By: Zerihun Gudeta Alemu ([email protected])
28 March 2020
Every media outlet we tune into these days is giving coverage to the coronavirus pandemic. This is good. It helps broaden peoples’ awareness of the virus. One could argue that this is not enough though. Existing efforts must be revamped and where possible new alternative information diffusion methodologies explored. There are millions more out residing in far distant places (physical and digital media-wise) with little or no information about the virus. Further, much is desired from the media houses (mainstream and social) to improve on the content of the information they are disseminating. At times it is disappointing to see that they are excessively dwelling on information that could be accessed cheaply from a number of dedicated media websites. I think more time should be devoted to the dissemination of knowledge than discussions about confirmed cases, new infections, number of deaths, etc. (Even my eight year old son Eebbaa could access this online).
The menace of the virus is not confined to peoples’ health alone. It is multidimensional (social, cultural, political, and economic to mention a few). It is scary to realize that its economic contagion effect is spreading as fast as the spread of the virus. I expect the same is true with other aspects of social life per se. They may seem less important in the first phase of the pandemic because protecting lives comes first. However, failure to appreciate and keep abreast of developments in other dimensions could cost us dearly now and in the aftermath of the pandemic. I wish experts in these fields also share their perspectives. Here, I attempt to make my two cents contribution on what I think would be the possible economic impact of the virus and proffer some suggestions (drawing from experiences elsewhere) that may be helpful to minimize the economic impacts of the pandemic.
So far, affected countries have implemented various types of measures to combat the spread of the virus. Some have already become household names – ‘social distancing, ‘lockdowns’, shutdowns, etc. In Ethiopia, ‘social distancing’ is the one that is currently being promoted. One exception is in the Tigray region; it is relatively a bit ahead of the curve. It imposed a 15-day region-wide state of emergency on the 26th of March. It combines social distancing with restrictions on the intra-state movement of people. In general, judging by its implementation, people are questioning if a voluntary social distancing approach would work for Ethiopia on sociocultural grounds. I think, it is an issue better left to the experts in the field for in-depth insight. Nevertheless, follow-up action is needed (if not already loading). As is done elsewhere, the government could deploy law enforcement agencies to enhance the effectiveness of social distancing. Or it could be elevated to the next higher relatively stringent containment measure – a ban on intrastate and interstate movement of people and goods to align it with that of the region of Tigray or maybe something even higher.
- Economic Impacts
The focus of economists on the matter has evolved. If my memory serves me right, in February and the better part of March, when the financial contagion effect of the virus became visible (e.g. the security markets tumbled globally), the priority in unaffected economies was protecting sectors exposed to developments in China and other affected countries (e.g. trade, finance, and tourism relations). As a result, more or less, a sector-driven approach was promoted to insulate these sectors from external shocks. Fast forward to mid-March, when the virus spread to almost all countries and country-specific measures to contain the virus begun to emerge, the focus broadened. Now, it is no longer about insulating economies to external shocks. It is rather about saving economies from collapsing.
In response to the above-mentioned developments, policy discussions morphed to what is now devising local and global response actions to support economic stimulus packages suited to needy countries’ circumstances. The depth and breadth of the stimulus package have varied from country to country depending on their respective policy spaces. In general, they aimed, in a very simplified jargon of economists, at minimizing the direct effect of the virus on the foundations of economic activities i.e. production, distribution and consumption. This is to ensure that the damages to these activities do not translate into massive job, income and consumption losses (indirect effects). This entails keeping businesses afloat and protecting the disposable income of vulnerable households.
In the context of Ethiopia, according to my reading, the focus so far has been more on administrative measures to contain the spread of the virus and less on economic policy interventions. This is understandable. The country does not have sufficient policy buffer to fall back on to which it can deploy to mitigate impacts.
I think while waiting for assistance from the global community, candid discussions must be in order involving the stakeholders – the government, the private sector, think-tank groups and others- to come up with appropriate/feasible local response actions. Lessons learned from the experiences of other affected countries point to the application of various types of interventions. They are mentioned in the paragraphs that follow. Where applicable, views are expressed if it is possible to localize the said interventions considering Ethiopia’s current economic situations.
On the fiscal policy front, broadly speaking, a wide range of fiscal policy measures have been implemented by affected countries. They included wage subsidies, tax relief, cash transfers, income support to laid-off workers, the extension of tax deadlines, extension of loan maturity, etc. Ethiopia does not have the luxury of such choices for the simple reason that it does not have a fiscal buffer. The economic stabilization package unveiled on the 27th of March is in support of this. It lacks depth and coverage compared with what we have seen from other countries with similar macroeconomic fundamentals and exposure to the pandemic.
