As the global coronavirus death toll exceeds 33,000, the unprecedented pandemic proves to be a major challenge for countries around the world. On top of tragic human consequences and mass hysteria, the COVID-19 outbreak has hit the global economy, leading to supply-chain disruptions and collapse in oil prices.
The slowdown in the global economy caused by the COVID-19 outbreak will likely cost at least one trillion USD in 2020, according to the UN's trade and development agency, UNCTAD.

On the other hand, the International Labour Organisation said the initial impact of COVID-19 would result in a rise of almost 25 million to global dole queues. It assessed that the pandemic has already affected businesses and the global production. 

“The crisis has already transformed into an economic and labor market shock, impacting not only supply (production of goods and services) but also demand (consumption and investment). Disruptions to production, initially in Asia, have now spread to supply chains across the world. All businesses, regardless of size, are facing serious challenges, especially those in the aviation, tourism and hospitality industries, with a real threat of significant declines in revenue, insolvencies and job losses in specific sectors,” it said in a report.

International economists are warning that the outbreak could trigger global recession. To limit the human and economic impact of COVID-19, governments around the world are devising economic response plans and taking extraordinary monetary and fiscal policy measures.

For example, the government of China has approved fiscal measures of an estimated 1.3 trillion RMB (1.2 percent of GDP) for increased spending on epidemic prevention and control, production of medical equipment, tax relief and waived social security contributions, and disbursement of unemployment insurance. It expanded re-lending and re-discounting facilities by 800 billion RMB to support manufacturers of medical supplies and daily necessities (300 billion RMB) as well as micro, small and medium-sized companies (300 billion RMB) and the agricultural sector (100 billion RMB) at low interest rates. Other measures include reduction of the seven-day and 14-day reverse repo rates as well as the one-year medium-term lending facility rate by 10 basis points, targeted reserve requirement cut by 50-100 basis points for banks, and policy banks’ credit extension to micro and small enterprises (350 billion RMB).

In the UK, the Treasury and the Bank of England launched a joint corporate financing facility to make 330 billion GBP (15 percent of UK GDP) of loans and guarantees available to businesses. The British government also reduced the bank rate by 65 basis points to an all-time low of 0.1 percent. Together with central banks from Canada, Japan, Euro Area, the USA, and Switzerland, the Bank of England further enhanced the provision of liquidity via the standing US dollar liquidity swap line arrangements, and activated a contingent term repo facility to complement the bank’s existing sterling liquidity facilities.

The government of Japan adopted two emergency response packages (on February 13 and March 10), for a total amount of 446 billion JPY (0.1 percent of GDP). As of March 24, the Bank of Japan had provided US dollar funding through the swap line of 10.4 trillion JPY (94.5 billion USD) for 84 days and 5.2 trillion JPY (47.3 billion USD) for a week. Japan also boosted special financing and guarantees primarily for micro, small and medium-sized business operators affected by COVID-19 to 1.6 trillion JPY (15.6 billion USD, or 0.3 percent of GDP).

South Korea, which has been commended for its quick preventive actions and high rate of testing has lowered the base rate by 50 basis points from 1.25 percent to 0.75 percent and opened a bilateral swap line with the US Federal Reserve for 60 billion USD. Other measures taken included: raising the cap on foreign exchange forward positions to 50 percent of capital for domestic banks (previously 40 percent) and 250 percent for foreign-owned banks (was 200 percent), temporarily suspending the 0.1 percent tax on short-term non-deposit foreign exchange liabilities of financial institutions, and temporarily reducing the minimum foreign exchange liquidity coverage ratio for banks to 70 percent (was 80 percent). On March 24, President Moon Jae-in announced a financial stabilization plan of 100 million KRW (5.3 percent of GDP).

Mongolia's response to COVID-19

Mongolia is no exception to the COVID-19 fallout as we don’t know how the crisis will play out in the future. The Mongolian government took swift action to prevent the spread of the virus in the country by tightening security and implementing a broad range of measures, including a travel ban from high-risk countries, temporary suspension of coal exports to China, social distancing, public events cancellations, and school and university closures. However, when it came to economic countermeasures, the government stood there like a deer in the headlights.

Since the COVID-19 broke out in China in December, the Mongolian economy has been struggling as it is largely dependent on the Chinese market. In the first two months of 2020, export dipped 35.9 percent. Mongol Bank warned that the economic growth could slump to 2.3 to 4.1 percent in 2020 if the COVID-19 situation isn’t handled appropriately. It even lowered the 2020 export outlook by 1.6 billion USD to 6.06 billion USD, following a continuous drop in mineral exports, especially coal. Moreover, 260,000 people are at risk of losing their jobs, according to a new study by the Mongolian National Chamber of Commerce and Industry.

The slow economic response frustrated economists, business owners, and relevant associations. They repeatedly demanded the government to support businesses, safeguard jobs and stimulate the economy.

