On February 24 - 25, 2021, the Bank for International Settlements (BIS) held a Meeting of Deputy Governors of the Central Banks from the emerging market economies (EMEs) to discuss the interplay between the monetary policy and the fiscal policy in the context of the COVID-19 pandemic causing serious shocks to the global economy and to each individual country. The meeting was attended by the Central Bank Deputy Governors of the 25 emerging BIS member economies. Deputy Governor Nguyen Kim Anh of the State Bank of Vietnam (SBV) was the Head of the Vietnamese delegation.
At the meeting, the Deputy Governors agreed that the COVID-19 pandemic had raised a need to consider the interactions between the monetary policy and the fiscal policy from a new perspective. The sudden and severe recession under the impacts of the pandemic has increased demands for both fiscal and monetary policies, and also raised the needs for tighter domestic policy coordination, and greater utilization of the central banks' balance sheets. Unlike previous crises, the emerging markets have loosened both the monetary and the fiscal policies in response to the COVID-19 shock. A common form of interactions between the monetary policy and the fiscal policy is the lending operation through direct or indirect loans provided by the Central Bank in supporting the credit flows to target areas, expanding the list of eligible collaterals and extending loan maturities... In the emerging economies, the monetary policy plays a larger role in responding to the COVID-19 crisis, and the interactions between the central banks and the fiscal regulators in the emerging markets have proven to be quite effective during the pandemic.
Participants attending the BIS Meeting of Deputy Governors of Central Banks from emerging market economies (EMEs).
During a panel In the discussion among the Deputy Governors, the participants agreed that, unlike the previous crises, during the current one, the fiscal and the monetary policies have complemented each other in resolving the shortcomings of the economy and mitigating the recession caused by the COVID-19 shock. The strengthened monetary policy, fiscal policy and financial market frameworks have enabled policymakers to act promptly and effectively. The impacts of the fiscal deficits on inflation have been smaller than before; along with that, the higher level of foreign exchange reserves acts as a cushion against the shock of capital flow reversal and the strong exchange rate devaluation, creating room for the monetary policy and strengthening the resilience of the economies. In addition, the public financial situations in the emerging economies have been improved in many ways through promoting counter-cyclical fiscal policy, limiting spending in good times, thereby improving investors' confidence. The consolidation of the banking sector has also facilitated strong, efficient monetary and fiscal responses.
Deputy Governor Nguyen Kim Anh attends the meeting from the SBV headquarters
In the coming time, the interaction trend between the monetary policy and the fiscal policy will depend on the complexity of the pandemic. Policymakers will face many constraints depending on various internal and external factors. On the outside, the recovery process is expected to be gradual and consist of many uncertainties; the policy cushion may become thinner as the private sector suffers much from the crisis. In addition, the US government's implementation of large-scale fiscal stimuli and increase of debt issuance has put more pressure on inflation, increased the long-term returns in key markets. If this situation continues, foreign investors may find assets in the emerging economies less attractive.
According to the assessments of the Deputy Governors, large-scale fiscal stimulus packages make fiscal cushions significantly thinner, reflected in high debt/GDP ratios in a number of the emerging economies. If the present tension continues, interest rates are likely to remain low; however, if low interest rates are maintained for too long, the banks' profits may be eroded.
The group of the emerging economies in the BIS is comprised of 25 members, among which there are many Asian economies, namely China, the Republic of Korea, India, Hong Kong, Malaysia, Indonesia, the Philippines, Singapore, Thailand and Vietnam. The Meeting of the Central Banks’ Deputy Governors from EMEs is held once a year by the BIS on the areas related to the monetary policy and the macroeconomy. This is the first Deputy Governors' Meeting that the SBV has participated as a full member of the BIS.
VA