There are only two fiscal policy measures in the stabilization package. The first relates to direct support to the health sector. It provided tax exemptions for the importation of equipment and material used in the containment of the virus. The second required the Revenue Authority to expedite tax refunds. I was expecting to see together with the second instruction to the Ministry of Finance to expedite the settlement of pending bills owed to the private contractors for supplying goods and services to the government. Maybe it is less of a concern in Ethiopia?
Quick processing of company tax refunds and payment of pending bills are some of the low hanging fruits that most low-income countries have considered to improve cash flows of businesses. Pending bills are becoming important contributors to growth in domestic debt arrears in many of the highly indebted countries. Maybe this is because most policy dialogues on debt management issues have so far focused on external than domestic debt. Some African countries are seeking assistance from the International Financial Institutions (IFS), as part of the emergency assistance package, to pay tax refunds and pending bills. Maybe this is an avenue the authorities could explore to free up resources for use elsewhere.
Another important area to explore is to reprioritize fiscal expenditures (especially capital expenditure) to free up resources to support the stimulus package. I take cognizant of the fact that Ethiopia is under the IMF/WB program. Ethiopia should learn from other countries that are in the IMF/WB program as Ethiopia but managed to quickly put together a raft of fiscal stimulus measures. Some did it by juggling expenditure items around. Therefore, while waiting for financial inflows from the international community, which may take time and may not be as fungible as one might expect, Ethiopia should initiate (if not done already) negotiation with the lenders to delay some of the agreed reform actions that might not be attained (anyway) if current situations persist. In the meantime, it could embark on a fiscal expenditure implementation audit to identify uncommitted/underutilized funds lying around that could be diverted to the fiscal stimulus package.
Yet another area to explore to create fiscal space is to take advantage of the plunge in the international price of crude oil. It fell from USD60 a barrel three months ago to about USD22 today, a 47 percent decline. This is equivalent to the oil import bill saving of not less than USD1.3 billion. I think, Ethiopia should not allow a 100 percent pass-through of this windfall gain to the consumer. It should rather see to it that a significant percentage of the gain finds its way to boost government revenue so that it could be accessed if need be to support the economic stimulus package.
On the monetary policy front, most central banks in affected countries, with sufficient monetary policy spaces, have responded with accommodative monetary policies. They lowered the cost of borrowing for MSMEs (e.g. by lowering policy rates) and/or injected liquidity into the system (e.g. by lowering cash reserve ratio). We have also seen some central banks taking important preemptive actions. They applied various mechanisms to respond to the possible surge in the demand for credit on the one hand and to address difficult financial conditions on the other. In the case of the former by creating funds dedicated to increasing credit supply to curb the possible credit-crunch dynamics – a situation where banks not availing credit at the same time as the demand for credit increases. In the case of the latter (i.e. difficult financial conditions), they introduced innovative financing mechanisms such as providing credit guarantees to support the cash flow of affected businesses and/or allow needy businesses to refinance/roll over maturing debts.
The odds are stacked against Ethiopia. Inflation is already in double-digit. This is giving the National Bank a limited room to maneuver to introduce an accommodative monetary policy as others did (i.e. policy rate, minimum reserve, and open market operation). Inflation is expected to surge further caused by supply and value chain disruptions. Furthermore, liquidity in the banking system is already in a precarious state. Analysis points to the fact that it is a cumulative effect of neglect by the NBE of its prudential guidelines.
The economic stabilization package talks about availing Birr 15 billion liquidity for the private banks to provide debt relief and to support customers in need. For the records, this is not the first time National Bank injected liquidity into the system. The last time it did the same was a few months ago. At the time, it was meant to bail out banks failing to meet the 15 percent liquidity ratio threshold. Maybe it has a wrong signaling effect. It might suggest that if situations don’t improve or things get rough in the sector, the NBE would take the unconventional monetary policy route. This is the least the market needs during such a difficult time. The National Bank must give utmost priority to keeping the banking industry in shape. Otherwise, with liquidity challenges looming and commercial banks struggling to stand on their own feet, additional liquidity injections alone would not achieve the intended targets.
In summary, minimizing the economic contagion effect of the pandemic is an area that warrants urgent attention. Unfortunately, Ethiopia lacks the policy spaces needed to organize an effective domestic response action/economic stimulus package to minimize the economic impact of the pandemic. The priority of the stimulus should be to ensure not only that the direct effects of the pandemic on production, distribution and consumption are minimized; but also that they do not translate into significant losses in employment, income and consumption. The intended beneficiaries of such an economic stimulus package must be businesses and vulnerable households. The following are areas that authorities could explore to revamp the government’s economic stabilization package announced on the 27th of March: reprioritize the budget, capitalize on oil price windfall gain, and leverage on funds anticipated to come from international financial institutions and other donors.