Opinions

The economy we’re committed to restoring

By Dinesh Weerakkody

The swearing-in ceremony for Sri Lanka’s new Cabinet took place at the historic Magul Maduwa, at the Sri Dalada Maligawa premises under the patronage of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa.

President Gotabaya Rajapaksa through an Extraordinary Gazette last Tuesday (11) announced the ministry structure consisting of 28 ministries and 40 state ministries. This includes key ministries and subjects that come under the purview of the President and the Prime Minister.

The good news for the new Cabinet is that global recovery has already begun. The key risk to the global recovery, however, is the fact that the coronavirus has not been brought fully under control in the UK, US, and across several other economies. Comparing the rest of Asia, the situation is now bad in India, where new cases have increased significantly. This compares with less than 2,200 new daily additions on average in the rest of the region.

The situations in Victoria, India, and the US, along with outbreaks in several parts of the world, raise the risk of a rise in infections as economies open up further, which might trigger renewed global restrictions that could impact global growth.

Sri Lanka has done well on many counts. The President during the Covid crisis was fully focused on designing fiscal and monetary policies able to support the direct provision of resources to support workers, SMEs (small and medium enterprises), and households. He wanted to put forward a single proposal to rebuild the economy.

Many governments have launched stimulus packages to cushion the outbreak’s economic hit to businesses and households. Whatever the stimulus, it must aim to sustain household income, business activity, and the macroeconomic fundamentals to allow for a quick and sustainable recovery. While these measures imply substantial costs to public finances, the cost of inaction – a long-term destruction of productive capacity – would be even higher.

Central banks globally have injected sizable sums to support the economy, both through quantitative easing.

The multiple effects of Covid-19 on commodities, trade, and local economies will have a big impact on GDP (Gross Domestic Product) growth in the region, which is expected to turn negative in 2020.

The travel and leisure industries will take 12-18 months to recover. An economic essential now is to prevent a collapse of the financial system globally if the crisis prolongs, as businesses and individuals will get pushed to delay their loan payments.

Central banks around the world will need to take significant steps to stabilise the Treasury bond market and the market for short-term inter-bank loans. In part, this may involve providing government guarantees for loans that stricken businesses have already taken out, or else issuing them new ones. Many smaller firms and economies may also need help.

Options for governments

The real challenge for most governments now is that while they do more and more to flatten the infection curve, they are steepening the recession curve. The public want the right health-related measures to save lives and ensure vital aid necessary to guarantee the health services-related capacity to deal with the threats posed by Covid-19.

The worry right now on a full-scale economic fallout is not yet fully understood for many reasons and it will however increase exponentially once the pandemic shows signs of being controlled and the infected numbers start to drop.

In many markets, the economic stimulus packages are expected to cover paid sick leave; maintenance of income to cover the cost of housing, electricity, food, and other essential items. This is seen as a strategy to sustain jobs and the economy, protect wages, the welfare of workers, and small businesses.

There are many good lessons to adopt from the financial crisis of 2008 for governments. For example, income support for poor families to ride over the crisis is far more effective because it also helps small businesses in many ways to survive.

The other challenge for governments would be that even if they provide nil borrowing costs it will not motivate factory owners to restart operations in factories that cannot source raw materials from their suppliers, or whose workers are ill, quarantined, or simply afraid of contracting the virus in their workplace or as they travel using public transport to their workplaces.

Therefore the challenge is severalfold; while we still have a lot to learn as to how this pandemic will end, yet for now it is far more important to do whatever it takes to minimise the impact on the economy in the short term.

The recovery from the Covid-19 economic crisis also coincides with a pivotal time in the fight against poverty.

The future

The post-Covid economy we create could turn out to be a whole lot more resilient than the battered old one.

Beyond exposing the fragile nature of global supply chains, top-down monetary policy, and a vanquished manufacturing sector, the Covid crisis is also unleashing a powerful drive by local and networked communities to rebuild business from the bottom up.

The mechanisms so many of us are now inventing and retrieving under duress may just survive after this crisis is over, and augur a new era of sustainable businesses and much better distributed economic prosperity.

Small farms, worker-owned factories, and companies for whom the bottom line has more to do with selling quality products than selling shares of its stock, will become a feature. The value created by such enterprises will not get sucked up and out of communities, but circulate again and again from one person or business to another.

The longer the crisis continues globally, the more faith people will have on the more locally managed, bottom-up economies.

Everything we do during and after this crisis must be with a strong focus on building more equal, inclusive, and sustainable economies that will be more resilient in the face of future pandemics, climate change, and the other global challenges we will have to face in the future, from time to time.