COVID-19's impact and possible solutionsFriday, March 27, 2020
The novel coronavirus has been wreaking havoc throughout the world, and projections are that what is to come will be even more dire than what we are experiencing today.
Covid-19 has an impact on both the social and economic framework, in a very extreme way, with the immediate impact being that people don't get to mingle with each other.
The Government, in my view, has been doing a good job in managing the crisis, and if I had any criticism, I would have been even more decisive and quicker about some of the measures.
For example, I would have preferred if all the measures — especially the travel ban — were enforced a week before and even stricter in that as soon as it was announced all those coming in should have gone in to mandatory quarantine, whether at home or in a government facility.
After all, the best time to prepare for a crisis is before it happens, which is the reason for insurance.
Anyway, we are where we are and we must focus on solutions, and importantly be unified in our approach, which means follow the lead of the authorities. We must strictly enforce the order and people who violate must pay and more where there is flagrant violation face the full force of the law.
My rationale for strict enforcement and decisive action, to ensure we get over this as soon as possible, is based on the following rationale.
For simplicity let us assume gross domestic product (GDP) at $1 million per week, or $52 million per annum. This means that if the government took the decision to close down the country completely for two weeks then the loss in GDP would be $2 million. Let's add another week to get things going again and therefore assume the GDP loss at $3 million.
Alternatively, if we are not decisive and we manage incrementally, then we could be talking about two months to address this, as infections would still happen although at a lower rate. Assume also that the incremental measures cause GDP to fall to half of what it was. Then in eight weeks we would have lost $8 million in GDP and not $3 million.
Short-term pain for long term gain.
Whether it is three or eight weeks, however, it is clear that the economy is going to be different, until at least the US eliminates the virus. This is primarily because our tourism industry is mostly dependent on US tourists. So the longer the US takes to eliminate the virus, the longer our tourism industry will be shut down, which seems like it may be for a while.
The other consideration is that the longer we take to eliminate this then the longer people are going to be without jobs and the more businesses will close. So the longer it takes to be virus-free the more difficult it will be for economic activity to go back to where it was, as people will need to recover from mounting debt payments before discretionary expenditure.
And the greatest pressure will be on low-wage earners, especially the minimum wage earners.
Consider also that many household workers may be affected as people may not want to risk the virus getting into their homes. This shows the impact on the informal economy also.
If we deal with this quickly though, the economy can see a V-shaped recovery. In other words, we can bounce back quickly. This is where enforcement and personal action is very important. This is why if people deliberately violate very firm action should be taken.
First let me say that I don't think that this epidemic will last as long as 12 to 18 months — as some international commentary suggests. But on the other hand anything over two months could be devastating to Jamaica's economy.
The reason why I say it won't last 12 months has nothing to do with getting it totally eliminated by then (as the selfishness and indiscipline of our people will not allow that) but because I think that a vaccine will be developed long before then (as this is a global emergency) and also that we will also have a rapid test which will identify and isolate immediately those who test positive.
I am hoping, therefore, that if we don't save ourselves that the international community will with a vaccine. The other question is by the time they develop one, will we be able to afford it, or I guess we will not be able not to.
What we face therefore is a race against time. This virus will no doubt eventually be eliminated, but the fact is that what we do not want is for it to take too long as the longer this fear lasts then the longer it is going to take for economic recovery, and the more the pressures of increased crime will be. And very importantly, another real risk is that the fiscal accounts could go back to pre-economic recovery days, such as the debt-to-GDP ratio increasing again.
Remember that the debt-to-GDP ratio is affected not just by movement in the debt, but also by movement in the GDP factor. So, the longer this goes on, the lower GDP will become and the higher the debt to GDP ratio becomes, even if debt remains constant.
Our debt to GDP is currently at about 90 per cent, with GDP at approximately $2 trillion, implying debt would be $1.8 trillion.
If the current situation goes on we can assume GDP is going to be at most 75 per cent of what it normally is, and will progressively get lower as it continues.
Therefore, after one month we would lose 25 per cent of one twelfth of GDP, which is $41.7 billion. So, if it goes on for three months then it would be $125 billion.
So if debt is at the same level (as tax intake will decrease and public sector salaries will become more difficult to maintain) then the debt to GDP could go back to 96 per cent in just three months, and that assumes that GDP falls to just 75 per cent of what it is, and it could possibly fall more.
It means that in six months debt to GDP could go back to 103 per cent, and in nine months to 111 per cent.
This would be unsustainable for the fiscal accounts, as taxes would fall significantly, and in particular GCT and income taxes, as income and profits plummet.
This is not even considering the individual impact and the resulting effect on the social infrastructure, including crime, and the health sector.
This shows that if we don't arrest this very soon then our economic achievements could be wiped out very quickly.
ECONOMIC RECOVERY PATH
What though would be a path for economic recovery? This I think is a critical question for us to answer, even before any significant downturn occurs, as the most devastating impact of this is going to be on the economy and the living standards of people.
