The job of stimulus is to stimulateTons of small businesses are simply hanging by a thread; they need grants, not loans.
Covid-19 threw the world a curveball. Governments, businesses and households were all caught off guard. At the outset, Nepal’s 2019-20 budget, for the fiscal year ending mid-July last year, set an ambitious goal of 8.5 percent growth in the economy; donor institutions such as the International Monetary Fund, World Bank and Asian Development Bank were not as optimistic, but they all expected the economy to put up decent growth. Then the pandemic hit. As the virus wreaked havoc, when it was all said and done, the economy hardly grew. Not much relief is in sight in the current fiscal year either; most growth forecasts are in low single digits. Six months into the fiscal year, the government raised 42 percent of its tax revenue goal of Rs913 billion. The Rs1,475-billion budget expects a deficit of Rs525 billion. Revenue shortfall either means more red ink or reduced expenditures.
The budget also talked about a stimulus package meant to provide relief for Covid-impacted businesses. Nearly six months went by before a concrete plan was announced. In the third week of November, the Ministry of Finance issued Business Continuity Credit guidelines to provide small and medium-sized enterprises and tourism businesses loans for payment of employee wages and for working capital. Borrowers will pay 5 percent interest in the first year and 6 percent in the second. The government was supposed to arrange Rs50 billion for the purpose, with funding from foreign aid, government-owned entities and its own resources. Thus far, less than Rs20 billion has been raised. Further, the loan uptake reportedly is very slow.
In contrast, Nepal Rastra Bank’s refinance facility under which businesses can borrow subsidised loans to refinance their existing loans has been a bigger success. The central bank got the ball rolling on this last October. Up to Rs200 billion is available for the purpose. Until recently, loans worth Rs83 billion have been approved. The programme apparently has clicked with borrowers. These loans, with a maturity period of one year, carry an interest rate of 5 percent. Speaking of rates, Nepal Rastra Bank, earlier, also extended the loan settlement period by six, nine and 12 months, depending on whether the businesses have been mildly, moderately or severely impacted by Covid. The six-month relief period expired mid-January.
The problem in a time like this is not so much the decision to provide stimulus rather how it is done and who it targets. If a particular industry is labelled severely impacted, it is probably not smart to paint the whole industry with the same brush. Take tourism, for instance. In the aggregate, it is probably the hardest hit. At the same time, after the lockdown was lifted last July, hotels in Pokhara and Chitwan likely fared better, thanks to a rise in domestic tourism, than their counterparts in, let us say, Kathmandu. Even in a sophisticated economy like the United States, the stimulus cheques of $1,200 last March and $600 in December, arguably could have been targeted better, as all single tax filers earning under $75,000 were eligible for the full amount.
The goal of stimulus is to help the needy so the money is recycled back into the economy right away. If it is socked away, it beats the purpose. In Nepal, during last year’s March-July lockdown, in particular, daily wage earners were probably the worst hit. But no help of substance came through. Understandably, the government itself is constrained by lack of resources. There was—still is—a better way to help. Every year, the government routinely fails to spend the allotted budget for capital expenditures; in the current fiscal, Rs353 billion has been earmarked. Aggressive infrastructure investment across the 753 local units could have created thousands of jobs, not to mention new or improved roads, bridges, parks and sewerage.
Policy-wise, between fiscal and monetary, the latter has limitations. Nepal Rastra Bank is an autonomous body but operates within the boundaries set out by the Nepal Rastra Bank Act 2002. Interest rate is its major tool. In rich economies in recent decades, central bankers have relied on the wealth effect to spur personal consumption. But sustained periods of artificially low rates can create bubbles in financial assets. Even in Nepal, post-Covid, deposits grew more than loans, resulting in excess liquidity, which in turn lowered interest rates. This was a godsend for many businesses, including hydro. The NEPSE doubled from 1150 last June to 2300-plus this month. But this helps the well-to-do more than the average person. For that, fiscal can deliver better.
For policymakers, the problem can be twofold. After they draw up a stimulus plan, a bigger headache is to make sure it gets to the intended. Abusers will try to milk the system, as it is not uncommon for authorities to lower the guardrails at a time like this. Globally, coronavirus scams are spreading like the virus itself. In the United Kingdom, a new hotline was launched last October to report suspected fraudulent activity. In the US, multiple small-business loans were issued to the same bank accounts and to ineligible businesses, among others. Here at home, let us say someone with the right connections gets subsidised loans at 5 percent, he can turn around and simply deposit the amount at a commercial bank at 8 percent fixed—for an easy three-point spread.
Immediately ahead, the risk is that those entrusted with making decisions will begin to relax thinking the vaccine is here, so why worry. However, it will be a while before the whole nation is immunised—or at least to a point of achieving herd immunity. Stimulus priorities probably need to be different this year from last year. Tourism took a hit last year, as the number of tourists collapsed 81 percent. It is very possible activity begins to recover in the second half, as vaccinated tourists begin to descend. At the same time, tons of small businesses in all kinds of disciplines are simply hanging by a thread. They deserve renewed focus. Granted data collection can become a nightmare, but a good majority of them at this stage simply need grants, not loans.
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