Coronanomics – Economy in the Grip of Medicine

Four nonstandard pneumonia cases were registered in the Chinese city of Wuhan on December 26, 2019. Reportedly, the virus started spreading on December 30 and the next day, on December 31, the Wuhan Healthcare Commission transmitted the alarm signal to the National Healthcare Commission of China and the World Healthcare Organization. On January 7, the 2019-nCov virus was identified. On January 20, the disease caused by the virus was named as COVID-19. On January 23, Wuhan was locked down. On January 30, the World Healthcare Organization announced a state of emergency in the world. On March 11 the WHO recognized COVID-19 as the global pandemic. The pandemic center moved  from China to Europe. The state of emergency has been announced in all big cities. Borders were closed. People stay stuck at home.

The World has changed today. Tomorrow, it will change further. 

Georgia’s Response – Part of the Global Plan

The responsibility in all countries primarily lays on the Government.

Today, the Government of Georgia is doing a good job to efficiently overcome the coronavirus challenges, keep full control over the developments and the whole situation. The Government has taken adequate decisions in time and space, including it has provided appropriate reactions to the ongoing developments in the economy.

By carrying out protective and restrictive policy, the Georgian Government has definitely chosen a right and a proper strategy to fight against the pandemic.

Georgia is a small, developing, open and growing economy. A small economy has both negative (more) and positive aspects. Having the undeveloped economy is a negative aspect, particularly, in terms of shock resistance; and the fact we are open economy is the necessity rather than a positive factor for us; Without open economy and without engagement in the global process, we cannot achieve fast and inclusive growth and we will be constantly discontent with its scales.

Business is not very strong, the middle class remains unstructured, salaries remain low, and unemployment is high. Many citizens stall live below the poverty line. Considering all the mentioned factors, our economy can hardly recover from this shock.

At this juncture, we prioritize to control the pandemic and provide adequate, fast and affective reactions.

We have valuably and honorably passed this period –it would be unjustified to carry out restrictive and stricter measures much earlier, while belated measures would bring disastrous outcomes.

 I believe and I am sure we will continue our endeavors in the same spirit.

This is very important.

A small group in our society asserts that the caution and measures taken by the Authorities were and are excessive and with the virus fears in our hearts, we “are killing the economy and aggravate the situation for future generations”. I do believe this is an erroneous opinion. I will not analyze moral aspects. This letter is not about moral aspects.

The chosen policy and strategy is definitely justified in terms of economic expectations – when our population feels safe amid the virus outbreak when it realizes that the Government controls the situation and provides maximally efficient job without taking excessively strict steps, demonstrates rational decisions in this existing situation, this signifies the future is foreseeable – and this is a fundamental value.

And another thing: I think this is an only case – when the majority of our citizens have stubbornly requested the government to announce the state of emergency.  For many days, the Government refrained from taking this decision, but finally, on March 21, the President of Georgia announced the state of emergency. Even in this component, our citizens have demonstrated exceptional positive values.

But…

When the society overcomes the virus effects and this moment will definitely come after its defeat or in the process of adaptation to it; or even without virus defeat or adaptation, the population will face the need of purchasing food, medications, and disinfectants, paying utility bills;

When the business sector, and not only from the so-called vulnerable industries, becomes unable to buy raw materials and/or packing materials, import them, the production cycle is thwarted and the chain of values will be disrupted….

I am longing that the country has an action plan before this moment comes, so as the Government follow this action pan and shape the so-called Protective Cushions in order to withstand the above-mentioned “WHEN” situations without expected deteriorations.

This letter is an attempt of generating considerations for such a plan.

You may either accept them, or not.

I only welcome any criticism at any dose, just because this is the best way to fine a better solution.

The main thing is that we have no time and opportunity to prepare a calculated and analyzed the so-called Brand New economic program.

We need fast, temporary and effective decisions to respond to the existing challenges, crisis situations and shocks.

Ajit de Alwis – We are facing the regretful reality, when the economy may also stop, together with human life. With tight relations in the world, essential dependence on each other, when production strives for higher scales, disrupted chains of values demonstrate how fragile these relations and systems are. Economics – this is the economy shaped under the coronavirus influence and outcomes.   

Economic factors completely depend on the conduct of the virus and the degree of our responsibility. Consequently, we should start suppositions and assumptions from medicine and our responsibility.

