NOT only is the coronavirus a health and medical problem, it also has huge economic challenges. China and the West face severe economic contractions. Cities are shuttered. Multiply industries have closed. Millions have suddenly been rendered jobless. Supply chains have busted. Economic activity is a fraction of what it was before. Deep recessions are forecasted. Some experts fear depression now tracks the world down. Governments worldwide are responding by embarking on unprecedented stimulus packages to keep their economies afloat.
The Chinese are pumping untold trillions into their financial markets and productive economy. The most austere large nation, Germany, casts aside its constitutional prohibition on deficit spending to enact a historic, unprecedented fiscal stimulus package. The free-market Tory government of Boris Johnson has abjured his conservative upbringing, if but for this harsh moment. His government has launched a fiscal stimulus unseen in the UK for decades. Likewise, the Bank of England vows to pump as much money into the financial market as is needed to unfreeze it and get it working again.
The conservative Trump government also abandons its laissez faire ideology in the face of this exigency. Trump is giving 2 trillion in fiscal stimulus and this will likely be just the first tranche. The Federal Reserve has announced an aggressive monetary policy to bolster the financial sector. This is atop the 1.5 trillion the Fed already promised.
In the end, do not be surprised if the US government injects over 5 trillion new dollars into the economy in the months to come. This would represent 25 per cent of last year’s GDP for that nation. Moreover, the US economy is also enacting various forms of debt moratoria such as forbearance on rental payments for struggling families and small businesses to tax relief of various types for companies large and small.
This is truly an eye opening endeavour based on lessons learned from the 1929 Great Depression when government failed to appropriately act and the 2009 Financial Crisis when governments acted in time.
The lesson learned is that a government has the sovereign power and requisite duty to intervene in the economy in order to stave calamity. To aid in this task, a government has the unlimited ability and again public duty to issue as much of its own currency as needed to quell shortage and buffer the populace from hardship.
Fortunately, we are not at the stage where we need to implement such strong economic measures; however, we should be preparing a response for that urgent moment may fall swiftly upon us. In doing so, we must be guided by the same lessons other nations have followed. When it comes to expenditures that can only be made in dollars, we must be extra careful. Dollars now come at a steep premium. However, when it comes to expenditures that can be made in naira, government cannot afford to be bashful or reticent when the need arises.
Already, the price of oil has fallen to around 32 dollars a barrel. This will bring a dollar shortfall. This does not, however, necessitate a corresponding shortfall in public sector naira expenditures. The US controls dollar issuance. We control naira issuance as is our sovereign right.
While individuals, companies and even state governments can go bankrupt during hard times, the Federal Government cannot become naira insolvent because it has the ability to issue our national currency. He who holds the printing press is never insolvent. The most serious concern and limitation on federal naira spending is not insolvency but inflation. Consequently, should circumstances require increased spending, we should not hesitate to do so; but we must keep the watchful eye to ensure inflation does not climb too high. However, to save both lives and livelihoods during a moment of historic emergency, a touch of extra inflation from enhanced government spending is a small price to pay. In fact, it is a price that must be paid. The alternative may be a harmful deflation which historically has proven more difficult to tame and cure than a small inflationary increase.
In all of this, the international financial institutions such as the IMF and World Bank must be cooperative and forward-leaning. These institutions must discard their mainstream orthodoxy of fiscal austerity which will straitjacket and injure nations like ours. They must encourage nations to engage in economic stimulus. Moreover, they must suspend debt repayments for poor and developing nations and begin to fashion a plan of partial debt forgiveness for indebted nations.
Below are a few preliminary thoughts on the economic action we might take at this challenging time.
Maintain government expenditure: The natural instinct will be to reduce spending. Such reductions may be prudent for individuals and households. For government to move in this direction only feeds economic carnage by amplifying economic hardship. Prudent fiscal policy is generally “countercyclical.” As the private sector shrinks, government does more.
At minimum, the Federal Government must stick to its naira budgetary expenditures. In fact, government should increase naira expenditures by at least 10 – 15 percent during an emergency. Allocations to state and local governments should be included in this addition. If not, we risk subnational recessions in important sections of the country.
Government projects: If coronavirus is largely kept from becoming a widespread public health menace, government should accelerate spending and actual work on key infrastructural projects, particularly regarding transportation. This will lower costs while bolstering the economy by generating employment and business activity.
If the virus does become a large-scale public health challenge, more funds should be allocated to the health sector.
Tax reductions: Government should announce a tax credit or partial tax reduction for companies or firms. VAT should be suspended for the next two to four months. This will help lower import costs and protect against shortages.
Food security: We need to protect the people from food shortages and high prices. As such, we must quickly improve farm-to-market delivery of agricultural produce. Also, government should initiate a crash programme to decrease spoilage of agricultural produce by construction of storage facilities in local marketplaces in and around major cities and towns throughout the country.
We must establish a strategic grain reserve. Government should help ensure supply by establishing minimum premium price for certain food products.
Lower interest rates: CBN should lower interest rates to spur borrowing and private sector activity.
Quantitative easing: CBN and other financial regulators should be alert to signs of fragility in the financial markets and banking sector.
The Central Bank should be prepared to enact extraordinary measures should the financial sector exhibit stress. The CBN should be prepared to give banks liberal access to its loan discount window to ensure adequate liquidity within the banking sector. The Cash Reserve Requirement for banks should be revised downward.
Also to ensure liquidity, the CBN should be willing to expand its balance sheet and improve liquidity by purchasing government bonds and other instruments held by banks and other institutions.
The Nigerian stock market is falling. CBN and others should be planning how they might intervene to prevent a potential run on the stock market. Potential measures include expanding Quantitative Easing to enable the Central Bank to purchase strategically important instruments trading in the stock market and instituting a moratorium on margin calls.
Exchange rate: The corona crisis will shrink the inflow of dollars. Hopefully, this is temporary, no more than a few months. CBN can allow some downward pressure on the naira without energetically intervening to defend the exchange rate. Only if and when the rate seems that it might dip precipitously should the CBN intervene.
The Bank may want to revisit its decision prohibiting non-institutional Nigerian dollar holders from participation in Open Market Operations. Greater leniency will bring more dollars into the CBN.
Debt suspension: If economic trouble does come, government must be willing to freeze payment of certain consumer-related private debts. Evictions, foreclosure and light and water cut-offs might have to be suspended. Suspension or partial reduction of payment of school fees for our most indigent families must be considered (that is when schools reopen) while government offers temporary support to the schools themselves.
Increase stipends to the poor: We must be ready to increase stipends to the poor. We do this by widening the net, substantially increasing the number of recipients of anti-poverty stipends.
I proffer these measures not as some comprehensive solution. I hope these ideas spark the needed dialogue about the ways we may need to employ to protect our nation from assault by the coronavirus.
- Asiwaju Tinubu is a national leader of the All Progressives Congress (APC).
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