COVID-19 and Insolvency Law

The World Development Report (WDR), 2022 highlights the relevance of adopting effective strategies for maintaining the financial stability of a nation in the wake of COVID-19. The pandemic resulted in the shrinking of the world gross domestic product by 3% and increased global poverty after a long gap. The national lockdown during the pandemic period severely affected the productive sectors of economies at large. The households and firms were not adequately prepared to overcome these shocks and fell into a severe income crisis at this time.

The World Development Report (WDR), 2022 highlights the relevance of adopting effective strategies for maintaining the financial stability of a nation in the wake of COVID-19. The pandemic resulted in the shrinking of the world gross domestic product by 3% and increased global poverty after a long gap. The national lockdown during the pandemic period severely affected the productive sectors of economies at large. The households and firms were not adequately prepared to overcome these shocks and fell into a severe income crisis at this time. The WDR, 2022 mentioned that in 2020, more than 50% of the population could not maintain their consumption, and the victims are mainly from the disadvantaged groups, and self-employed and casual workers. The “social distance measures” further adversely affected them. The financial sector of many nations also could not adequately respond to the situation. This led to a high financial risk for the households and firms. The number of loan defaulters has increased and the availability of credit from financial institutions also shrank. Though the decisive policy response of the government has raised some hope, initially, it could not be geared up adequately. Then, it was a big challenge for the policymakers to “flatten the curve” of the COVID-19 cases and prioritise recovering from the economic fragility.

In this context, the WDR, 2022 points out that the reforms made by different countries in their “insolvencies law” were the right steps to subside the economic crisis and prevent many economies from a deep recession. Such reforms give a breathing space to individuals, businesses, and financial institutions to mobilise funds to continue their business. The report reminded us about strengthening the formal insolvency mechanism in the future. The reforms in legal insolvency are inevitable to protect the interests of debtors for a while at the time of a national crisis. The capacity to manage insolvency or the efficiency of the bankruptcy system is one of the determining factors for an economic recovery during the COVID-19 crisis.