Let’s assume that

• The virus retreats in 2-3 months- we will have new medications, the existing course of outpatient treatments will be improved and so on.
•  We will be the people with a higher sense of responsibility, we will protect hygiene rules and get adapted to co-existence with the virus;
• The vaccine will be accessible in the middle of 2021;
• In the end, we will be accustomed to vaccination – this is the part of a long-term forecast;

Consequently, and with this assumption in the economy:

• The shock is deep but temporary;
• The applicable mechanisms should be simple and temporary to be able to shortly get back to the old regime or move to the new one if the situation changes; naturally, this does not rule out that the temporary measures may be transformed into permanent measures;
• Based on the universal and extraordinary character of the situation, we can revise several important margin parameters (temporarily), assuming that we could return to the previous benchmark in the midterm period. For example the budget deficit, the state debt’s margin volume in relation to Gross Domestic Product (GDP), target inflation rate;
• Applicable mechanisms and instruments consist of:
• Monetary policy – comparatively in limited scales;
• Fiscal policy – in bigger scales compares to monetary policy;
• Economic regulations;

The Key Objective in Economy – Maintaining the Macroeconomic Stability

What are the short-term tasks:

• Providing valuable operation of the health system in emergency situations;
• Stable operation of the business sector – providing continuous chain of values;
• Maximal alleviation of shock effects on the most damaged industries such as tourism, transport – aviation, services, sales in imperishable products and clothes, automobile dealers, development and operation of commercial spaces, winemaking;
• Curbing the plunge in citizens’ solvency and maximal alleviation of the raging shocks – elaboration of effective and temporary social package.

What are long-term tasks – in my view, despite the extremely emergency situation, there should be a group of people that would prepare post-coronavirus period models and new opportunities for Georgia - I believe we have such opportunities and advantages, in terms of industrial directions. In the due period we should launch production,  reduce dependence on only one industry if we want to be more resistant to shocks. I do believe that we will have such opportunities in the post-coronavirus period and we should use these opportunities.

Lado Papava – Today, the economy is “in hostage”. We can only try to guess the expected losses in the global economy or in the Georgian economy because the pandemic-generated economic crisis is rooted in not economy, but in medicine, while the latter chain seems impotent to make more or less realistic forecasts regarding coronavirus elimination timeframes.

What Macroeconomic Stability means:

• The economy, business companies, and household economies should maintain liquidity to be able to continue operation;
• The GEL to USD exchange rate - the exchange rate must be stabilized! This is a vitally important component! Today it is upon the exchange rate stability to maintain other indicators. At least, we should maintain the exchange rate at the point of 3.08-3.10 GEL against USD. This would be a satisfactory result. If we manage to regain the exchange rate at the point of 2.90-2.95, this would be the best result and we could say we have taken appropriate decisions. If the existing exchange rate plunges further, then we should recognize that we have carried out wrong and invaluable policy. Why? The inflation rate is the answer to this question;
• If we maintain the GEL/USD exchange rate at the point of 3.08-3.10, the inflation rate will be 6-7%, which is the 2019 indicator and this would be a satisfactory result. The improved exchange rate (2.90-2.95) is expected to narrow the target inflation rate to the direction of 3% by the end of 2020 and this would be a successful policy. All other higher inflation rates should be considered as the outcome of the wrong policy. Why? The consumption structure comprises the answer to this question.
• Changes to the Consumption Structure – consumption ratio of food, medications and disinfectants will essentially rise in households, where the inflation rate over the past few periods remains higher, traditionally. Consequently, we should take into consideration this factor and naturally, the National Bank of Georgia (NBG) should demonstrate more prudence when carrying our floating exchange rate policy;
• Budget deficit – planned below 3%. In this situation, it would be expedient to revise the rate in the direction of growth. I suppose the 5% rate would not be enough, but this mechanism comprises limits that are explained in the fiscal policy part;
•  State Debt – Today, the correlation of state liabilities to GDP is about 40% and this is a good indicator and this enables to bolder use this opportunity, even more so international financial institutions, the International Monetary Fund (IMF), the World Bank (WB) have announced plans for allocating additional financial resources and urged countries to launch negotiations with them on the mentioned issues in order to overcome the raging challenges in countries;
• The efficiency of Budget Expenditures – in this situation the budget expenditures should be revised, primarily, for the healthcare sector, in order to strengthen fiscal component of the economic growth stimulus and finance assignments for temporary social packages.

