11 April 2020, NIICE Commentary 4036
Sunil Kumar Chaudhary
The COVID-19 pandemic has driven the global economy into a downturn that will require massive funding to help the developing nations. It is having an unprecedented impact on all the countries, both in terms of prompting the scaling of public health preparedness and response, protection of vulnerable populations, and in terms of requiring mitigation of broader social and economic impacts.
The COVID-19 crisis is no longer just a “Chinese Problem” or an “Italian Problem” or the “USA Problem” as viewed earlier, rather, it has become an “everybody problem”. This is leading the world towards global recession that is going to hit all the major economies of the world at the same time at higher magnitude. The efforts to reduce the spread of COVID-19 has reduced economic activity as most of the countries are in the lockdown situation, keeping the labour force away from the means of production and consumption. As a result, COVID-19 pandemic affects both supply and demand shocks. Business disruptions have lowered production, creating shocks to the supply and the reluctance of consumers and businesses to spend has lowered the demand. However, the larger effect on economic activity occurred because of efforts to contain the spread of the disease through lockdowns and quarantines, which led to a drop-in capacity utilization. Similarly, on the demand side, the loss of income, fear of contagion, and heightened uncertainty has made people spend less.
Considering that the economic fallout reflects, particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to help affected households and businesses. Households and businesses hit by supply disruptions and a drop-in demand could be targeted to receive cash transfers, wage subsidies, and tax relief, helping people to meet their needs and businesses to stay afloat. Central banks should provide sufficient liquidity to banks and nonbank finance companies, particularly to those lending to small and medium-sized enterprises (SMEs), which may be less prepared to withstand a sharp disruption. Broader monetary stimulus, such as policy rate cuts or asset purchases, can lift confidence and support financial markets if there is a marked risk of a sizable tightening in financial conditions.
The COVID-19 pandemic is a public-health crisis, and it is morphing into an economic crisis, too. In a more likely scenario, given how governments are dithering on emergency financial measures and bungling their public-health responses, it might slash global growth in half, meaning that many countries would fall into outright recession. Moreover, it would be the “greatest threat” since the Great Recession. The COVID-19 crisis has consumers and firms all around the world putting off spending; they are in the wait and see mode. The modern economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial institutions. If one of these players is ruptured by the disease or containment policies, the outcome will be a cascading chain of disruptions. In simple words, household own capital and labour, which they sell to businesses, who use it to make things that household then buy with the money businesses gave them, thereby completing the circuit and keeping the economy growing. Thus, a flow disruption anywhere causes a slowdown everywhere.
The economic damage could be persistent without preventative measures, jobs may not be there when the recession passes, many firms might go broke, and bank and national balance sheets could be impaired. The key is to reduce the accumulation of ‘economic scar tissue’ – reduce the number of unnecessary personal and corporate bankruptcies, make sure people have money to keep spending even if they are not working. A side benefit of this would be to subsidize the sort of self-quarantine that is needed to reduce the new infections.
Need of a Huge Effort
As the countries are still struggling to fight the COVID-19 pandemic, economists are still uncertain about the size of the economic damage, but it is certain that it will be huge. Hence, the governments have to quickly take increasingly bold anti-recession measures that will ‘flatten the recession curve’. The governments should deploy some of these policies to mitigate the economic crisis caused by COVID-19.
- Central banks should be ready to provide emergency liquidity to banks and nonbank finance companies, particularly to those lending to small and medium-sized enterprises (SMEs), which may be less prepared to withstand a sharp disruption. Broader monetary stimulus, such as policy rate cuts or asset purchases, can lift confidence and support financial markets.
- Policymakers need to implement substantial targeted fiscal, monetary, and financial market measures to help affected households and businesses. Households and businesses hit by supply disruptions and a drop-in demand could be targeted to receive cash transfers, wage subsidies, and tax relief, helping people to meet their needs and businesses to stay afloat.
- To avoid a negative shock to consumption, people need to be reassured that whatever happens because of the pandemic, they will not lose their salary, at any cost. To limit the reduction in consumption, families must be given a certain level of certainty. They must be guaranteed that if the companies they work for close due to the crisis, their incomes will be guaranteed, whatever the type of company they work in and whatever their contract mentions.
- Increase workers protections, extending unemployment insurance, providing cash assistance to individuals and social protection measures, such as expanding paid sick leave provision.
- Reduce the number of personal and corporate bankruptcies and increase public investment and health care spending.
- Set up an economic task force, which must anticipate and act in advance to help country tackle the crisis.
- Re-capitalise health and epidemiological systems.
- Lift existing trade restrictions especially on much needed medical supplies.
- This crisis has exposed the gaps in the health sector and social protection; and the stimulus packages should focus on overcoming these gaps which will also help in achieving sustainable goals.
- To keep businesses afloat, particularly small and medium-sized firms, with special support packages in hardest hit sectors, such as tourism, should be provided.
- Both the IMF and the World Bank have to mobilize resources to address the impact of COVID-19 crisis on vulnerable, least developed and small income countries. They also have to address the “structural reforms” to create confidence and foster markets.
These recommendations are to shorten the time to recovery; create conditions for growth; support small and medium enterprises; help protect the vulnerable, least developed and small income countries; and to support private companies and their employees hurt by the economic downturn caused by COVID-19 pandemic. Given the global nature of the outbreak, many of these efforts would be most effective, if coordinated internationally. This is the opportunity for the world to learn and build their capacity for health and economic crisis that might erupt in future.
