There is no denying that the coronavirus pandemic has created an economic crisis “like no other” as Kristalina Georgieva, managing director of the IMF, put it at a news conference last Friday“ — one that is “way worse” than the 2008 global financial crisis. This is why governments across the world have made available extensive financial packages to support employees, the businesses sector and large corporations affected by the Covid-19 pandemic. Central banks have also intervened and decreased their lending rates to almost zero. The sizes of the support packages of the rich countries are record-breaking: there is the US’s $2.2 trillion stimulus package, representing about 10% of GDP, and New Zealand’s is about 5% of GDP.
The Mauritian government came up with a ‘Plan de Soutien’, comprising both monetary and fiscal elements, whereby the government will be injecting Rs 9 billion – Rs 1 billion to be drawn from the Consolidated Fund; Rs 2.7 billion in the form of equity participation by SIC, and the remaining Rs 5 billion to be provided by the Bank of Mauritius to support short-term loans to small and medium enterprises at the below-market interest rate of 2.5%. According to AXYS, that injection, representing 2% of GDP, may prove insufficient for the long term given that growth rate will witness a contraction of almost 5%, and it would require much more to kickstart the economy once we get back to a situation of normalcy. That view is shared by other economists who believe that the proposed measures will do little to protect the economy from the unfolding crisis.
In an interview to this paper, Dr Ancharaz mentioned that all of this illustrates the limited fiscal space that the government is currently facing. ‘Government’s recurrent spending has increased continuously to over Rs 130 billion for the financial year 2019-20. With public debt reaching 70%, government’s ability to borrow is severely constrained… However, it can raise bridging finance by imposing a solidarity levy on the most profitable sector — the banks.’ That was not to be. Instead the Ministry of Commerce has through a Government Notice modified the price structure of fuel, which allows for a deduction, as from April 4, of Rs 4 on each litre of gasoline and diesel to be paid to the Covid-19 Solidarity Fund.
The questions that arise is how the funds thus collected will be used, who will benefit from them and whether these funds will serve to beef up the Plan de Soutien – in effect a stimulus package by another name? Dr Ancharaz also said that the government should be mindful about not repeating the outcomes of the bail-out or economic stimulus packages that were dished out during the financial crisis of 2008-09, which left workers out in the cold, whereas the business groups made good for themselves. A concern that is shared across the world where stimulus packages financed by taxpayers can and indeed in some cases have been put to wrong ends or in the wrong hands. That is why it is important that we scrutinise these programs carefully.
‘The sums involved are incredibly large and we will be remiss if we mis-spend what we are now borrowing from our children and grandchildren,’ argues Ilan Noy, Chair in the Economics of Disasters and Professor of Economics, Victoria University of Wellington. ‘Whether large corporations need to receive support depends partly on the longer-term importance of their sector. It is easier to justify support for national airlines, which are an important linchpin in many countries’ global ties, than to support fossil fuel producers, for example. Nor are there many reasons why taxpayers (present and future) should bail out wealthy individual owners of large businesses, when these businesses could be restructured in bankruptcy proceedings that should not lead to their shutdown.
Covid-19 stimulus packages should be threefold, and we should assess them against these three goals: (1) make sure people’s basic needs are satisfied, (2) make it possible for the economy to spring back into action once the necessary social distancing measures are relaxed, and (3) use these funds to create positive change, and rebuild areas we previously neglected. From an economic perspective, it is clearly more efficient to provide support only to the people/business sectors who really need it – those who have lost income and would not be able to support themselves.’ That’s an important consideration which should not be lost sight of.
It is noteworthy and also significant that the number one goal identified is the basic needs of people. As the Covid-19 pandemic has forcefully and brutally reminded us, these are two-fold: health and food, and next would come shelter (housing) and all the rest. National governments must therefore start to think ahead on how to support and consolidate the structures and frameworks that are required to bring the health sector up to scratch and boost agricultural practices for long term sustainability, so that should another crisis visit us, we shall be ready to face and overcome it. Once that foundation is assured, the economy can revolve around and diversify on it.
* Published in print edition on 7 April 2020