Going through this together

Times of Malta

Opinion 21 03 2020

 These are extraordinarily abnormal times. An invisible virus has come out of nowhere to shake the major economies of the world. No one was really prepared for this. If the crisis prolongs, the world will be dragged into a recession. The type of recession will depend on developments which are mere guesstimates at this stage.

If the spread is controlled within the next few weeks and confidence to resume normal times emerges in the the second half of spring, then we can expect a good recovery in the second half of the year so that the year will finish with lower growth but still some growth. This will be a V-shaped recession.

If on the other hand the recovery in consumer confidence takes longer to re-emerge, this recession will be as bad a recession as that of the early 1908s.

It will be a U-shaped if not L-shaped recession.

In Malta, thankfully, we are facing this challenge from a position of economic strength. The performance these last seven years has been impressive and the macro economic position is endowed with fiscal buffers which can be released to cushion the negative impact of the current crisis. Debt to GDP is now just over 40 per cent, down from 68 per cent in 2012.

The government budget has been in surplus for four successive years. Reserves have been stashed away in the National Development and Social Fund (NDSF) to be used to finance investments outside the main budgetary stream.

The government has already announced measures to aid businesses to manage their cash flows as their revenue streams dry up. This applies particularly to economic operators in tourism, hospitality, personal services and distributors/retailers of non-essential goods.

It may apply also to other sectors like construction and manufacturing if workers cannot get to work or if orders get cancelled in the face of emerging uncertainty.

Postponement of tax payments due in March and April offer a boost to business cash flows which help them to stay alive until we put this crisis behind us.

However it does little or nothing to cushion the blow to the operating performance of businesses in the eye of the storm.

The government could consider sending a payment to every household to maintain consumer confidence

Hotels, restaurants, retailers of non-essential goods, and small businesses offering personal services could be severely hit. On the other hand, wholesalers and retailers of food, medicine and other essential goods and services are having a Christmas in spring.

The government needs to extend support to those being hit in a socially just manner. It cannot condone the principle that profits are to be privatised but losses are to be socialised. 

Whatever it does must be focused on those who need assistance to stay alive so they can be around to facilitate the recovery when the crisis abates. The level of government support should be timed to facilitate coming challenges not to address past stress. A bad month after several years of growth should not be fatal to serious businesses.

Assistance needs to be targeted to help businesses and protect workers. Those enterprises that need to adopt short work weeks should benefit from a government subsidy to keep intact the basic take home pay of affected workers.

Employees who are forced into mandatory quarantine should have a good part of their salary financed by the state.

The government can offer indemnity to banks against a good part of losses they may incur through offering borrowers a one year capital repayment moratorium. This applies to business loans as much as to house loans, though interest has to continue being repaid as due.

The government could also consider sending a payment to every household to maintain consumer confidence in the face of rising prices caused by panic buying. No cheques... simple direct credits to avoid sending people to queue outside our banks who are already stressed by staff shortages. Ideally this measure should be timed to impact as soon as quarantine restrictions are lifted to give a boost to consumption which is currently being constrained.

These measures and the huge expense government is incurring to try to keep us healthy, will probably turn a projected one per cent budget surplus to a few percentage points of deficit.

So be it! The priority now is not the budgetary end result.

The priority is saving the economy and protecting our operators to ensure that they stay energised to regain traction when this crisis is behind us in the second half of 2020.