IMF chief economist urges governments to provide 'equity-like' support to firms

International Monetary Fund (IMF) Chief Economist Gita Gopinath on July 10 said that governments across the world should support companies in the form of equities and not in the form of loans to help them recover from coronavirus crisis effectively. Gopinath while speaking at a webinar co-hosted by the IMF and the University of Tokyo on the global economic outlook during the COVID-19 pandemic said that governments' support to firms in the form of loans would put them into crisis even more as they would sink in huge debts and would find it difficult to get out. However, if it is equity-like support, then the onus on firms would be less and that would make it easier for them to recover. 

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"I think all governments across the world are dealing with following issues, one because this is a massive real shock the issue is more about solvency as opposed to liquidity, which is that we have a problem where we are going to see firms becoming insolvent because they go through many months of loss of revenue as the longer this crisis gets. I think in terms of the policy response what is meant is that because there is a bigger insolvency issue here, governments' support will have to shift more towards being equity-like as opposed to being debt-like because otherwise, you will end up with a lot of firms that exit this crisis with huge amounts of debts overhang," Gopinath said while in discussion with Tsutomu Watanabe of the Graduate School of Economics, University of Tokyo. 

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Path of recovery 'uncertain'

Gopinath had late last month said that there was still 'tremendous' uncertainty about what path of recovery from COVID-19 for countries would look like. In recent weeks, many countries in Europe and Asia have reopened in a bid to save their plunging economies. The IMF also predicted that the global economy will shrink 4.9% this year, significantly worse than the 3% drop it had estimated in its previous report in April. It would be the worst annual contraction since immediately after World War II. 

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