Immediate Economic Policy Options for Ethiopia to reduce the economic and social effects of COVID-19

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“Immediate Economic Policy Options for Ethiopia to reduce the economic and social effects of COVID-19”

By: Tesfaye Etensa and Mekonnen Bersisa (PhD)

Introduction

The world is hit hard by the multidimensional effects of COVID-19 pandemic. Health, social and economic effects of the pandemic seem to self-reinforce and created a wave of channels through which the impact of the pandemic has got an amplifying effects. The socio- economic effect of the pandemic will be more pronounced in developing economies with weak economic bases, low social welfare, crippling health facilities and strong social bods. To focus more on economic effects, African countries will now face decreasing revenues combined with the need for increased spending for tests, treatment including medication and protective equipment, and other measures to support the population.

Fragile and conflict-affected countries will need special support from multilateral institutions and bilateral partners in order not to be left behind, as they cannot handle this emergency alone. As the virus spreads across borders, delaying extending hands to developing countries in general and African countries in particularly will ultimately results in negative consequences for the entire world, not just the affected countries.The size and persistence of the economic damage will depend on how governments handle this “sudden close encounter with nature and with fear.”

Spooky side, it could become an economic crisis of global dimensions and a long lasting reversal of globalization. On the good side, it could be the moment when policymakers manage a common crisis response and strengthen their capacity to formulate and apply robust policies to tackle global crises. They might even manage to rebuild some trust and create a cooperative spirit that helps humanity tackle other common threats like climate change, corruption, and the like.

Although it is possible to recommend what will be done in the future once this virus is over; at a moment it is difficult to know exactly what the leaders should do. However, based on the information obtained from different reports and economic theory, we proposed quick policy recommendations for what will be done today for Ethiopia. We promise to come back with detail policy options for containing the socio-economic effects of the pandemic and post pandemic reconstruction to the affected sectors. At first, all macroeconomic policy instruments (fiscal and monetary) should be used at optimum and governments should save the economy and thus welfare of its society. The policy measurements to be practiced by governments, national banks and other bodies currently for the immediately recovery or to prevent the economy from long last shocks are presented below.

 Expansionary monetary policy: Decreasing Interest Rate: the Investors fear of the spread of the coronavirus will destroy economic growth and that government action may not be enough to stop the decline. In response, central bank in our country has to reduce interest rates. That should, in theory, make borrowing cheaper and encourage spending to boost the economy. Hence, national bank of Ethiopia should implement expansionary monetary policy: decreasing loan interest rate for investors; it has two effects during a given period time.In the short run, it helps the firms to be successful in loan payment up until the pandemic is fully controlled and built firms’ confidence.

 In the long run, it encourages the confidence of the investors and encourage and all firms including small and mediums can participate in different business activities and hence investment, which in turn will have multiple effects like increasing government tax revenue, decreasing unemployment, or to prevent in correcting economic shocks to prevent wide scale bankruptcies and a financial crisis.This policy option may not be viable if the existing interest rate is already negative because lowering already negative interest rates further might trade off aggregate demand effects with putting further pressure on banks’ balance sheets. Here the effectiveness of this policy option depends on the extent to which the National Bank and the government control the rate of inflation in the economy through facilitation of domestic supply of consumer goods and scaffolding the already disruption domestic and global supply chain of commodities.

 From expansionary fiscal policy, increased government spending should be first directed at the health sector, supporting all necessary spending on prevention, containment and mitigation of the virus, including attractive payment and remuneration for health professionals and better working environment conditions, as well as encouraging problem solving entrepreneurship and research. Supporting vulnerable households and firms is essential. Containment measures and the fear of infection can cause sudden stops in economic activity. In Ethiopia the issues have been started but many tasks and efforts will be left.

 Moreover additional expansionary fiscal policy options like announced temporary tax cuts with an obvious negative effect on its fiscal position. This seems the most reasonable approach right now, though it certainly might lead to problems further down the road in terms of debt sustainability.

 Beyond health, the priority should be on people and thus the government has to focus on providing immediate relief to workers and enterprises in order to protect livelihoods and economically viable businesses, particularly in hard-hit sectors. Options include using short-time working schemes and providing vulnerable households with temporary direct transfers to tide them over the loss of income from work shutdowns andlayoffs. And of course, they must protect people’s health, with whatever measures are appropriate to the workplace: positive hygiene habits, personal protective equipment, amended sick-leave policies: whatever it takes to ensure health and safety.

 Modern economy, in both manufacturing and services, depends on a highly skilled and often specialized workforce. Once those skills are lost then recovery can be almost impossible. Thus, it requires measures to provide companies with financial life, such as the interest-free loans being provided by some governments, as well as those that reduce the costs falling upon businesses. Examples of this include deferment of tax payments, interest on loans, and utility bills, and financial support to enable employees to be leaved. Most developing countries, give attention by giving permission for the elder without compensating what mentioned earlier and other. As per our assessment there is no attention given for highly skilled and specialized workforce in African countries in general and in Ethiopia in particular.