First, we must accept that as long as the US has a problem then the tourism industry will not recover to where it was before. And the longer the US takes to recover the longer it will take for our tourism industry to come back.
Additionally, if the US recovers before we do then we will have the stigma of a COVID-19-infected country and we will be shunned for a while. If, however, we ensure we recover long before the US and many other countries then we would have a competitive advantage as people will want to come here first.
This must therefore be a strategy we aim for.
We also will inevitably lose remittances, and so between these two industries we could see losses of around US$4 billion.
Additionally, bauxite earnings will no doubt decline as global demand falls. Assume we lose another US$500 million. And we will no doubt see other experts decline.
Let us say though that the FX losses are around US$3.5 billion short-term, until the US market comes back. Based on what's happening in the US it looks like they will be out for at least three months, as they can't seem to find policy consensus and I see reports that people still are not taking the protocols seriously.
And even after that it will take some time for incomes to recover and for the tourist markets to come back, as the impact of this will be more widespread and consequential than the Great Recession in 2008.
What this means though is that tourism will be out for at least three months, and also many peoplewho depend on remittances will see their incomes severely cut.
So the knock-on effect will be credit payments to banks and NHT, credit card and mortgage payments, hire purchase payments to furniture stores like Courts, household help employment, and general expenditure in restaurants, etc will continue to erode.
It means that along with the problem with the fiscal accounts (at some point also the Government will need to start reducing services) there could develop a credit problem.
We can see how this develops. Again, I say, however, that the extent of this economic damage depends on how long it continues. It is very important that we understand that the losses depend heavily on the time it takes to eliminate the fear in the society, whether through containment, elimination, or education.
In addition to arresting this early, we should also restructure the economy to minimise the impact of the FX earnings losses.
We first need to recognise that the problem immediately is not that we don't have money to spend, but rather that there is a lack of economic activity caused by fear. So that if miraculously we were to eliminate that fear today then we would see an explosion in economic activity.
The extent of the explosion again depends on how long we take to remove the fear of the virus. It is important that the reason for the slow down is the fear, so that even if we eliminate the virus and the fear is still there we still have the problem.
This is why I say that stimulus funds while fear exists will have minimal impact, as people will get the money but just won't spend it on any normal daily economic activity, but will spend it on debt payments, or dare I say toilet paper.
So supermarkets and pharmacies will continue to benefit more, but restaurants and entertainment spots will continue to suffer.
It stands to reason therefore that the primary objective should be to first eliminate the virus and remove the fear so that people feel comfortable moving around again. If this is not done then the problem continues, and therefore emphasis on education is now key.
Time again must be stressed as a key factor, as what we do not want is for people to return to economic activity without money, as in that case a big part of that economic activity could be crime. So this crisis has shown us clearly what many of us have been saying is the impact of crime.
This is why early stringent and strong enforcement is critical as people are ignoring the necessary protocols.
Once we can achieve this though, and even before, we have to start planning to reduce our dependence on FX earnings.
So I discussed last week some of the measures we need to take to reduce our dependence on foreign exchange earnings. These include a secure and efficient public transportation system, increased local food production (using tax incentives and grants), more renewable energy use, and lower GCT rates on local production vs imported goods.
What we must do through fiscal policy, is drive economic behaviour towards local production and consumption.
So fiscal policy such as tax incentives and tax rates should have a bias towards local inputs in production and consumption. For example, lower, or zero GCT on locally-produced goods. We should also have tax credits for businesses that keep people employed as another example.
Food production that normally goes to the hotels from farmers and local producers should be geared towards exports and also local consumption. So we don't reduce food production,just because the demand from hotels have fallen, but instead of selling to the hotels, we should find export markets (with the help of JAMPRO) or use our local manufacturers such as GraceKennedy to see how they can package these to replace part of our US$1 billion food bill.
Unless we get rid of the COVID-19 threat, the truth is that fiscal policy initiatives like stimulus have minimal impact.
This current virus threatens us like crime, in that it is not that people don't want to go to the corner shop to buy groceries and play dominoes while drinking. The problem is that because of the virus, or crime, people fear going to the corner shop.
So irrespective of how much money the person has, they will not spend money at the corner shop unless they are in critical need of things like food.
We will end up spending on basic necessities only, which cannot drive growth.
We will also need to immediately look at how we are going to retrain the thousands of workers in the tourism industry, who will lose their incomes. I not only refer to the official income they get from the hotel, but more the tips they receive.
With all that said I remain confident in the authorities to execute as needed, and it must be clearly understood that while there is always the temptation to try moral suasion first, the possible impact means that, that should not be the immediate option.
Dennis Chung is the author of Charting Jamaica's Economic and Social Development AND Achieving Life's Equilibrium. His blog is dcjottings.blogspot.com.
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