COVID-19 has shaken the foundations of the T&T economy by creating a massive negative shock of oil and gas prices and by creating a major cash flow crisis that threatens widespread bankruptcy of businesses and a wrecked economic landscape, says senior economist Dr Vanus James.
In an interview with the Sunday Business Guardian on how Government can attempt to achieve stabilisation and stimulate of the economy James outlined several measures.
He noted that since early January, signs began to appear that the virus is going to produce a special economic effect that policy-makers need to recognise when they take action.
James said even if the fundamentals of the economy remain intact, whatever the unresolved problems of development, COVID demands social distancing that is first creating a widespread cash flow problem which threatens widespread bankruptcy of businesses, to be followed soon after by a variety of supply chain challenges.
Related social problems are important, James said but added that the threat of business bankruptcy is the main policy challenge.
“The proper focus of the economic response of Government should be to put a cashflow-based programme together to freeze the economy in place, keeping workers and businesses together, so that after COVID, recovery can take off from where the virus intervened and speed up thereafter,” James advised.
He warned if businesses fold, then whoever survives the pandemic will have to start from scratch under new recovery (post-bankruptcy) laws.
That, he explained, would be far more difficult and expensive than if a business-focused holding pattern is properly conceived and funded.
James said over the past months, while the Government seemed well-advised by its health scientists, no leading economist appeared to be guiding its programme of economic responses.
He said the main elements of a sound economic response package needed to stabilise the economy at this time should reflect the structure of business cash outflows as follows.
1 Loans and debt obligations are a major component of regular business cash outflows. Continuously adjusting policy is needed to increase liquidity in the banking system to suitable levels and lower interest rates.
This must be accompanied by supporting steps to increase the capacity of bank and non-bank lenders to provide quick-access cheap credit inflows and deferred debt obligations (interest and principal) to businesses.
2 Taxes and other related obligations are another major cash outflow of businesses. This should be addressed by a wise combination of tax cuts and tax deferrals for the first six months of COVID-19.
3 Wages are the biggest outflow obligations of most of businesses.
To address these outflows, a programme of conditional cash transfers to businesses is needed, tied to the number of employees kept on the payroll. These transfers can be disbursed by the Finance Ministry or even through the Central Bank.
“Consider the troubles of recovery if businesses have to hire and train new workers in a COVID-sensitive recovery environment, when all sorts of testing and confidence issues will abound.
“This programme is completely absent from the policies of the Government. It seems more intent on assuring workers that assistance is available if they become unemployed,” James said.
4 Not unrelated to the wage obligations are other large intermediate cash outflows, for rents and such matters.
The conditional cash transfers, James said, should be scaled to address them too.
He said it is not enough to ask landlords to exercise forbearance, noting that this type of programme must be designed to target the MSMEs, under 100 employees, in addition to the upgrading of the standard social programmes.
“Whatever the business selected, if scaled and targeted properly, such programs would also alleviate supply-side problems” James added.
Regarding how the programme will be financed, he said taxes are not especially relevant.
“Government has to borrow locally and internationally, joining the international solidarity movement being promoted by UNCTAD for instance, inclusive of international debt forgiveness and deferral,” he added.
He explained the general expenditure standard is to target at least 10 per cent of GDP ($15 billion in the case of T&T) for the first three months of COVID, and then recalibrate after.
On this basis, T&T is at least $5 billion short, James said.
He noted Jamaica has committed under two per cent of its GDP.
Japan has committed 20 per cent of its GDP for six months, Australia 10 per cent for three months, the US 15 per cent for six months.
Economic recovery and restructuring will be governed by the response to the crash of oil/gas prices since January, and the method of reopening whatever the country is able to preserve with suitable policy during the current phase of the COVID-19 attack, James said.
He said since January, 2020 the virus has been destroying global demand for new oil.
James argued that the global COVID crash of oil prices are the latest dramatic reminders that T&T has to do much more to diversify its economy, especially its exports.
