'We must save our economies'

Covid19 has changed the world. The fight against the novel coronavirus has led to aggressive social distancing measures and pandemic lockdowns, not only in TT but in the region and around the world. As a result, markets across the world have suffered and commodity prices have fallen, which is predicted to cause large drops in the GDP’s countries around the world, including TT.

But this is not your typical recession, so, typical means to counteract it may not work. New policies are needed to provide relief and maintain stability while the economy recovers.

The Inter-American Development Bank (IDB) recognised this, and, in its 2020 macroeconomic report provided fiscal, monetary and financial policy recommendations for the region in the face of what is being called the world’s greatest economic crisis.

“We need to preserve the core of our economies to improve the chances of a rebound,” said IDB president Eric Parrado. “Providing relief to those more vulnerable households that have lost their sources of income, helping and giving incentives to firms to reduce liquidations and avoid separation of employees, and extending liquidity to banks so they are part of the solution, can all work in that direction.”

The recommendations comes after IDB announced in March that it will be donating up to US$12 billion to provide financial support focused on the immediate public health response to covid19, safety nets for populations at financial and health risk, economic productivity and employment, and fiscal policies that would counteract the financial impact of the disease.

According to the report, before the covid19 outbreak became recognised as a pandemic the region was doing well. Despite a low outturn in 2019, attributed to trade tensions and general policy uncertainty worldwide, Latin America and the Caribbean were expected to experience a recovery of 1.6 per cent for 2020 and 2.3 per cent for 2021.

But that changed when covid19 was recognised as a pandemic in on March 12. To date the covid19 has affected close to two million people and claimed the lives of over 100,000 people. The financial effect could only be described as devastating. The need to close borders, and limit movement to only the essential has resulted in loss of jobs, a decrease in productivity, and a stagnation in trade and transport not only in TT but worldwide.

According to the report, in January 2020, the price of oil stood at about US$100 a barrel, but by April 1, it dropped to around US$30, an uptick from the cost in March, which was about US$20. In places like Washington, DC and Puerto Rico, stay-at-home directives affected 85 per cent of their populations, and resulted in the closure of all non-essential businesses. That in turn led to a record spike in unemployment insurance claims. Stock markets took a nosedive. S&P, for example, fell 23 per cent. In response the US passed a 2.2 trillion dollar fiscal package which was focused on relief packages and additional support for the health sector.

The report did not give any good news for Europe or China either. Projections in the report taken from leading investment banks suggest that China would see a negative growth of -3 per cent, and for the Eurozone, a negative growth -1.5 to -5 per cent, and even worse.

“The dramatic developments in China, Europe, and the United States will have considerable impact on Latin America and the Caribbean. Moreover, they come at a time when growth in Latin America and the Caribbean had fallen significantly, from 1.1 per cent in 2018 to 0.1 per cent in 2019, or from 1.8 per cent to 0.8 per cent if Venezuela is excluded in the aggregate,” the report said.

The report projected, based on the shock to worldwide economies that the growth in the region would be placed at about -1.8 and -5.5 per cent. Covid19 could have a fiscal effect that could last years, according to the report. While the disease has affected the entire world, the report recognised that the disease and its impact on the worldwide economy had a greater effect on the poor who do not depend on returns on investments, but payment from work. Therefore, the report suggested that governments think carefully before they act.

“The first line of attack should be containment and mitigation of the coronavirus by revamping health expenditure for effective prevention, detection, treatment, and containment. The main challenge is to avoid a health infrastructure collapse. The time for growth will come later,” the report said.

The second priority of each government should be to provide relief for those most vulnerable financially because of social distancing policies. A third priority should be to support firms in operation to minimise unemployment.

“Closely monitoring the financial sector should be an additional priority to ensure financial stability and allow commercial banks to assist firms and households. In each area, most policies should be designed and communicated as temporary and extraordinary measures,” the release said.

While advanced economies would be able to maintain its population for a longer period of time, developing economies may not have the same luxury. Therefore the report suggested that developing countries in the region prioritise its finances.

“First, efficiencies in both revenue and spending can be identified. Second, resources can be saved in some areas and transferred to priority needs. Third, some countries can access markets and can borrow more without sacrificing sustainability, although they will likely face higher financing costs. Countries in the region are in a range of different positions regarding the fiscal space available to them given these different funding sources.”

“Countries can also seek additional resources from multi-lateral and bilateral institutions. Recent reports indicate a large number of countries are talking to the IMF to obtain rapid financing and deeper lending programmes, and multilateral development banks including the Inter-American Development Bank have already announced larger lending programmes.”

As China shows signs of recovering, the report expressed optimism saying cases in Europe and the United States will also begin to decline and restrictive stay-at-home measures will be loosened. However, much remains unknown.

“Further work is also required to discern the best set of economic policies and their sequencing to accompany the efforts supporting the economy during the pandemic. As the governments of Latin America and the Caribbean seek answers to these issues, the Inter-American Development Bank is pursuing a wide research agenda to assist and support those efforts.”