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Paying The Price In Battling Covid-19

By HUBERT EDWARDS

My last article analysed COVID-19's impact, and the need for effective leadership from an economic and health perspective. I now turn to an examination of the relief measures taken to date. As this article was completed, the deputy prime minister announced more assistance for Bahamian micro, small and medium-sized enterprises (MSMEs), well as a tax credit and deferral initiative targeted at medium and large-sized enterprises.

THE INITIAL RESPONSE

As it became clear that the western hemisphere was in for a big hit, governments sprang into action. COVID-19 cases in the US started to increase, with the first Caribbean infection showing up in the Dominican Republic. It was time to move. Multiple cases were discovered on cruise ships. There was evidence of infected persons having travelled on airlines. The race was on to save the health and economic arrangements of the Caribbean, with The Bahamas and Jamaica among those taking proactive steps in a race to possibly save the very existence of the region as we know it.

THE BAHAMAS

K Peter Turnquest, deputy prime minister, following consultation with industry players and his opposition counterpart, unveiled a suite of measures designed as a "phase one" response to the expected fallout from COVID-19. These included a $16m allocation to cover detection, isolation, treatment and other COVID-19 mitigation activities, plus $4m to provide food, assistance and social support for displaced workers directly impacted by the virus. There was an allocation of $10m to provide for a temporary unemployment benefit, offering assistance of $200 per week for up to eight weeks with a pledge to adjust this as needed. The government highlighted the availability of normal sick benefits for individuals who contract COVID-19, or are quarantined because of exposure or suspected exposure. Those temporarily laid off because of COVID-19's economic impact will be eligible for unemployment benefits for up to 12 weeks.

The government also asked the Water & Sewerage Corporation to reconnect all recently-disconnected services for residential customers, having regard to the personal hygiene implications in the fight against the virus. Banks committed to provide mitigating measures, with some eventually offering deferral of loans on a blanket basis, while others committed to doing it on a case-by-case basis. Some $20m in short-term loan support was provided to Bahamian small businesses with no repayments for the first four months. Looking for other means of creating potential stimulus, the announcements also included acceleration of a Youth Apprenticeship Programme; reprioritisation of capital projects to increase the number of quickly deployable small-scale works to boost small business activity; an accelerated process for all domestic and foreign capital investments projects currently in the pipeline; and restriction of all non-essential expenses. To date, no monetary policy action has been taken.

JAMAICA

Jamaica on the other hand, having the advantage of the COVID-9 pandemic occurring at the end of its fiscal year and budget presentation, has rolled up new and previously announced fiscal measures as part of its fight. Excerpts from Jamaican newspapers detail the following approach. The country launched the largest fiscal stimulus in its history at J$25bn ($185m). This includes the reduction in general consumption tax (GCT) or sales tax from 16.5 percent to 15 percent, which puts J$14bn back in the hands of consumers and supports consumption. An MSME tax credit will provide critical cash-flow support, together with a dramatic reduction in regulatory fees for agricultural producers. The banking sector volunteered to forgo the reduction of the previously-announced asset tax, increasing their COVID fiscal contingency from J$7bn to J$10bn ($74m).

Additionally, through the Bank of Jamaica, the country has implemented macro-prudential measures valued at some J$57bn ($422m) to help deposit-taking institutions during the crisis. Based on Jamaica's economic strength, the central bank said it will not cut its reference interest rate at this point. It is maintaining its overnight placements rate at 0.5 percent. The Bank of Jamaica will continue to support foreign exchange needs, but will halt investment transactions that require the purchase of foreign exchange. It temporarily increased the limit on the foreign currency net open positions by five percentage points. A bond-buying programme for Jamaican government securities also began, with the central bank declaring it is prepared for early redemption of its own securities.

Taking into account financial stability, the Jamaican central bank removed the limit on the amounts deposit-taking institutions can borrow overnight without being charged a penal rate. The bank believes these measures will help to facilitate the smooth functioning of the credit market and support inflation, remaining within the inflation target of four percent to six percent over the ensuing eight quarters.

COVID-19 is a common threat, but the circumstances and responses are fundamentally different up to this point. In part, this is a function of timing. Jamaica is at the end of its fiscal year and, on the back of a relatively successful structural readjustment programme with the IMF, has been riding the wave of 20 consecutive quarters of growth, a robust stock market and measures that have created fiscal headroom because of reductions in debt repayment. The Bahamas, on the other hand, is still a few months from its budget presentation. Generally, it has been operating under an austere regime with the implementation of fiscal reforms designed largely to correct its debt-to-GDP position and structural weaknesses observed in the management of the national finances. It has the same intent as Jamaica; freeing resources for investment in the economy.

