COVID-19 is an unprecedented health and economic crisis that is causing havoc in our lives. Three things make it different from earlier global crisis. First, it is a combination of a health pandemic and an economic crisis. Second, the crisis became global in record time giving precious little time to prepare. Third, it has affected both the demand and supply side of all the major economies. The damage caused by the virus are immense and requires a deep and multifaceted policy approach. Its effects can be grouped into three categories.
- Human suffering. The rapid rate of fatality and hospitalization have led to deterioration of health infrastructure in the developed world leading to more miseries. Secondly lockdown measures to break the chain of transmission of virus have caused economic suffering through loss of jobs and other incomes. In a little over three months, more than 180,000 have died and more than 2.5M have become hospitalized, not to forget the suffering of the many more millions of family members. Small and Medium enterprises are hammered by the lockdowns, millions of workers have lost their jobs or are working on reduced work schedules and pay slips. In US alone 22M people lost their jobs in the last one month. Developing countries such as India have put at stake the livilihood of millions of daily wage workers. If the economic suffering is prolonged and as deep as expected, this will bring inexplicable misery to the people.
- A severe global macroeconomic fallout. It is now a foregone conclusion that the global economy will slip into a recession in 2020. What is uncertain is how deep, long, and widespread the contraction in economic activity is going to be. As a result of the unprecedented sudden stop in global economic activity, 2020 is on track to witness the deepest global recession on a scale not seen since World War II. The IMF in it World Economic Report of April 2020 is projecting world GDP to contract by 3% which would be higher than the 2008 crisis. It has predicted for 2020 that in all developing regions (EU, LAC, MENA and Africa) except Asia there will big contractions in GDP. Even in Asia, the sudden slowdown will feel like a recession. China and India are projected to grow at below 2% rate.
- Deep distress in financial and corporate sector. The financial and corporate sectors are likely to suffer on a large scale. Markets have taken a big hit, financial systems are under stress, and banks are likely to see huge pressures on their balance sheets. Private firms are being hurt by the collapse in demand. The likelihood of large-scale bankruptcies is rising. Rapidly increased risk aversion among investors has led to a sudden stop in capital flows to emerging markets.The flight of capital from emerging economies have put pressure on their currencies. Companies from consumption driven sectors such as Oil have suffered immensely. Countries depended on Oil as their premier source have seen pressure on their currencies with record low levels of Oil.
By itself, each of these three adverse outcomes is devastating. But because these outcomes are combined the threat is even more ominous. The world will have to bear the consequences for years if the policy response is late, weak, or uncoordinated.
THE PRESCRIPTION: SIMULTANEOUSLY FLATTEN THE PANDEMIC,ECONOMIC DOWNTURN AND CORPORATE DISTRESS CURVES
Pandemics, economic downturns are mutually dependent.This means that they need to be mitigated at the same time:
- Flattening the pandemic curve is important because it saves lives by avoiding bottlenecks in the health system when larger numbers of sick exceed the health system’s capacity.
- It varies from one country to another but deep and prolonged recessions caused by lockdowns must be avoided, for these can cause long lasting damage. Long periods of weak supply and demand can lead to high structural unemployment, permanently lower capital stock, and contained “human desires.” Flattening the recession curve is therefore important.
- Finally, corporate distress can have cascading effects on creditors and other stakeholders. The fiscal cost of bailing out banks and firms can be enormous for Governments already under stressed. This argues for the need to flatten the corporate distress curve at the same time.
Simultaneous action on all these fronts requires greater resources both fiscal and monetary as well as a framework for coordinated action.
A FRAMEWORK FOR FLATTENING THE CURVES
A swift, simultaneous, and sequenced implementation of four sets of policy instruments is needed to flatten the three curves discussed above:
- Healthcare policy. This requires allocation for large scale testing and treatment, hiring of new medical staff, setting up beds and hospitals etc.
- Fiscal policy. Governments have announced measures that include deferring filing and payment of taxes, providing stimulus to specific vulnerable sectors, distribution of cash or other benefits to the weaker sections of society etc.
- Monetary policy. Many countries have cut policy rates injecting liquidity into banks and other financial institutions. This needs to be passed on to the small and medium enterprises firms who are struggling to meet ends.
It is important that these measures are effective and proportional to the current crisis to bring both the life and economy back on track.