“More immediately, as the Minister of Finance has already reminded us, they will lead to more deficits in the budget and in the balance of trade, and thus to worsening deficits on the balance of payments on the current account as the country responds to the crisis,” James said.
In turn, he added this would require increased foreign borrowing to pay for necessary imports, even assuming supplies are available from a crumbling global supply chain.
It would also require increased official local borrowing, including growth of the money supply, to cover the growing budget deficits.
To return to pre-COVID levels of effective demand that could drive necessary growth, local effective demand will have to be supplemented by export demand, especially through industrialised tourism, James recommended.
This, he said, will require a sharp shift of Government policy from its pre-occupation with the energy-based industries towards an industrialised tourism.
Monitoring and evaluation
To monitor and adjust to progress on recovery initiatives, efforts will also be needed to collect and disseminate data on all aspects of industry and commerce, as well as poverty and inequality, James recommend.
James said the conditions of businesses will have to be routinely monitored and reported, along with indicators such as the level and rate of growth of output, demographics and education statistics, travel and trade statistics, crime statistics, and the level of self-employment and the living standards of households.
This initiative is crucial for monitoring progress in the tourism industry, but also important for all other sectors of the economy, including agriculture, James added.
At the national level, James noted financing of the recovery process would depend on the output capacity that can be generated during the recovery process.
Bank and non-bank financing predicated on private saving capacity would have to run to about 10 to 15 per cent of GDP.
“Expansion of the money supply to create credit in support of investment in the capital-producing industries will also be needed, backed by appropriate development banking, “ James added.
Not only about spending
Former Director of Economics at the Caribbean Development. Bank (CDB) Justin Ram noted that although the country has fairly large foreign exchange reserves it is currently not earning much foreign exchange coupled with the fact that T&T has such a high propensity to import.
Added to which the Government now has to provide stimulus to the economy by spending more, Ram who recently left the CDB to purse extensive consultancy work said.
“But every time the Government spends more in the economy and that goes into people’s pockets when they go to the supermarkets to shop the majority of things they are buying are imported so the money goes out,” Ram said.
He advised the country needs to focus on net positive exports as it tries to stimulate the economy.
“Look at areas that are good for driving exports outside of the oil and gas sector
“Stimulation is not only about spending money it is about the business environment the climate, looking at the regulatory set up in the country,” Ram added.
The ease of doing business is also critical, Ram emphasised, noting the port for instance must be improved to achieve efficiency.
“These are things the Government can do without having to spend a lot of money because then investors have started to do things,” Ram recommended.
Noting that the Government doesn’t have much money in the first instance to create stimulation Ram advised Government must make it easier for the private sector to want to stimulate the economy themselves.
“Stimulation also means providing a lot of tax breaks for example for investment because you want the private sector to start driving the economy.
“Infrastructure like broadband should be prioritised over road building,” Ram said.
He noted on the flipside Government ought to look at areas that will produce services to assist replace imports like agriculture and food processing.
Safety net critical
Stabilisation of the economy firstly entails that the necessary resources for the health sector must be provided, as saving lives is critical, said Dr Regan Deonanan.
Financing this expenditure, he added, may come from several sources such as budgetary reallocation, domestic or external borrowing, emergency financing from development banks, utilising fiscal buffers, among others.
Given that some developing countries have limited fiscal space, they may need to utilise a combination of these sources, Deonanan, lecturer of economics at UWI advised.
Secondly, he said a safety net should be provided for those likely to face significant impacts.
For instance, given the quarantine measures implemented by many countries, retail workers, transport workers, those employed in non-essential services, and those in the informal workforce, are among those at risk of losing income, or facing job loss.
“The objective for policy-makers then should be to protect workers’ incomes, especially low-income workers, and avoid job destruction,” Deonanan said
He added fiscal policies that may help to achieve these objectives include temporary grants and transfers, temporary subsidies for wages, and relaxing certain tax deadlines, while monetary policy can complement by using instruments which lead to a reduction in the lending rate, thus providing greater liquidity.