Here’s how the authorities can flatten the economic recession curve
The Coronavirus disease (COVID-19) outbreak has brought the world to a sudden halt. It is threatening to be as contagious economically as it is medically. Let me start by commending government for the swift enforcement of the various containment policies to ensure the COVID-19 pandemic does not kill Ugandans.
The first priority is clearly to keep people as healthy and safe as possible. Government, particularly President Museveni and Dr. Jane Ruth Aceng, the Minister of Health, have delivered a series of informative and medically accurate messages to the public, advising the general public early, clearly, and forcefully on ways to minimise the virus spread.
The Government has continuously advised people on both personal hygiene (e.g. washing hands often and thoroughly) and social distancing (avoiding crowds and unnecessary gathering, disinfecting surfaces and doorknobs). It has also taken early and decisive actions to enforce quarantines and social distancing when we got information of the first cases and their contacts.
This may sound humdrum but not every government has succeeded in conveying clear and trustworthy advice to the public consistent with the best available medical knowledge.
However, I will quickly remind the government that flattening the infection curve inevitably steepens the macroeconomic recession curve. While quarantining and social distancing is the right prescription to combat COVID-19’s public health impact, the exact opposite is needed when it comes to securing the economy and people’s financial well-being.
Right at the beginning of this pandemic, we knew that even if no Ugandan got infected or was killed by the virus, many businesses would be bankrupted and the economy and wellbeing of people ruined. Now, the number of Ugandans testing positive to the virus is increasing and the state has responded with more stringent interventions on activities that normally define what we refer to as an economy.
The public health decisions taken by government have plunged the economy into a sudden stop. Workers are home, factories have switched off, planes are grounded, cars, taxis and buses are parked, shopping malls and groceries are shut, and schools and religious shrines are out of bounds.
While addressing the nation on Friday, April 3, 2020, President Museveni seemed to underestimate the damage this pandemic is likely to inflict on the economy. He said, “Although some sectors such as tourism are going to suffer, the overall economy will not be affected as much as some ‘pessimists’ have predicted.”
In particular the President said agriculture and manufacturing might instead flourish because people will need food and fast moving goods (FMGs) especially those demanded by the health sector. He is banking on the fact that Uganda has generated more electricity and also has raw materials needed for the manufacturing production. He also promised to capitalize Uganda Development Bank (UDB) to avail cheaper capital to the manufacturers.
Well, although the President may be right that the pandemic presents some opportunities for Ugandans in select sectors, he needs a reminder from his advisers about the basic textbook economics of circular flow of incomes and expenditures.
It doesn’t require one to be an economist to know that this pandemic is going to impose a massive blow to Uganda’s economy. Although the size of the economic damage is still uncertain, what is certain is that it is going to be large. All economic indicators – annual output growth (GDP numbers), inflation, credit markets, currency value, stock markets, and overall business and individual well-being – are in deep trouble, and I am going to illustrate how.
The circular flow of incomes and expenditures
An economy is nothing but a circular flow of incomes and expenditures between and among individuals, households, businesses (both local and international), and the government. Economists tell us that when people stop traveling or going to the market, bar, sports arena or other gatherings, in a face-to-face service-based economy, the impact is often enormous. Efforts to flatten the epidemiological curve reduce economic activity.
Someone needs to remind the President that the demand for his livestock products and the FMGs produced by manufacturers depends on health of other sectors including hotels and restaurants, schools and weddings that purchase agricultural produce in bulk, as well as businesses he loves to ridicule like bars that complement the consumption of agricultural items such as chicken, pork and others.
The pandemic and the resultant containment policies imposed by government are going to cause a cascading chain of disruptions – households have slowed their spending either because they are already facing a financial distress or the goods and services they would want to buy are out of reach or out of stock. Some have entered the wait-and-see mode. As a result, a domestic demand shock is likely to hit the nation.
The reduction in demand and/or direct supply shocks are going to lead to a disruption in international and domestic supply chains. Bookmakers predict that the manufacturing sector will be hit by the wait-and-see behaviour of people and firms, and that it is especially vulnerable since spending on most manufactured goods are postpone-able.
Business bankruptcies are also likely to rise since businesses are loaded up on debt. A reduction in the cash flow will only create a cascade. When creditors and workers don’t get paid, they spend and invest less. Bankruptcy of one firm can put other firms (its suppliers or demanders) in danger. Worker layoffs are also likely to cause less spending.
Therefore, as we try to flatten the epidemiological curve of COVID-19 using containment policies, government should think out and quickly enforce emergency policies to flatten the economic recession curve as well.
Like the case has been for the COVID-19, to flatten the economic recession curve government must act fast and do whatever it takes. We need to deploy policies that ‘flatten the recession curve’ while avoiding long-lasting damage to the economy.
When fighting economic downturns, there are six guidelines to policy makers:
(1) Better to do too much rather than too little;
(2) Use existing mechanisms as much as possible,
(3) Enlist the private sector as much as possible;
(4) Invent new programmes where necessary;
(5) Diversify and do not fear duplication or unintended ‘winners’ in the response; and
(6) Ensure the response is dynamic and persistent.
So, what needs to be done?
There are six categories of policies in an economist’s toolbox:
(1) Fiscal policy (manipulation of government expenditures, taxes and debt);
(2) Monetary policy (manipulation of interest rates to achieve price stability);
(3) Financial regulation policy;
(4) Social insurance policy;
(5) Industry policy; and
(6) Trade policy.
Economists have advised that for the COVID-19 crisis, conventional monetary policy won’t be very effective. Instead, fiscal policy should be the first tool to the rescue because the main shock is coming from the real economy.
We need to quickly craft and implement targeted fiscal support for households and firms. The measures include income subsidies for affected workers, tax deferrals, social security (NSSF) deferrals or subsidies, suspend loan repayment, and extend state loans or credit guarantees to key companies.
However, big government spending means big increases in public debt. Should we be worried? I don’t think so. Why? Wars, disasters, epidemics and recessions are textbook examples for running large fiscal deficits and accumulating debt. COVID-19 is a symmetric shock and a fully exogenous one; and thus requires higher fiscal deficits.
While fiscal policy should be on the front line, monetary policy has to first play a supporting role, guaranteeing the liquidity of the financial system. We have often called upon Bank of Uganda (BoU) to fix the roof while the sun was shining. Now it is raining, hard. Hopefully they heeded our advice. We shall need a relatively stronger shilling to import the essentials and/or the raw materials for import substitution, at a time when exports have been hard-hit.
Someone remind the people in charge of the economy that like some people in some countries who ignored the medical advises to contain COVID-19 on the grounds that they had better things to do or that the virus was a hoax, economic actors can easily make individual decisions that amplify and precipitate a much larger economic downturn.
Without proper macroeconomic support and implemented at the right time, the impact of the downturn might become much deeper. The secret in measures to mitigate an exogenous shock is in proper timing. We need to support businesses now to keep workers on the payroll.
The IMF has asked central banks to be ready to provide ample liquidity to banks and non-bank finance companies, particularly to those lending to small and medium-sized enterprises (SMEs), which may be less prepared to withstand a sharp disruption.
Right now the economy is in a freezer. How long can we keep it in there without damaging it? Apart from the public health measures that GoU has put in place, and a few disjointed economic emergency measures so far announced, we need an integrated multi-sectoral and multi-stakeholder economic response plan to support businesses, groups of vulnerable people, and the overall economy.
We should assume the worst, even if we are hoping for the best for the informal workers, manufacturers, investors in tourism and hospitality, real estate sector, financial institutions, traders, media, and other economic players.