The Corona economics
Muhammad Armaghan Faisal
Averagely, a Pakistani makes around Rs 21,000 per month. This minute amount is viable to cause hardships for households across Pakistan, even without economic fallout. The Coronavirus has caused an already fragile system to take a nosedive. The virus is not just bound to kill thousands and lay off millions of workers; the true aftershocks of this tremor are still immeasurable at such an early stage. But we can take a look at nations across the world and analyze their economic response to help the citizens of their country. This will allow us to come up with a strategy with the highest probability of success. One thing to note is that there is no perfect strategy; each strategy will involve some sacrifice, but some strategies are certainly better than others. The best strategy will involve lower interest rates, well-tailored fiscal policies on the local level, and some introspection.
First, we can take a look at the United States, which has responded with a huge stimulus package to keep the economy running and maintain its competitive edge against China. The US has already sent out $1,200 stimulus cheques to every citizen over the age of 16. Its Central Bank, known as the Federal Reserve Bank, has taken on an ambitious strategy to input money into the market. It has also temporarily reduced the Federal Funds rate to0. The Federal Funds Rate is the interest rate at which banks can take out loans from other banks. The low rate means banks will not hesitate to take out loans from other banks since it would not cost them much in interest, thus stimulating the market.
Since the Coronavirus cases in the United States differ state to state, there is no one policy fit all for the 50 states. That is why a chunk of the fiscal policy has been left for the local and state governments to implement and execute, with the help of the federal government. These local fiscal policies would include tax benefits for small businesses, favorable business loans amid other various policies. The state of Pennsylvania, for example, is trying to set aside roughly $10 million worth of funds to help boost local volunteer organizations in fighting the virus.
One country that can be deemed similar to Pakistan outside of the subcontinent is Indonesia with its massive 268 million majority Muslim population. The World Bank has projected that Indonesia’s economic growth will slow down to 2.1 percent and millions could slip into poverty as the country tries to fight the virus. The Government of Indonesia has cut corporate taxes to 22 percent from the previous 25. The state budget deficit has also been eased to allow the states to borrow more if necessary. The government might also issue state bonds or Shariah sovereign bonds to reduce the money supply. If necessary, they can inject the money generated from the bonds back into the market. Over $5.4 billion worth of funds have been set aside to directly help the villages fight the virus.
Pakistan has also responded rapidly to improve its economic situation. On 10th April, the State Bank started offering refinancing schemes to businesses throughout Pakistan. As the press release states, “The mark-up on the loans under this scheme will be up to 5%.” This can be very beneficial to those who can afford to take out loans but it’s still a risky endeavor as the chances of businesses going bankrupt are already very high. On March 17, the SBP also reduced the ‘policy rate’ to 12.5% from 13.25% previously. Then it was reduced to 9% on April 16. According to Bloomberg, SBP has slashed the most rates so far compared to any other country in the world.
One good thing to note is that there is a lot of room to maneuver, but the 9% is still pretty high to generate some serious economic activity, as most banks would not be willing to borrow at such a high rate. It is expected that this rate will continue to decline as the crisis continues. This should be done cautiously and slowly, preferably about 25 to 50 basis points at a time to hinder a panic in the market. Other measures were also taken such as doubling the period for rescheduling loans and concessional loans to hospitals in need.
We must realize that Pakistan is a very diverse country, even in terms of its economic activity. The industrial economy of Sialkot is not the same as the agricultural economy of southern Punjab. The population distribution also varies greatly. So, the fiscal policies that are being implemented throughout Pakistan must be implemented at the local district level rather than at a national level. If an area is suffering from a rapid increase in coronavirus cases, then its local government should implement a policy that will help the local businesses, hospitals, and individuals ride the tide with the help of the provincial and the national government. In a beneficial strategy, the tax rates would also differ even within a single province depending on how hard that particular area has been hit.
With the increased community spread of the virus going on in densely populated areas, especially in major cities, an imminent and strict lockdown is necessary.
But this does not require a lockdown in low-density areas such as villages and other rural areas around the country. That is why this decision should be given to the local governments. The workers in these areas are usually not interacting with each other as much as in crowded bazars and factories within a city. The harvest season is on the horizon and its imperative that agricultural workers be allowed to work in their fields or graze their cattle if they must. While the urban economy is bound to suffer due to business closures, the rural economy should be allowed to flourish, this can also help tackle the various food shortages around the country.
The State Bank should pursue a quantitative easing policy by injecting money into the economy. This can be achieved by buying securities from the open market and it would help ease the spillover effects caused by different collapsing sectors. Now, this could cause inflation if the government decides to print money to achieve this. Controlled inflation for a short term would devalue the currency eventually. But that is what a fiat currency is for. It is a tool that allows a country to absorb economic shocks and stimulate the economy in the short run. Unfortunately, this tool has been needlessly used in the past by corrupt leaders to stimulate the economy just to win voters’ support.
The coronavirus situation requires its use, but it should be utilized cautiously and only where it is needed.
No doubt, Pakistan will come out of this crisis stronger than ever if the important actions can be taken on time. These policy changes over a short period of time will allow the market watchers to collect data on how economic behaviour is influenced. This can be very effective in future and really help the government hamper down on price instability or the bottlenecks within the country that have been hindering the economy for decades. Alarm bells should be going off in heads of policymakers and even opportunistic businessmen as the world tries to diversify its manufacturing capacity and moves away from China as a sole producer. Could the next destination be Pakistan?