Greater intervention by the public sector is justified by the emergency for as long as exceptional circumstances persist, but it must be provided in a transparent manner and with clear sunset clauses
The coronavirus pandemic is a crisis like no other.In a matter of weeks, the highly contagious disease has pushed the world to the brink of a recession more severe than the 2008 financial crisis. The speed and scale of its transmission and the severity of its impact is not, we know now, to our cost. As the virus rapidly tracks people vectors worldwide, the control of its impact is inextricably linked to the availability of resources and depth of governance.
While all nations are threatened and struggling to avoid the abyss, it is necessary, more than ever, to think globally and to adapt locally in order to protect the world's most vulnerable communities. Not only are they at risk of the virus itself, but its political, economic and social aftermath. Global pandemics do not come cheap. And they are expensive to combat, especially for the poor.
Today, at a moment of extreme stress, this combination of low income and limited means is potentially fatal. Moreover, the impact of the oil price collapse; weak food security; the disruption of trade and global value chains; the sudden stop of aviation, tourism, and foreign direct investment; and tougher conditions on financial markets all place an additional strain on the global economic ecosystem.
The current situation feels like a war, and in many ways it is. In a war, massive spending on armaments stimulates economic activity, and special provisions ensure essential services. In this crisis, things are more complicated, but a common feature is an increased role for the public sector.
At the risk of oversimplifying, policy needs to distinguish two phases
Phase 1: The War. The epidemic is in full swing. To save people's lives, mitigation measures are severely curtailing economic activity. This may be expected to last at least one or two quarters.
Phase 2: The Post-War Recovery. The epidemic will be under control with vaccines/drugs, partial herd immunity, and continued but less disruptive containment measures. As restrictions are lifted, the economy returns—perhaps haltingly—to normal functioning.
The success of the pace of recovery will depend crucially on policies undertaken during the crisis. If policies ensure that workers do not lose their jobs, renters and homeowners are not evicted, companies avoid bankruptcy, and business and trade networks are preserved, the recovery will occur sooner and more smoothly.
This is a major challenge for advanced economies whose governments can easily finance an extraordinary increase in expenditures even as their revenues drop. The challenge is even greater for low-income and emerging economies that face capital flight; they will require grants and financing from the global community
Unlike other economic downturns, the fall of output in this crisis is not driven by demand: It is an unavoidable consequence of measures to limit the spread of the disease. The role of economic policy is hence not to stimulate aggregate demand, at least not right away. Rather, policy should have three objectives: i) guarantee the functioning of essential sectors. ii) Provide enough resources for people hit by the crisis. iii) Prevent excessive economic disruption.
In this view, we are highlighting the recent actions taken by the world's largest economies, multilateral institutions and as an emerging economy like Bangladesh is doing to respond to the coronavirus downturn:
In a sign of the staggering toll the virus is already taking on the US economy, roughly 10 million Americans filed for unemployment in the last two weeks of March. Some analysts suggest that the US unemployment level could reach as high as 40 percent in the second quarter of the year, significantly higher than its peak of 25 percent during the Great Depression.
While Washington has been criticised for mismanaging the public health response to the pandemic, it's also been credited with moving decisively to stabilise financial markets. In March, the Federal Reserve indicated that it will do anything within its power to support the economy and provide liquidity. Among the Fed's historic actions have been: cutting interest rates close to zero, reducing bank reserve requirements to zero, rapidly purchasing hundreds of billions of dollars in Treasuries and mortgage-backed securities, buying corporate debt, and extending emergency credit to nonbanks.
Meanwhile, on the fiscal side, lawmakers passed a $2 trillion stimulus package that some analysts have characterised as a bridge loan to get the US economy through the crisis. It includes direct payments of up to $1200 to individuals, hundreds of billions of dollars in loans and grants to businesses, increases to unemployment benefits, and support for hospitals and health-care providers.
The world's second-largest economy was stirring back to life in March after suffering a withering blow from the coronavirus, which originated in the city of Wuhan in Hubei Province in late 2019. Several weeks of government-imposed lockdowns on dozens of cities led to double-digit percentage declines in factory output, retail sales, construction, and other economic activity. Urban unemployment reached a record high of more than 6 percent in February. Some researchers say China's growth could slow to below 3 percent this year as global demand for its exports dips.
China's leadership seems less inclined to spearhead a global economic recovery this time than it did following the 2008 financial crisis, when it spent liberally on a stimulus package of more than a half trillion dollars. In the years since, China has roughly doubled its government debt—to about 60 percent of gross domestic product (GDP)—and many analysts think it cannot afford to spend so aggressively again.
So far, China's central bank has taken relatively modest actions, reducing reserve requirements for banks, which will allow them to loan an additional $80 billion to struggling businesses, and indicating that it will cut interest rates in the months ahead.
The pandemic is paralysing the UK economy just as the country's leaders are negotiating its post-Brexit relationship with the European Union. Prior to the outbreak, there were already concerns about a recession from a so-called hard Brexit. Economists now say that the coronavirus pandemic could take a 5 percent slice out of the economy in 2020.
