Stabilising the Economy
In the last edition of Fiscal Alert with the Bain Sisters, hosted on Gudday Grenada (Grenada Broadcast) I concluded the discussion on the economic impact of the Covid-19 by outlining the negative impact on the local economy; and stated that we were on the verge of a potential global economic recession.
A recession is a period of low economic activity with falling national income and rising unemployment. During a recession, the main focus is on halting the declines in the economy, in order to maintain a basic standard of living, and thereafter resuscitating economic activity. In this environment, the government takes the lead in stabilising the economy.
At the macro or national level, fiscal and monetary policies are the most common instruments used to restore economic activity. In the case of the small economies of the Organisation of Eastern Caribbean States (OECS), including Grenada, fiscal policy would be the main policy instrument applied.At the micro level, businesses, households and individuals also have to manage during the recession.
In approaching this unfolding global crisis it must be noted that in the past there have been numerous economic crisis. There were the September 11 events of 2001 which contributed to the decline in the Grenadian economy by two (2) percent in 2001. Then there was the financial and economic crisis of 2008 to 2010. At that time, the local economy grew marginally by one (1) percent in 2008 but declined by six (6) percent in 2009 and by one (1) percent in 2010. The sectors directly affected were tourism and construction with spillover effects in the other sectors.
What was the policy response and what lessons can be learned?
The fiscal policy response by the Government to the 2008 to 2010 financial and economic crisis was to provide economic stimulus packages which included tax incentives and increased government expenditures.
In the 2008 to 2010 period, the tax incentives involved reduction in the Value Added Tax (VAT) on building materials aimed at stimulating the construction sector. There were also increased expenditures on the wage bill to reduce the impact on unemployment. However as a consequence, capital expenditure contracted, fiscal deficits widened, and debt increased.
In the 2008 to 2010 financial and economic crisis, there were no monetary policies used as a means of cushioning the effects. The Eastern Caribbean Central Bank (ECCB) focused on addressing the tight liquidity and loan delinquencies or non-performing loans that were emerging in the commercial banks.
Given the depth of the depression, there was a need for financial inflows to stimulate the economy. However, there was no significant financial injection to push the economy out of the depression. In recognition of the need for inflows in the economy, the Caribbean Development Bank (CDB) provided policy-based loans to the member countries, and Grenada received US12.8m dollars in October 2009. However, as the global economy recovered, economic activity picked up.
This experience points to the need for financial inflows during a recession and the importance of building reserves during periods of economic growth. Also, in any stimulus programme, capital expenditure must be a core component. If possible, the contracting of debts should be avoided as the debt could become unsustainable after the economy has stabilised.
Many governments in the region have been putting together economic stimulus packages to cushion the effect of what may be the worst global economic recession in modern times. Prime Minister and Minister for Finance Dr. Rt. Hon. Keith Mitchell on Friday 20th March 2020, presented an economic stimulus package of forty-two (42) million dollars in direct monetary benefits and an undeclared and yet to be costed amount in indirect benefits.
The stimulus package as presented by the Prime Minister has positive proposals but there is scope for enhancement. The main objective is to provide financial support and it can be considered a transitory and an emergency package. The details of costing, implementation, monitoring and evaluation will need to be worked out and the proposals would need to be modified accordingly.
The positives of the stimulus package are:
- The payroll support granted to the hospitality industry and the income support for other service providers such as taxi and bus drivers.
- Consideration of unemployment benefits.
- The lines of credit through the Grenada Development Bank.
- The acceleration of community-based capital projects through the public sector investment programme.
- The proposal, in principle, for moratorium on loan payments.
In finalising the details of the proposals and their implementation, it is recommended that in relation to the productive sectors, consideration should be given to income support to the farmers and fishermen who provide products to the hospitality industry. This will also signal the importance of the agriculture sector.
Along with the support mentioned for agriculture, there should be a stronger focus on the production of short-term crops to supply the domestic market, contributing to food security in the event of scarcity and higher prices.
For the payroll and income support, a critical issue will be implementation. The funds are limited and must be allocated among the entities in the industry. How will the funds be allocated? Who will get and what portion?
Consideration could be given to integrating this proposal with the proposed unemployment benefits. The management of the employment and unemployment support will be critical to their success.
During this period, it is necessary to examine the social safety net programme to determine how to address the informal sector. There are households where the income earner does not have a steady source of income and that income may be affected by structures put in place to prevent and slow the spread of the corona virus. This includes persons in cottage industries, domestic assistants, gardeners and the independent sole traders.
There may be safety net programmes that are not relevant for this period and could be placed on hold whilst the monies are channeled into immediate areas of need.
Additionally, the proposal for the financial sector has been qualified in principle.
This is important as the financial sector will be affected. A moratorium on loan repayment has implication for earnings. If this is combined with loan delinquency, the financial institutions could be challenged. Therefore a whole economy approach must be adopted given the pervasive nature of Covid-19. It requires effective economic management.
In preparing for a crisis, activities undertaken must be in accordance with the governance arrangements, complying with the laws of the country, unless they are relaxed. There was no mention in the presentation of the planned economic stimulus package having received parliamentary approval in keeping with the Public Finance Management Act. It may be necessary for a Supplementary Estimates to cover the planned expenditure.
Furthermore, no mention was made of a relaxing of the measures under the Fiscal Responsibility Act to cater for increased expenditures. This too must be addressed.
The National Transformation Fund from which forty (40) per cent of monies from the Citizenship by Investment Programme were being placed for budgetary expenditure associated with contingencies, was not mentioned.
If the potential impact of Covid-19 is of such proportion to cause the announcement of an economic stimulus package, shouldn’t a public health emergency be declared to trigger the use of monies in the National Transformation Fund?
The immediate response by ALL in this current environment would be to maintain healthy living and contain the spread of the virus. After emerging from this crisis, the focus should be on growing and transforming the economy.
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Laurel Bain is an economist by profession who used to work with the Eastern Caribbean Central Bank.