“Although Mongolia is successfully fighting against and preventing the spread of COVID-19, it is not taking effective measures for potential economic consequences. In terms of health, the government can be commended but in terms of economy, it could receive some backlash. The economic response is too slow, the measures they are taking seem deceitful and taken just for the sake of appearances. They are empty promises that will most likely be ineffective and fruitless,” said economist Kh.Batsuuri.

On March 11, Mongol Bank cut the policy rate by 100 basis points to 10 percent, reduced the capital requirement of banks by 200 basis points to 8.5 percent, and narrowed the policy rate corridor to plus/minus one percent. The lower reserve requirement released 324 billion MNT (0.8 percent of GDP) of additional liquidity in the banking system.

On March 18, the central bank and the Financial Regulatory Commission implemented temporary financial forbearance measures on prudential requirements, loan classifications, and restructuring standards.

Former Prime Minister M.Enkhsaikhan was skeptical about the government’s decision to extend consumer loans of businesses and individuals struggling due to COVID-19 precautionary measures by three months.

“The government together with Mongol Bank told people not to pay loans for three months, but that decision wasn’t reflected in official orders and resolutions sent to banks,” he noted. “Because of this, banks have no basis to move (extend loans). It’s like saying, ‘you die instead of me’. (The government) is practically pushing the responsibility to banks. In reality, the one to take action should be the government. If the government changes the fiscal and monetary policies to make it more people-oriented, then banks can mobilize.”

Even banks didn’t know what to do for a week and many loan holders misunderstood that they didn’t have to repay their loans for three months when they had to make a request to their corresponding bank. On March 27, the prime minister gave a stern warning to banks on this matter which prompted them to facilitate people’s submission of loan extension requests by launching online services.

On the other hand, M.Enkhsaikhan sees the reduction of capital requirement of banks as a temporary measure that’ll allow banks to cope for another two or three months at maximum. Assessing that the COVID-19 pandemic could stretch for 18 months, the former prime minister advised to stop underestimating the virus and devise a comprehensive plan.

As mentioned before, many central banks across the world are cutting policy rates to control economic fallout and challenges caused by COVID-19. Mongol Bank also lowered its policy rate by 100 basis points to 10 percent, but this move hardly makes a difference in Mongolia, says economists.

Expert in macroeconomics Kh.Batsuuri explained that the term “policy rate” is used differently in Mongolia than other countries. In particular, Bank of England cut its policy rate by 65 basis points to 0.1 percent. This cut will apply to the interest rate of loans the Bank of England is issuing to commercial banks, according to the economist. In other words, commercial banks will receive loans with a one percent interest rate from the central bank and offer loans with a slightly higher interest rate to the public.

“This 65 basis point cut is a huge support. The policy rate cut enables commercial banks to give out loans with much lower interest rates,” said Kh.Batsuuri. “However, the opposite applies to the policy rate in Mongolia – it applies to the interest rate of loans Mongol Bank is getting from commercial banks. The higher the policy rate, the higher profit commercial banks can make. Banks will want to give out more loans if the profitability rate is higher. This system doesn’t actually directly impact the economy.”

Without an effective economic response in place, small and medium-sized businesses, business support organizations, and associations had become hopeless but Prime Minister U.Khurelsukh showed them a silver lining.

5.1 trillion MNT designated for economic response

On March 27, Prime Minister U.Khurelsukh announced a 5.1 trillion MNT stimulus package to address economic challenges stemmed from COVID-19. The package consisted of the following actions.

• All companies and entities are absolved of paying social insurance premiums fees for six months from April 1 to October 1.

• Personal income tax will not be collected for six months from April 1 to October 1.

• Entities with revenues of less than 1.5 billion MNT will be exempt from corporate tax for six months from April 1 to October 1.

• The government will pay monthly 200,000 MNT to each employee of private companies struggling because of COVID-19, keeping workers in their job despite the difficulties in businesses and declining revenues for three months.

• Loans with three percent interest rate, totaling 300 billion MNT, will be granted by the government to national cashmere companies as cashmere incentives to herders. Cashmere price will be set at no more than 100,000 MNT. This measure is expected to directly benefit 233,000 herder families.

• For three months, the monthly Child Money allowance of 20,000 MNT for children under 18 is raised to 30,000 MNT.

• Necessary measures will be taken to cut fuel prices by 300 to 400 MNT per liter starting April 15.

Even though the fiscal budget is running short of 275 billion MNT, Minister of Finance Ch.Khurelbaatar says the 5.1 trillion MNT required for the new measures will be made available through appropriate capital management of state funds. He was reluctant to provide a clear answer as to where this large sum of money will be drawn from.

Economists cautioned that Mongolia doesn’t need additional foreign debt and advised to use domestic resources to fund this stimulus package. They also warned that the economic fallout could hit Mongolia drastically in July once the election is over.

In any case, we will have to keep a close tab on the government’s economic response to protect local businesses as much as possible from financial ramifications stemming from COVID-19.