The government is prepared to make interventions that would be "unprecedented in the history of the British state" to support the economy, finance minister Rishi Sunak said in early March. Among its emergency measures, the Treasury has pledged to pay 80 percent of workers' salaries for several months to keep companies from resorting to huge layoffs; deferred tax payments; increased unemployment benefits; and made loan guarantees.
Additionally, the Bank of England has lowered its benchmark interest rate to 0.5 percent, a record low, and loosened capital requirements for banks. All told, the rescue efforts could see Britain spend upward of 400 billion pounds, or about 15 percent of GDP.
The German economy is expected to shrink for the first time since 2009, anywhere from 3 to 10 percent this year depending on the length of the country's lockdown. In March, nearly a half million German companies applied to have their employees join a short-term government work program intended to prevent mass layoffs.
To counter the economic fallout from the coronavirus, Berlin is taking bold actions, abandoning its steadfast commitment to balanced budgets, known as "Schwarze Null" or "black zero." It is allocating at least 350 billion euros—or about 10 percent of its GDP—to prop up the Eurozone's largest economy. Funds will be spent to bail out struggling businesses, including by making unlimited loans and potentially taking equity stakes.
It seems that Germany is poised to spend aggressively because the government has kept its finances in check in recent years, reducing its debt-to-GDP ratio from more than 80 percent in 2010 to below 60 percent today.
Economists predict that Japan's export-driven economy will shrink by around 3 percent this year, which would be its worst performance since 2008. The deep impact from the pandemic comes on the heels of an economic slowdown from a sales tax hike last fall. The virus has also forced the government to postpone the Summer Olympics until next year.
Like some of its peers in the West, Prime Minister Shinzo Abe's government is reportedly planning an unprecedented spending package to help the country through one of its most challenging periods in recent memory. Stimulus measures could include cash payments to citizens, interest-free loans, and delayed tax payments, among other things.
Amid market volatility in mid-March, Japan's central bank announced it would double to more than $100 billion its annual purchase of stocks, bonds, and other assets. However, some critics say the move demonstrated the Bank of Japan's limited options after having kept interest rates next to zero for years.
European Central Bank [ECB], through its Pandemic Emergency Purchase Program, is set to buy up to 750 billion euros in additional bonds this year to help its members; the International Monetary Fund [IMF] set aside $50 billion and The World Bank announced $12 billion to lend to member countries, with preference given to emerging economies.
Prime minister Sheikh Hasina has announced a total financial package of Tk 727.5 billion [apprx. USD 0.85 billion], including the previously announced Tk 50 billion, to face the shocks of the coronavirus on the economy.The amount of the total stimulus package is 13.9% of Total Budget F.Y 2019-2020 and 2.52% of GDP. The package is segregated into two segments. The first package is for Tk 50 billion, which is specifically for export-oriented industries to provide salary and wages for workers and employees. The second portion is Tk 677.5 billion for subsidised lending facilities to different categories including export development fund and the Pre-shipment Credit Refinance Scheme.
In line with the bailout packages declared by the prime minister, the central bank has undertaken quantitative easing by reducing both the policy rate (i.e. repurchase agreement rate or repo rate) and cash reserve ratio (CRR) to inject liquid funds into the market to push through the ongoing economic fallout. The CRR has been reduced by 100 basis points to 4 percent, which would directly inject about Tk 128 billion into the economy. Repurchase agreement rate has been slashed by 50 basis points to 5.25 percent to make funds cheaper for banks.
The above financial packages and regulatory support will help to revive the economy in this turmoil. However, it will also have an impact on revenue management. It seems that there will be roughly a Tk1.0 trillion revenue collection shortfall in this fiscal year, and adverse implications for revenue mobilisation in coming days. The increased public expenditure and revenue lossunder thestatedpackageswouldtrigger fiscal deficit to 5.00~5.5 per cent or above of GDP of this fiscal year.
Given the above scenarios, it can be said that greater intervention by the public sector is justified by the emergency for as long as exceptional circumstances persist, but it must be provided in a transparent manner and with clear sunset clauses.
Promoting the recovery will have its own challenges, including higher levels of public debt and possibly new swaths of the economy under government control. But relative success in our stated Phase 1 will ensure that economic policy can go back to its normal operation. Fiscal measures to boost demand will become increasingly effective as more people are allowed to leave their homes and go back to work.
Interest rates and inflation were projected to be low-for-long prior to the pandemic in most advanced economies. Preventing major disruptions in supply chains should avoid inflation during the emergency and recovery phases. If the measures to contain the spread of the virus are successful, the necessary increase in the public debt ratio will have been sizable, but interest rates and aggregate demand are likely to remain low in the recovery phase. Under those circumstances, fiscal stimulus will be appropriate and highly effective in most advanced economies and emerging economies. Hopefully, this will facilitate exit from the exceptional measures introduced during the crisis.
Imran Khan, a banker by profession is a policy analyst