Playing chess against Covid-19
Since the first case was reported in Wuhan, China in December, Covid-19 has been wiping pieces off chessboards worldwide. Namibia will have to be very smart not to be outmaneuvered.
25 March 2020 | Economics
A slow-drip stimulus will achieve very little. – Rowland Brown, EAN/Cirrus
“The corona shock is a six-sigma+ event and the economic impact is going to be large,” the Economic Association of Namibia (EAN) said yesterday in an impact study of Covid-19 on the economy which was compiled with Cirrus Capital.
“However, the shock will last a finite amount of time if well managed,” the report added.
EAN/Cirrus proposed a number of interventions, emphasising that “no single party or group of parties can carry the cost of the virus alone”.
Without drastic action, Namibia is likely to see businesses collapsing, mass retrenchments, households suffering and the economy in a deep contraction, the report warns.
“Normal fiscal ‘rules’ is off the table,” says economist Rowland Brown, compiler of the report.
A deficit of 3% of gross domestic product (GDP) is no longer the standard; the world will run deficits of 10% of GDP this year, Brown forecasts.
Without suitable stimulus, Namibia’s economy will collapse, he says. “A slow-drip stimulus will achieve very little.”
If the cost of the business interruptions presented by the virus are carried by the employer alone, mass retrenchments can be expected, Brown warns.
“In Namibia, an unemployment rate north of 50% is probable if nothing is done, and this could exceed 70% if the business interruptions continue for an extended period of time, without any fiscal support.”
Jobs will haemorrhage because the revenue of many businesses are already pressure. While most have some reserves, few have sufficient reserves to weather an extended storm, Brown maintains.
Government has a few options to pump money into the economy, the report states.
It has a deposit account with Bank of Namibia (BoN) which comprises of three sub accounts: the two sinking funds – one in US dollar (estimated at US$400 million) and the other one in rand (estimated at R2.3 billion) - as well as an operational account.
At yesterday’s exchange rate the aggregate sinking fund balance was R9.3 billion, Brown said.
The BoN Act allows the central bank to grant loans to the government which has to be repaid within six months. Under the applicable terms and conditions, this short-term funding is approximately N$2.882 billion, according to Brown.
In addition, various global support packages currently exist, he says.
“Most immediately relevant and ready to utilise is a U$14.5 million package for health support from the World Bank. These facilities, as well as support from the International Monetary Fund and others, need to be utilised as soon as possible,” Brown advises.
To avoid retrenchments and to ensure that household incomes are not lost completely if company revenues collapse, flexibility in employment conditions is required, EAN proposes.
“During periods of severe disruption, it is recommended that employers and employees are able to temporarily negotiate an up to 50% reduction in wages, rather than retrenching. Thus, household incomes remain somewhat protected, and incomes should recover quickly when the threat is passed, as opposed to creating long-term unemployment.”
EAN/Cirrus further proposes that income tax for those earning below the 28% bracket should be suspended for the current tax year to cushion the blow from reduced wages for lower income earners.
“Thus, while incomes may drop as a result of temporary lower wages, the blow will be cushioned by increased take-home pay as a percent of gross income. Higher income earners would still be expected to pay tax as normal.”
Brown says this is a “very low-friction, simple to implement intervention”.
Rent and mortgage payments should also be arrested.
“However, the provision of housing/loans for housing is not free, and thus a suitable manner of carrying this burden is required,” he says.
The BoN should subsidises the “mid-point between (absolute) interest expense and interest income of the commercial banks during this period”.
To provide cash-flow relief to consumers, the acceptance of municipal arrears without charging interest or stopping service is critical, Brown says.
“A government guaranteed (off-balance sheet) facility should be provided by the commercial banks to these municipalities and utilities.”
To ensure that informal workers, including but not limited to domestic workers, are not retrenched should they not be able to attend work during major interruptions, a direct or employer subsidy is recommended, EAN/Cirrus proposes.
“Using the records of the Social Security Commission, but paid for by government, a subsidy of 50% of an employee’s income, capped at N$1 500 per month, is suggested.”
EAN says it is “unconscionable that low-income employees should carry the cost of a shut-down through retrenchment or non-payment while such persons are unable to be present at their place of work”.
Ensuring that businesses do not close and that the economy can recover quickly when the shock is over is of upmost importance, EAN says.
“For many businesses, sustaining sufficient working capital to manage expenses while revenue is down (or gone entirely) is critical to survival. This is particularly important for small and medium enterprises, without large buffers.”
A subsidised overdraft facility, subsidised by the BoN and administered through commercial banks, is highly advisable, EAN proposes.
“For a two-year period, it is advised that these overdraft facilities are made available to MSMEs at the repo rate, both to reduce closures through badly interrupted periods, and to scale up thereafter,” Brown says.
Most Namibian companies are going to experience revenue declines, however expenses for most will not decline precipitously, he says.
“As a result, cash-flow issues will likely ensue, causing many businesses to close, and the velocity of circulation of money to drop. It is thus critical that VAT refunds are expedited, and that the backlog of refunds is settled.”
The corporate tax rate should also be revised.
Following the current shock, there will exist a great need to rebuild the Namibian economy, recover the fiscal position and protect the currency peg, Brown says.
“The efforts to achieve this need to start now.”
EAN suggests a join task-force of credible private and public sector entities to evaluate the impediments to investing in Namibia, and such impediments should be resolved in the next 18 months.
Namibia’s investment policies and environment have to be “materially re-assessed”.
“It requires that we set aside out nationalistic, state-interventionist, increased regulatory focus, and turn towards a more free and open business environment.
If this is not done, Namibia’s economy will not recover from this corona shock, our public finance situation will become a debt trap within a few years, the currency peg will be lost and household incomes will not recover. The good development work of the last three decades will be rapidly undone, and Namibia’s potential will not be realised in many of our lifetimes,” Brown says.