Bary Eihengreen – Coronanomix 101 – When fighting against the COVID-19 pandemic, economists, the people who shape economic policy and institutions such as G7, should recognize that “All Corresponding Instruments”, primarily, imply the instruments employed by doctors and epidemiologists.

 Monetary Policy

The government’s initiatives say nothing about the monetary policy and they only refer to commercial banks. Supposedly, the government was waiting for the NBG’s monetary policy committee meeting and this is a correct position – the National Bank is an independent institution.

Independently from the NBG, the government’s initiatives regarding commercial credits are as follows:

• Commercial banks will provide am individual loan restructuring for business companies that fail to serve the loans. This signifies about 100 million GEL resources will be accumulated in the tourism industry;
•  The Government will cover interest rates on bank credits for hotels with 4-50 suites for six months;
• Physical bodies will enjoy a 3-month grace period on loans;

NBG’s written statement turned out insufficient to settle the situation. This was expectable. The statement’s text was not easy to understand and it rather comprises academic interpretations. The monetary policy committee meeting could be convened much earlier. At the same time, the committee’s decision not to change the monetary policy rate is acceptable, given we will attract currency reserves from international financial institutions.

Distinct interventions cannot heal the situation. As a confirmation, several days ago the NBG sold 20 million USD, then 40 million USD, but in vain.

Some representatives of the opposition parties urge the Government to tighten the monetary policy and suspend the refinancing loan instrument for commercial banks.

The stricter monetary policy will immediately raise interest rates, but comparatively later, and affect the GEL exchange rate. By this period, the shock will pass away in 2-3 months. As a separate measure, it is less efficient.

If the NBG suspends the refinancing credits for commercial banks, the money mass growth will be halted, the burden on the exchange rate will be neutralized and this is an efficient mechanism.

But, how do these measures respond to the current economic challenges?

Today, economy, business, households are facing liquidity problems, together with the GEL exchange rate volatility.

We will only deepen the liquidity problem by restricting GEL; we will artificially curb the exchange rate; as a result, the demand will extremely plunge and after the panic demand we will more powerfully hit the GEL and in the end “stifle” the economy.

The “Small” GEL cannot ensure a fundamental resolution of the problem and stimulate the economy. Today, we should intensify the foreign currency supply to the economy, because we can attract it and we should manage to attract it to our economy.

In terms of monetary policy, the integrated approach is the most efficient way and it  should comprise the following measures:

• the refinancing credits should not be suspended, but we should ensure their supply adequately to the foreign currency inflows and this implies it will determine certain parameters;
• Lowering the USD mandatory reserve requirements for commercial banks to 15%.  The interest rate on USD is declining in the world – we are entering the phase of the Cheap Dollar and this process will be reflected on loan interest rates in Georgia too. As a result, we will stimulate currency loans and this component will positively affect the GEL exchange rate;
• Amid the shock-generated demand, a more aggressive intervention policy should be implemented to neutralize the speculative demands.

And the monetary policy tightening should be considered as the extremely last mechanism.

There is another fundamental issue – essential deregulations on loans; for example, lowering the 200 000 GEL margin or abolishing it entirely at this stage; this decision will become an additional factor to neutralize the pressure on the GEL exchange rate.

Besides all the mentioned measures, negotiations should immediately start with the IMF to attract additional funds for stabilizing macroeconomics, the exchange rate stability and all other parameters.

When analyzing such services as crediting and installment loans, we should remember that only four commercial banks have announced a 3-month grace period. We have no information about what happens with loans issued by other commercial banks and microfinance organizations. We should carry out an integrated policy –all financial institutions should join the mentioned preferences and all of them should prove their solidarity.

Installment loan programs announced by various commercial banks are also very important. No additional regulations can bring efficient results. The same preferences should apply to these installment loans too. As the best case, all installment schemes must be integrated into the banking sector, but not under the so-called “regulated” conditions.

Engagement of microfinance organizations and other commercial banks into the initiative announced by four major system commercial banks, transforming all sorts of nonbank loans into bank loans will make the current risks in the banking sector the manageable and foreseeable products in terms of responsible crediting, alleviate the financial burden of main households.

It is visible that commercial banks have been carrying out a flexible policies to promote the business sector and households and definitely, this is an inarguably positive and encouraging fact.

It is also very important that commercial banks supply more analytical materials as part of the business sector support efforts.

