The World Bank and its International Finance Corp. (IFC) boards of directors have approved an increased $14 billion package of fast-track financing to assist companies and countries in their efforts to prevent, detect and respond to the rapid spread of COVID-19.
IFC, a member of the World Bank Group, will increase its COVID-19 related financing availability to $8 billion as part of the $14 billion package, up from an earlier $6 billion, to support private companies and their employees reeling from the economic downturn caused by the unfolding pandemic.
The bulk of the IFC financing is earmarked for client financial institutions to enable them to continue to offer trade financing, working-capital support and medium-term financing to private companies struggling with disruptions in supply chains. IFC’s response will also help existing clients in economic sectors such as manufacturing and tourism directly affected by the pandemic to continue to pay their bills. The package will also benefit sectors involved in responding to the pandemic, including healthcare and related industries, which face increased demand for services, medical equipment and pharmaceuticals.
“This package provides urgent support to businesses and their workers to reduce the financial and economic impact of the spread of COVID-19,” David Malpass, president of the World Bank Group, said. “The World Bank Group is committed to a fast, flexible response based on the needs of developing countries. Support operations are already underway, and the expanded funding tools approved today will help sustain economies, companies and jobs.”
The additional $2 billion builds on the announcement of the original response package on March 3, which included $6 billion in financing by the World Bank to strengthen health systems and disease surveillance and $6 billion by IFC to help provide a lifeline for micro, small and medium-sized enterprises, which are more vulnerable to economic shocks.
“Not only is this pandemic costing lives, but its impact on economies and living standards will likely outlive the health emergency phase,” Philippe Le Houérou, CEO of IFC, said. “By ensuring our clients sustain their operations during this time, we hope the private sector in the developing world will be better equipped to help economies recover more quickly. In turn, this will help vulnerable groups to more quickly recover their livelihoods and continue to invest in the future.”
The IFC response has four components. First, $2 billion from the Real Sector Crisis Response Facility will support existing clients in the infrastructure, manufacturing, agriculture and services industries vulnerable to the pandemic. IFC will offer loans to companies in need, and if necessary, make equity investments. Another $2 billion from the existing Global Trade Finance Program will cover the payment risks of financial institutions so they can provide trade financing to companies that import and export goods.
IFC expects this will support small and medium-sized enterprises involved in global supply chains.
In addition, $2 billion from the Working Capital Solutions program will provide funding to emerging-market banks to extend credit to help businesses shore up their working capital, the pool of funds that firms use to pay their bills and compensate workers. A new component initiated at the request of clients earmarks $2 billion from the Global Trade Liquidity Program and the Critical Commodities Finance Program, both of which offer risk-sharing support to local banks so they can continue to finance companies in emerging markets.
IFC is already working to deploy its response financing. For example, IFC recently expanded trade-financing limits for four banks in Vietnam by $294 million so they could continue lending to companies in need, especially small and medium-sized enterprises.
“Disruptions to supply chains, demand, international trade flows and travel, along with lockdowns and collapsing stock prices, resulting from the coronavirus disease 2019 virus have dealt a heavy blow to the global economy,” the economists said. “The United States, Europe and Japan are headed for recession.”
The IHS Markit forecast for world real gross domestic product (GDP) growth in 2020 has been revised down to 0.7 percent in response to the spread of COVID-19, noting that growth below 2 percent is classified as a global recession.
“Forecast risks are overwhelmingly on the downside and depend crucially on how governments respond,” Behravesh and Johnson said. “Central banks have already taken emergency actions, but the fiscal response is more uncertain. The recent sharp drop in oil prices will help energy consumers and hurt energy producers. The net effect on global growth is likely to be negative, but small.”
In the U.S., IHS forecast a recession will start in the second quarter, as “fear and financial stress stemming from the spread of the COVID-19 virus have swamped that good news.”
“Volatility has surged, risks spreads have widened and equity values have fallen more than 25 percent year to date, wiping out trillions in household net worth,” the economists said. “Real GDP growth will be hurt badly in the second quarter as consumers spend more cautiously and businesses put some investments on hold until the outlook clears up. Bans on travel and public gatherings will also hurt. Growth is not expected to return until the end of the year.”
All told, U.S. real GDP should fall 0.2 percent on a calendar year basis in 2020, they noted. The bottom line, the economists said, is that the “rapid spread of the COVID-19 virus beyond mainland China has set the global economy up for the worst growth downturn since the 2008–09 financial crisis.”