 Now it is a critical time to save life. Hence, finance ministries, government and donor agencies must recognize that this will require additional funding, obtained from reserves or by borrowing, by mobilizing domestic resources from voluntary groups and encourage self-help group and integrate them with the formal financial sector.

 Other policies include corporate loan guarantees, expanding civil servant recruitment or creating jobs, tax breaks, rent cuts on government lands and other fee waivers.

 Unlike other economic downturns, the fall of output in this crisis is not driven by demand: it is an unavoidable consequence of measures to limit the spread of the disease. The role of economic policy is hence not to stimulate aggregate demand, at least not right away. Rather, policy has different objectives. Guarantee the functioning of essential sectors is one among different objectives. Resources for COVID-19 testing and treatment must be boosted. Regular health care, food production and distribution, essential infrastructure, and utilities must be maintained. It may even involve intrusive actions by the government to provide key supplies through recourse to wartime powers with prioritization of public contracts for critical inputs and final goods, conversion of industries, or selective nationalizations.

 The Economic Commission of Africa suggests African governments could review and revise their budgets to reprioritize spending towards mitigating expected negative impacts from COVID-19 on their economies. It is also a good policy recommendation for Ethiopia.

 It is not a time of profiteer. The government must take a serious corrective measurement on those who seek to benefit from a crisis. Because, now is not the time for profit making and rent seeking. As reported by Woodhouse (2020), throughout history, crises have encouraged the emergence of profiteer. In this crisis, there have already been many accounts of substantial markups on products such as hand sanitizers and protective equipment. Others exploiting an outbreak include lenders who rise up interest rates. Hence, government have to controls on prices; have to develop “fixed price rule” and order companies to dispatch the price of the product forconsumer on their product label; this is an important especially when weak institutional arrangement is dominated like in developing economies.Rationing and rules against hoarding may also be warranted in situations of extreme shortages.

 Greater intervention by the public sector is justified by the emergency for as long as exceptional circumstances persist, but must be provided in a transparent manner and with clear sunset clauses.All the governments of developing countries have to adopt one of the following measurements as soon as possible to build the confidence of the health care workers along with their health care.

 Pay bonus for health care workers. It is an experience from Singapore
 One-month salary donated by political leadership in solidarity. It is an experience from Singapore)

 Provide a small amount of face masks to all households (and discourage them from using them as long as they are healthy. It is an experience from Singapore
 Giving legally promised education chance (scholarship)
 Government has to provide land to build residence.

• Although the virus is transmission rate is low in African countries relative other developed countries, the national banks should stand ready to provide liquidity in case of market disruption or stress on financial intermediaries and keep lending to small businesses. They should signal readiness to dip into their toolbox one more time in case there is indeed a long-term shortfall in demand and do so in coordination with other central banks. Fiscal measures could quickly be deployed as targeted help for those affected by quarantine and income shortfalls.

• As a safety net, the think tank is urging governments to provide incentives for food importers to quickly forward purchases to ensure sufficient food reserves in key basic foods items. Furthermore, the African government has to prepare assign “Agricultural campaign” which concentrated in “potential regions of the country” and produce different agricultural products which reached within small span of time, to solve food insecurity that may occurred in the short term to medium term by using modern agricultural methods like irrigation and have to feed his society.

• Policies in support of households will involve a mix of liquidity measures (Suspension of mortgage payments, Suspension of payments for utilities, Tax and social contribution deferrals) and solvency measures (cash transfer).

• Policies in support of businesses will involve a mix of liquidity measures (Extension of loan maturities, Tax and social security contribution deferrals, Emergency tax reductions, Tax and social security contribution deferrals, Direct Credit provisions by central bank, reduction in profit tax and low interest loans ) and solvency measures (Subsidies for maintaining employment, Direct subsidies based on pas sales (tax based)

• Care should be given in rebuilding the already disrupted supply chain (both locally and globally). Supply of basic goods for consumers should be encouraged through cooperatives and whole sellers.

• Commercial banks should have to ramp up its different e-banking services like Pointd of sales Machine (P.O.S), Automatic Tailer Machine (ATM) where their service implementation is not negligible in banks of Ethiopia. Because these services can minimize the spread of the virus via limiting in person cash handling.
©18 April 2020, Tesfaye Etensa, & Mekonnen Bersisa, Ambo University Woliso Campus, Woliso
Source: Taken from Tesfaye E and Mekonnen B.’s book on “COVID_19 and African Economies: Effects and Policy options”

Via: Tamiru L Kitata