Fiscal Policy

The Government of Georgia:

• Will postpone property tax and income tax for the tourism industry for 4 months;
• Double VAT returns and instead of the planned 600 million GEL, the Finance Ministry will return 1.2 billion GEL to companies (600 million GEL in addition);
• Increase the support for capital projects and fund them by 300 million GEL to ensure additional stimulation of the economy;

The Government has also announced plans for growing other expenditures of the state budget and revising the budget deficit indicators.

The Government has expressed readiness to take additional decisions for economic stimulation. The plan for similar decisions should exist due to scenarios.

The opposition parties have voiced only one direction – tax cuts in fiscal part, as the most effective measure to maximally cushion the existing shocks for our population. This direction referred to growing the VAT payers; and reducing the incomes and property taxes.

I believe that the fiscal stimulus is more important ad multilateral compared to other mechanisms. The main thing is to tackle the liquidity problem and maintain job places.

We should remember the assumption that the shock is temporary and the applied measures should be also of a temporary character, simple in content and simple in terms of enforcement and cancellation.

At this stage, postponing the incomes and property taxes for the tourism industry and related sectors is a definitely right and timely decision, but insufficient. In this given four-month period, the mentioned taxes should be postponed for all sectors for the same 4-month period.

Furthermore, as additional decisions the Government should:

• Free the advance payments from VAT tax;
• Restore the Golden List principle for importers, even for a limited number of companies and grow the 5-day timeframes for paying imports tax to 30 days;
• Zero the profits tax and later, remove its completely  (not temporary measure).

In the event these measures turn our insufficient, I reiterate, as a temporary measure, it is possible to lower the VAT tax from 18% to 15%, considering the growth in the minimum margin is not a solution because of various factors;

And finally, based on reality, the Pension Agency assignments should be reduced. This decision would accumulate financial resources in the economy, on the one hand, and save budget funds, on the other hand, and direct these funds to the current social allowances.

These steps would grow liquidity and they should be taken in stages, depending on how the situation sharpens.

Together with the postponement of taxes, that will make a positive effect on the business sector and households, it is also important to enforce fiscal stimulus instruments.

Besides funding infrastructural projects, this will be very important to ensure economic growth.

We should also remember that this decision will bring effects comparatively later. In this regard, we should take into consideration that operational problems may arise (considering the factors of Iran and China).

Yuval Noah Harari – None of the countries can overcome the coronavirus crisis independently. We need a global plan. So far, global leaders have not discussed such a plan. What are they waiting for? And what kind of a plan may they prepare?!

The budget expenditures should be also revised.

The Health System is a priority field and the part of the national security. The Heath System should receive everything that ensures its efficient, timely and valuable operation in space.

We should remember that the virus cannot be defeated by money. Only time and proper management can beat it. However, we should also remember that the very time and proper management will face difficulties without money.

Another priority direction of national security is an introduction of a new, temporary and urgent social package for our citizens. Many compatriots are expected to lose job places. They will remain without elementary living conditions and the social assistance package will be a decisive factor for recovering the country from the existing crisis and for rehabilitating it as soon as possible. The mentioned package should comprise a temporary scheme for funding utility bills, paying unemployment compensations, other social assistance packages.

Partly re-orientation of entrepreneurship promotion projects under the Enterprise Georgian state program may also replace the mentioned social package. The sectors that are potent to replace imports should be provided with operating assets – this would be a crucial stimulus in terms of growing employment and paying valuable salaries.

One question may arise: We cut taxes and grow expenditures. Where do we take finances from?

First, we believe that the state budget has real resources for the reorientation of expenditures;

Secondly, as noted above, the budget deficit should be corrected and this will be an important fiscal stimulus for the economy, but in this case, I should stress that resources attracted from abroad would be the best source for covering the deficit to prevent the pressure on the GEL exchange rate and consequently, on inflation.

We will only welcome if the Government takes new liabilities, new financial resources are allocated by international financial institutions under special programs because similar decisions will accumulate necessary resources in the shortest period. In this case, it is very important that the Government provide fast and effective job for conducting negotiations with due organizations in order to timely contract required financial packages.

And finally, the field of regulations comprises huge reserves for economic stimulation.

The new regulatory mechanisms should not be introduced unless we have overcome the negative virus effects on the economy.

All regulations enforced in the previous period should be revised and they should be suspended temporarily.

Only an integrated and consolidated plan of measures can overcome the current challenges.

The time will defeat the current challenges. How long will it take to gain the victory depends on how timely we will take due measures to respond to the coronavirus-generated problems.

Georgia should provide timely, efficient and effective response.

We Can Do This!