A full-spectrum response

27 Mar 2020


The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad

THE world as well as the global economy are going through extraordinary times. The global scale of the disruption and dislocation is unprecedented in our lifetime, and the knock-on effect on economies, firms, jobs, livelihoods and wealth around the world is approaching a seismic scale.

Exceptional times such as these require exceptional policies. Broadly, the government’s policy response to the Covid-19 crisis needs to be along the following axes:

— Preserving jobs and livelihoods, and keeping businesses afloat to the extent possible;

— Providing for laid-off workers and those with at-risk incomes below a threshold;

— Equipping the health sector and front-line staff with adequate resources in terms of finances, personnel, facilities as well as equipment;

Exceptional times call for exceptional policies

— Safeguarding public safety by ‘flattening the curve’ of infection cases through a combination of mitigation as well as suppression strategies;

— Ensuring availability of supplies of essential items (food, medicines, protective equipment etc.) across the country;

— Ensuring the stability and viability of the financial system.

In this backdrop, the government has announced an emergency package for the economy. Directionally, the announced package of measures appears to be correct, with two important caveats. The entire current focus of policy should be on three axes: 1) slowing the spread of the virus; 2) minimising bankruptcies; and 3) preserving jobs and livelihoods to the extent possible. The government package does not go far enough on the last two critical fronts, both in terms of emphasis as well as in terms of money. In addition, some elements of the package are not aligned with the challenges being faced by the economy — leaving one to wonder if policymakers fully comprehend the gravity or the nature of the challenge at hand.

In terms of the strategy to fight the virus, the dithering and delay on a national lockdown has epitomised a lack of clarity on the part of the government, and has gone against the advice of most epidemiologists and experts, as well as global practice and experience. While well intentioned, it is not clear what work daily-wage earners would find amid unprecedented disruption, while exposing themselves, their family members and the public at large to the coronavirus. The unwillingness and inability to halt large congregations such as the Raiwind ijtima, or daily/weekly congregational prayers, or to ensure a safer return of zaireen from Iran, have been crucial failures that will very likely have allowed a contagious spread across the country and prolonged the crisis.

In terms of the economic measures, amongst the most important element of the government package should be the minimising of layoffs and maximisation of job retention by firms via a wage subsidy. While the government hopes to achieve this via the Rs100 billion in expedited tax refunds to be given to firms, it is not conditional on receiving firms retaining their employees.

The announced policy steps need to be complemented by measures for businesses/industry that provide for immediate liquidity, while ensuring long-term viability, especially in the export sector. For households, measures are needed to supplement disappearing incomes. The complementary measures need to include:

— Interest-free loans by the State Bank for an initial period of three months to all registered businesses in the country that apply, to cover wage payments and other specified obligations;

— Deferment of loan repayments and servicing of interest without penalties for businesses till year end;

— Extending the adjustments made in export refinance performance criteria for one year;

— Waiving of minimum turnover tax till end-September;

— Swap existing high-cost loans with subsidised credit schemes for certain high spill-over sectors (with high linkages and employment intensity, for example);

— Reduction in the standard GST rate, and waiver of GST completely on essential food and medicines;

— A bigger pass through in petroleum prices and electricity/gas tariffs.

Many of the measures can be made conditional and apply only to those firms that do not lay off their employees.

At some stage, the government may also have to consider a minimum guaranteed employment programme for three months to provide income directly to affected segments of the population in rural, semi-urban areas.

It would be tempting to suggest ramping up public spending via the PSDP/ADPs, but anti-cyclical policy instruments such as public infrastructure spending work when there is demand destruction — not when the real sector has virtually stopped functioning due to a massive, unprecedented global health shock. The effects of an immediate supply shock — with production at a halt, supply chains disrupted, and shipments stopped (and even returned in some cases) — will be amplified by a subsequent demand shock caused by the global economy tipping into a ‘recession’.

While public infrastructure spending will become relevant at some stage, for now, however, the government will have to respond with a ‘helicopter drop’ of money — putting money directly into the hands of the affected populace.

To be able to do this, the government will require: negotiating a one-year suspension of conditionality under the IMF programme (not the programme itself); re-appropriating resources from low-priority/longer gestation projects in PSDP; and accelerating interest rate cuts by the State Bank.

The reduction of the policy rate into single digits will free up hundreds of billions of rupees in budgetary resources. And contrary to the bank’s fear, it will not be the catalyst for hot money to flow out. There is a global flight to safety in financial assets and carry traders are not being guided by relative interest rates. (Hot money began to flow out when the policy rate was at 13.25 per cent). Nonetheless, to offset any potential adverse impact on forex reserves and the exchange rate, Pakistan should negotiate a $5bn standby facility with the IMF.

As I wrote in my op-ed in late January titled ‘A bolder policy framework’, Pakistan needs a bolder, more heterodox economic policy framework. One lesson from previous pandemics: piecemeal responses do not work. This is no time for timid policies.

The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, March 27th, 2020