stimulus required, it will most certainly depend on the extent to which growth has taken a hit and the size of fiscal policy multipliers (which tends to be lower during deep downturns given the fall in marginal propensity to spend). While the second round of fiscal stimulus will be heavily country- and situation-specific and is without much precedent, some lessons might be drawn from the experience of post-war era financing.

The overwhelming challenge for a post-COVID-19 world will be the need to manage the acute production and supply-side damage done to the global economy. In this regard, several detrimental factors could curb the global medium-term growth potential. For instance, there will be higher transactions costs due to inevitable changes in behavioural protocols in offices, shopping malls and other places as well as reconfigurations of factory lines and regular deep cleaning. Further, tighter borders globally and a more general shift away from hyper-globalization towards reshoring may well result in a move towards a greater degree of self-sufficiency and resilience (especially in food and medical supplies), effectively altering the just-in-time global supply chain economy that has been in vogue to date. Given these negative supply side considerations, too much stimulus on the demand-side in such circumstances could be counterproductive. Hence, the priority must be on the type and quality of spending that would assist in partly compensating for the supply side shocks of the economy, including investments in health care, advanced technologies, greater digitization and clean energy.

Financing the Stimulus

Some developed countries whose bonds have a global demand (like the US for instance) will be able to manage the massive fiscal stimulus without too much difficulty. Other countries such as Singapore that have been highly prudent in the past have also been able to draw on accumulated savings by tapping into its deep pool of reserves. Europe is hotly debating possible issuances of Euro crisis (Corona) bonds as a means of pooling risks, keeping the cost of borrowing down and reducing the degree of indebtedness of specific countries, which may end up facing a Greek-style sovereign debt crisis if they have to do it alone. Unfortunately, such an option is limited in other regions of the world, though in Asia, the Asian Development Bank (ADB) could conceivably take a lead on this front. The ADB has already offered a package of about US$ 20 billion (tripling its initial package of US$6.5 billion) to its developing member countries and could offer more if needed.  

Low-income countries with limited resources, highly deficient health care systems, and are and suffering from sharp decline in remittances, have understandably started turning to the IMF for help. In turn, the IMF has opened its doors through its emergency financing facilities and likely some degree of debt relief. The question of financing of the stimulus will however prove to be quite challenging for many middle-income emerging markets. Countries like India have resorted to seeking capital flows to finance its additional stimulus by encouraging foreign investment in government securities and raising the corporate bond limits for foreign portfolio investors. Fiscal sustainability concerns apply to countries like China as well which has been relatively more guarded so far in undertaking a massive fiscal stimulus like in 2008. One of the perverse effects of its massive stimulus following the global financial crisis (GFC) included a sharp rise in local government debt that coincided with a marked expansion of shadow banking activities alongside a weakening of their domestic banking system, which the Chinese policy makers have been battling over the last few years. One would expect that this experience would force China to be more measured in terms of its fiscal response to COVID-19, moving forward.

A much-mooted financing alternative (as Modern Monetary Theorists would argue) would be to allow individual central banks to print money to buy the government bonds as long as inflation remains under check. One issue with regard to such money-financed fiscal stimulus or “helicopter money” however, is that in some countries this may run into difficulties if there is legislated central bank independence. More generally though, as long as inflation is under control (which might not be the case if commodity prices start rising and aggregate demand growth starts to outpace the increases in aggregate supply), central banks could assist fiscal expansion by keeping long-term interest rates low (i.e. “yield-curve control”) to reduce concerns about fiscal sustainability.

Given the financial predicaments that many governments will inevitably face as they respond to the evolving health and economic crisis, there may be scope to re-examine the roles of sovereign wealth funds (SWFs) and how they might to able to assist governments’ efforts in managing economic disruptions. Considering that there are almost 100 SWFs with combined estimated resources of US$ 8.4 trillion in assets under management (AUM), potentially this is an important resource that ought not to be left untouched in these exceptional circumstances. Indeed, Norway (reported to have the largest AUM to date) has led the way in this regard by channelling its oil revenues from its SWF to support the government’s fiscal response towards COVID-19. Other notable examples would be Singapore’s Temasek Holding and the GIC, which have been instrumental in helping fund the country’s fiscal spending even before the outbreak of the COVID-19 pandemic. For instance, the returns from reserves held by these two SWFs (as well as the country’s central bank, Monetary Authority of Singapore) have supplemented Singapore’s annual budget in FY2019 to the tune of 18 percent and has become the single largest source of budgetary revenue in recent years. Further, Temasek Holding has also offered financial assistance to help the country’s national carrier (Singapore Airlines) tide over the crisis inflicted by COVID-19.   

Moving Forward and Future Concerns

The world is entering uncharted territory with the COVID-19 pandemic. While the global financial crisis (GFC) happened after a prolonged period of robust and non-inflationary global economic expansion (“Great Moderation”), the current pandemic-induced economic contraction has occurred after a period of rather anemic growth. The global economy had just about returned to trend growth – based on data from IMF’s world economic outlook the average global economic growth pre-GFC between 2000 and 2007 was 4.4 percent, while the corresponding growth post-GFC between 2010 and 2019 was 3.8 percent. The longer the global lockdown the greater is going to be the extent of damage to the global economy. Left too long, there could be a form of hysteresis in that persistent weakness in demand transforms into lower potential growth. Accordingly, there is a growing chorus to end the lockdown and reopen the economy at least in a phased manner sooner rather than later. However, any premature move to relax the stringency measures relating to lockdown heightens the risk of a resurgence of the virus, further aggravating the original problem. As aptly noted by the WHO Chief Tedros Adhanom Ghebreyesus “…some countries are already planning the transition out of stay-at-home restrictions. WHO wants to see restrictions lifted as much as anyone… At the same time, lifting restrictions too quickly could lead to a deadly resurgence. The way down can be as dangerous as the way up if not managed properly.”

Some countries in Asia that were relatively more successful in containing the spread of the pandemic in the early days have been forced to introduce more stringent circuit-breaker measures to tackle a rapidly rising second wave of infections. Thus, any possibility of mounting an economic recovery will significantly hinge on both the effectiveness with which countries manage to contain the virus fully as well as undertake timely stimulus injections.

It has become a common refrain for governments to say they will “do whatever it takes” to moderate the economic slump and aid economic recovery. However, there are valid concerns in some countries that such large-scale government spending might, over time, be co-opted by special interests rather than safeguarding the interests of taxpayers; become highly politicised; lead to other inefficiencies and distortions (the China GFC example above being a case in point), waste, fraud or abuse; or threaten macro fundamentals. One would not be surprised to see some countries experiencing bouts of market instability and ratings downgrades and/or slower growth if they are unable to return to a degree of fiscal discipline in the next few years. Countries with higher initial public debt levels need to be particularly concerned, though often it happens to be these very countries that possess the least state capacity to make the required tough decisions to return to a trajectory of fiscal credibility.



Sasidaran Gopalan is a Senior Research Fellow at the Nanyang Business School, Nanyang Technological University, Singapore. Email:

Ramkishen S. Rajan is Yong Pung How Professor at the Lee Kuan Yew School of Public Policy (LKYSPP), National University of Singapore (NUS). Email:

Disclaimer: Views are personal.

Source: Authors based on CEIC for fiscal balance; data for Covid-19 Economic Stimulus Index (CESI) taken from Elgin et al. (2020).

Image: Pixabay via Pexels

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