The COVID-19 coronavirus crisis is putting unprecedented strain on markets, governments, businesses and individuals. The human, economic and financial costs are increasing dramatically, with potentially huge impact on developing countries and emerging market countries in addition to developed countries and regions. Across all of these, the greatest toll is likely to fall on those least able to bear it, with terrible damage to human development across the world.
This paper examines how the digital financial infrastructure that emerged in the wake of the 2008 Global Financial Crisis is being, and can be, leveraged to overcome the immediate challenges presented by the pandemic and manage the impending economic fallout.
The origins of the 2008 crisis and current crisis are different: 2008 was a financial crisis spilling over into the real economy. 2020 is a health and geopolitical crisis, spilling over simultaneously into financial markets and the real economy. As such, this crisis requires different approaches.
This study operates at two levels:
• At the macro level, it seeks to identify areas of systemic risk and strategies and frameworks to support policy coordination and action; and
• At the micro level is seeks to illustrate how digital finance tools may be able to assist addressing some of the challenges emerging.
Strategies to address financial aspects of the crisis in order to reduce the economic and human impact include: (1) ensuring sufficient liquidity to support market functioning and underpin demand; (2) intensifying information exchange on health and financial / economic matters in an effort to ensure accurate information despite forces that work against this; (3) heavy, temporary financial support for individuals; for small, medium and large enterprises to avoid loss of infrastructure and preserve the capacity for an orchestrated response (by avoiding mass insolvency); and potentially, in some cases, for governments; (4) leveraging digital finance and payments to reduce human-to-human contact, while organizing support for the elderly and other digitally excluded people who would normally use physical channels; (5) establishing a well-funded coordination body as a crisis management tool to ensure information exchange; (6) directing financial resources to medical infrastructure; and (7) directing financial resources to digital infrastructure and connectivity to support all other aspects of society and the economy, including, especially, the online facilitation of education and widespread work-from-home policies.
At the same time, the digitization of financial services in the last decade offers alternative and more direct means by which it may be possible to stimulate the real economy, which will be critical in mitigating the economic impacts and maintaining social cohesion. Tools that support financial inclusion, sustainable development and achievement of the UN Sustainable Development Goals can also provide useful tools during a crisis.
These short term strategies are expected to generate deeper structural changes long-term. For now, one cannot predict the new world that will emerge post crisis, but this issue will require focussed attention going forward as the immediate situation eventually comes under control and recovery begins.