Both countries, though, currently suffer from low growth. The Bahamas, while securing two years of above average growth compared to the previous ten years, missed its targeted two percent-plus growth rate in 2018. The same is likely for 2019 once the numbers are finalised. Jamaica, despite its impressive multiple quarters of growth, has seen GDP expand by minimal levels. This represents one of the most significant pressure points in its effort to reorganise the economy.

Notable commentators such as Denis Chung, and Michael Lee Chin, chair of Jamaica's Economic Development Committee, have recently lamented this fact. Despite cogent planning and marked successes, it is recognised that true economic transformation demands growth that is more robust. This is critical to our examination of the COVID-19 impact. We have often echoed the sentiments of Mr Lee Chin as it relates to The Bahamas. For the last few budget cycles we were of the view that greater focus should be placed on facilitative growth, leveraging the growth that was being experienced across the world but primarily in our most important market, the US.

Our consistent concern was that there was a closing window of opportunity, and the drive for growth should have been better aligned to that opportunity. Last year started to prove the efficacy of that thinking through the economic headwinds being created by Brexit and the US- China trade wars. We did not secure the growth desired, and consequently COVID-19's economic impact is likely to prove a significant challenge, one which may have been easier to face with a stronger foundation on which to build a stimulus effort.

We are being careful not to minimise the depth of the risk faced by both countries and the wider Caribbean region. Neither is there any intention to pre-judge the efficacy of any response already announced and yet to come. This will undoubtedly be a hard road going forward and, in many ways, a very complex set of realities. Supply side shock, coupled with a demand side shock complicated by significantly disrupted value and supply chains, is the result if this global pandemic. There is no easy or cheap way out of this. The US has passed the larger stimulus package in its history aimed at rescuing its economy, with clear signals of more to come. The early signs, however, show that this will be a very interesting time as the fundamentals at play are significantly outside the control of a single country and rest fundamentally on the effectiveness with which the health aspect of the crisis is managed. The US, in our opinion, is currently losing that battle or at least has not yet shown that it is in control of the effort to contain the spread of the virus. This is bad news for the Caribbean, as the US represents one of its most significant tourism and export markets.

GLOBAL

Long before the US and the Caribbean started to take this matter as seriously as it is now, Indonesia was taking steps to shore up its banking sector, January 30, 2020. China's central bank was applying monetary policy in early February, as was Thailand, Singapore and other Asian countries. These came more than a month before the US signalled its first real economic response. Under pressure from the Trump administration, the Federal Reserve cut its reference interest rate to be followed by a further slash to a range of zero to 0.25 percent.

Over that period, the virus, was ravaging Europe, especially Italy. Meanwhile, Russia and Saudi Arabia started to cross swords on oil, further destabilising the financial markets. This event will be very costly. To date, cursory analysis shows that fiscal and monetary responses by major countries are valued at $7tn and counting, well in excess of resources expended on the 2008 global financial crisis. This holds important implications for the Caribbean, which generally has limited financial resources. We need the global effort to be successful to create spillovers for our benefit. Critically, the Caribbean needs the US economy to come back strong quickly. That observation, though, may be wishful thinking. Unless there are fundamental changes in its approach to containing the virus, information coming out of the US will continue to create adverse pressures on global markets and economies. Economists generally agree that the crisis could persist beyond June.

This gives us a clear idea of how deep and costly this event is expected to be. Most stimulus measures have been undertaken within the last 30 days of writing. Why is this important? The health event is unfolding and changing the outlook very rapidly. Therefore, the basis on which any projections are made must be dynamic, and pronouncements are simply indicative for the moment. We see this in The Bahamas' initial expectation of a $1bn loss to the economy. A week later, the deputy prime minister declared that "The Bahamas faces a very deep and stark recession", urging the country to brace for major problems if the crisis persists beyond the summer. Therefore, what are the outlooks on this? Does this event have legs to take us into the summer? With the Bahamas being highly dependent on tourism for upward of 50 percent of GDP, and with tourism and travel being the most significant sector impacted, timing is extremely critical. The impact on others will be no different, only potentially at a lower level. Will the region be able to afford, should this extend over the mid-term, to truly defend its various economies?

To be continued...

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