Following on my last article I thought it would be good to look at the possible economic impact of COVID-19 on Jamaica, especially in light of the report from Fitch that they expect a four per cent economic decline for 2020.

The Prime Minister (PM) laid out an argument, which many may not have realised the importance of, primarily because too many people, I think, are today driven by fear rather than thinking rationally. The PM stated, quite correctly, that in dealing with the situation he has to find a correct balance between total lockdown of the economy on the one hand; and risking the spread of the virus, and its impact, with no lockdown at all on the other hand.

Many people I see are driven by the fear of what is said about the virus, and many influenced by what they see on CNN about the number of deaths in the US. This fear has caused them to say total lock down should be in place, even though 50 per cent or more of our population has no savings and live “hand to mouth”, and we also have a significant number of our population paying rent, car payment, and mortgage, who will start to experience serious consequences very soon without an income.

Let us be clear that a prolonged lockdown at this stage, or a total lockdown would, not only mean economic devastation for the country as a whole, but would cause a collapse of the social infrastructure in the country.

So if we think we have crime now, wait until the Government finds itself in a position where it is unable to afford equipment for the police and unable to pay salaries to public sector employees. We need to understand that if the economy does not work then there are no taxes for the Government to collect. So we can expect government assistance to the most economically and socially vulnerable to dry up. As a previous PM said, “It takes cash to care.”

So, let’s look at the possible impact on the fiscal accounts, as shown in the table below. It is important for us to understand that Jamaica does not have the financial resources that the US has, or the ability to print money like they can. And so, the arguments that Jamaica should dole out aid like the US betrays a lack of understanding of the differences.

Let us assume that all taxes are affected as at Q1 (April to June) by 50 per cent, Q2 (July to September) by 30 per cent, Q3 (October to December) by 10 per cent, and no reduction in Q4 (January to March 2021) — as a result of job losses, reduction in economic activity (local and foreign travel), and lower income levels.

There are two exceptions, namely telephone tax will be unaffected and Guest Room tax will see much more significant declines.

This also assumes that non-tax revenues will be impacted similarly, and capital revenues, grants, and loan receipts are unaffected. If this scenario happens (which could be worse or better depending on how we deal with the economic recovery) then it means we could be looking at a revenue shortfall of $151 billion.

The question then arises, how will we fund the recurrent and capital expenditure projected.

The first thing I expect is that discretionary capital expenditure could be delayed, which means that we may not see the level of upgrades to schools, police stations, and police equipment. Also, construction activities on the roads could decline. This could result in a negative impact on crime and reduced employment in the construction sector.

Second, there could be an impact on social programmes, which again may impact poverty levels, and things like the school-feeding programme.

Even with this there may be a temptation to go back to the International Monetary Fund (IMF) to either renegotiate payment terms or seek assistance.

What is the possible impact on the economy? We can first look at the labour force impact, shown in the table:

The labour force assumes two different scenarios: If the current shut down last for one to three months, or three to six months. I expect that agricultural jobs will remain intact on average, over both periods, mining and quarrying will lose 50 per cent of jobs over both periods, manufacturing will see a 10 per cent decline in jobs under the one to three month scenario and a 20 per cent decline under the three to six month shutdown, and so forth for the other industries.

It is important to note that this is the effect that the shutdown will have on jobs at the end of 2020. In addition to the effect on jobs it could also mean that income levels will decline, or don’t grow as projected in the Government’s fiscal budget, thereby negatively affecting tax income, as highlighted above.

Under the first scenario, the employed labour force could go down to 1,080,045, from 1,248,400, and under the second scenario it could go down to 1,017,810. The unemployment level could therefore end up at 19.71 per cent or 24.33 per cent, respectively, as many businesses may not reopen or scale back activities.

It is important to note that this labour force number may not include many in the informal economy, who eat by a “hustle” every day.

With respect to trade and the balance of payments, we have an opportunity to minimise the impact, as we can look at food import substitution and look for export markets for our food production, and the opportunity to reduce our oil bill, as prices may remain low, and we can improve our public transportation. This will need a deliberate action though to work with farmers and get companies like GraceKennedy involved.

This will be a process and will not be immediate and more importantly it will require effective leadership. It can’t be just a campaign, like telling people to buy Jamaican.

In any event even if we were able to effectively put these strategies in place, I suspect we will see a significant loss from tourism earnings (around US$2 billion) and at least a 20 per cent decline in remittances. The balance of payments will decline by at least US$1.1 billion, and this assumes that our strategies to restructure the economy are successful.

Finally, looking at the possible fall-off in gross domestic product (GDP), I used the last annual amounts at market prices available, as a proxy of a possible fall-off in GDP. If we look at the 2018 numbers, we can assume two scenarios — a one to three month economic slowdown and a three to six month slowdown.

I believe the hardest hit will be hotels and restaurants, which could see a 60 or 80 per cent decline for the year, followed by mining and quarrying and as shown for the others.

If these numbers hold true, then it means that nominal GDP (market prices) could fall by 7.28 per cent to 20.12 per cent and assuming that five per cent inflation is recorded then we could look at a real GDP fall of between two and 15 per cent for 2020.

This analysis is clearly based on the assumptions I have made about how long the economic slowdown could last and the possible fall-off in the segments. I think it is reasonable to assume that tourism and mining will see a significant fall- off, and other sectors will decline also. This will in turn affect tax revenues and employment.

What is clear is that the impact will be significant, and we have to recognise and prepare for it. This also against the backdrop of a country that does not have the reserves to tolerate any long period of slowdown, given that maybe 50 per cent, or more, of the population does not have any substantial savings and many work in the informal economy at subsistence levels, and, perhaps most important, already has a bad crime problem with a growing economy prior to COVID-19.

It is therefore going to be critical to find that right balance between total lockdown and economic revival, as in both cases our well-being depends on it.

Dennis Chung is the author of Charting Jamaica’s Economic and Social Development AND Achieving Life’s Equilibrium . His blog is dcjottings.blogspot. com.

E-mail: drachung@gmail.com