Potential costs of a pandemic

According to a study by the International Monetary Fund, a pandemic could have a global economic and financial impact. Next we present a summary of the study:

1. If the pandemic is severe, the economic impact is likely to be significant. A pandemic could result in a sharp but only temporary decline in global economic activity. Economic disruptions on the supply side would come directly from high absenteeism, as people may be asked to stay at home, or may choose to do so because of fear of being exposed themselves. There may also be disruptions to transportation, trade, payment systems, and major utilities, exposing some financially vulnerable enterprises to the risk of bankruptcy.

2. Once the pandemic has run its course, economic activity should recover relatively quickly. The pace of the recovery would depend upon business and consumer confidence, the speed of resumption of international trade, and the recovery of asset values.

3. While it is most likely that a pandemic will be followed by a rapid recovery, it is possible that a severe pandemic will have a more disruptive impact. Open economies could be the most vulnerable, tourism could drop sharply, exports could suffer from trade and transportation restrictions, as well as from lower global demand and domestic supply disruptions. On the other hand, imports in some countries may rise on account of higher need for medical goods and services. Low income countries could see deterioration in their trade balance owing to high health-related imports, but if financed through external grants this would not increase their debt burden.

4. A severe pandemic could pose risks to the global financial system. A severe pandemic could pose risks to the global financial system. Some temporary increase in risk aversion is highly likely, which would lead to a corresponding surge in demand for liquidity, specifically for cash, and for low-risk assets, leading to a decline in assets prices.

5. A severe pandemic may also lead to a significant but temporary reduction in net capital flows to emerging markets. Foreign direct investment plans may change little, although major investments may be postponed.

6. Aside from sharp changes in asset prices, operational risks constitute the greatest challenge to the global financial system in the event of a severe pandemic. High absentee rates could result in disruptions of critical functions and services of the financial system.