The economy and the pandemicThe government should provide incentives and tax cuts to help businesses and individuals.
The Covid-19 pandemic and subsequent lockdown has led to demand collapse and supply shocks as businesses have shut down. The demand disruption and supply shock is set to decrease the gross domestic product of countries. The extent of the fall will depend on how long this persists. As per the Organisation for Economic Cooperation and Development, on the assumption that the epidemic peaks in China in the first quarter of 2020 and outbreaks in other countries prove mild and contained, the annual global GDP growth is projected to drop to 2.4 percent in 2020, from an already weak 2.9 percent in 2019. Emerging economies will be in greater trouble, and there will be capital flight to more secure advanced economies.
The occurrence of Covid-19 can be related with the Black Swan concept introduced by American economist Nassim Nicholas Taleb. In the last decade, we saw outbreaks of different diseases like Ebola, SARS and MERS, but we were not prepared for their large economic impacts. The spread of Covid -19 throughout the world and slump in oil prices, increase in US unemployment rate, contraction in airline industry, crash in the United States, Europe and Asian stock markets, and drastic interest rate cuts show how unprepared the world economy was to withstand such shocks.
The current economic phenomenon is different from the recession of 2009 as then the recession came from within the financial markets, and a limited sector was affected. But now we have a health emergency, many businesses have shut down and people and businesses in all sectors have been affected.
In order to keep public spirits up amid the gloom, many countries have offered residents helicopter money so that they can maintain their purchasing capacity. But a question has been raised whether this aid should be given equally or in a targeted fashion as everybody's income has not been affected to the same degree.
Countries are now rushing to save lives, and it is the duty of every person in charge to do so. A recent study by Michael Greenstone and Vishan Nigam of the University of Chicago’s Becker Friedman Institute for Economics has suggested that if a dollar value is given to life, moderate social distancing has the potential to save well over a million lives, and those saved lives are worth $8 trillion to the United States economy, which is about 40 percent of its GDP.
It can be presumed that a decrease in Nepal's GDP and economic growth is inevitable. Industry, construction and service sectors, which account for a major proportion of the GDP, have been severely affected due to the lockdown as production has halted and demand for goods and services is also suppressed. Further, the agriculture sector, which contributes more than 25 percent of the GDP, may also shrink if the lockdown continues up to the monsoon and the pandemic worsens. The Asian Development Bank has also recently revised Nepal’s economic growth rate to 5.3 percent from its earlier 6.3 percent; and it may go down further if the pandemic continues and restrictive measures need to be continued.
The Gulf countries and other economies like the United States, Japan, India and Australia, which are major sources of remittance for Nepal, are under full or partial lockdown; and the income of Nepalis working in these countries has been severely impacted. Consequently, the remittance to GDP ratio, which has been falling since fiscal 2016-17, is expected to plunge, leading to a decrease in the overall national savings.
Public borrowing is going to rise sharply in the coming weeks as the government needs funds due to increased spending on healthcare and public welfare. There is a possibility that these large fiscal deficits will be financed by Nepal Rastra Bank, and receivables from the government will remain in the central bank's books permanently.
Nepal Rastra Bank's investment in government treasury bills, bonds and savings certificates at the end of fiscal 2015-16 amounted to Rs21.28 billion. It swelled by 118 percent to Rs46.41 billion in fiscal 2016-17 and again increased by 60 percent year-on-year to Rs74.24 billion in fiscal 2017-18. This figure will increase exponentially if the pandemic intensifies and heavy expenditure needs to be done in the healthcare system and government revenue decreases due to a reduction in business activity and imports.
The government of Nepal and Nepal Rastra Bank recently introduced relief packages to save the economy and normalise people’s lives. It seems that the relief and exemptions need to be broadened. The central bank has extended the instalment payment deadline for loans from mid-April to mid-July. However, as most of the businesses are not running and the lockdown has been extended to April 15, businesses will face a cash crunch to manage two instalments at the same time. Instead of extending the payment due date, if payment is deferred by a month or two, businesses and individuals whose income has been affected will get more relief.
In order to raise the morale of the hospitality sector and small industries which have been hit hard by the lockdown, some incentives, in addition to the existing deferral of the tax payment deadline, such as tax cuts if 90 percent of the existing employees are retained should be given, and a restructuring of loans on a case by case basis should be permitted. Tax cuts can be made for individuals so that demand can be maintained at shrunken capacity and demand recession can be prevented. Further, some packages should be introduced by the federal and local governments to engage the people who might return from overseas after international boundaries are opened as many are expected to lose their jobs due to economic effects of Covid -19.
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