COVID-19: the war against an invisible enemy

Fazeel Najeeb

This article is part of Covid 19: Stimuli and Beyond edition of the Journal of the Maldives Economic Review, Volume 1, Issue 3, March 2020

COVID-19 has impacted the whole world in more ways than one can fully imagine. It is microscopic yet so deadly that it really threatens to destroy life as we know it. For the Maldives, matters of our anxiety include the pandemic nature of the virus, limitations in physical and human resource capacity to manage the crisis, its adverse impact on the country and economy and our ability and availability of resources to manage it, the precariousness of availability of our essential foods and medical supplies, and uncertainty on being able to meet many other needs on which people are directly dependent for their normal daily life. This article is on the potential economic impact of the COVID-19 crisis on the Maldives, and on possible economic measures that may be taken. The article is intended as a serious and well-meant discourse on the matter as all concerned search for ways to manage and withstand the crisis and rebound from it.

Economic impact At global level, the outlook for global growth in 2020 is negative according to the IMF Managing Director who opined that the world was facing a recession at least as bad as the one during the global financial crisis of 2008 or worse, but that recovery was expected in 2021 (IMF, March 2020). During the global financial crisis, the world GDP had a negative growth of -0.08 per cent in 2009, and the Euro Area was even deeper in negative territory at -4.5 per cent. Normally in well organised economies stock exchange is a barometer of the economy. Movements in trading of shares and securities in stock markets indicate the economy’s general growth direction. In the Maldives this cannot be said as true due to the insignificance of the stock exchange as an institutional player in the economy. Some assessments have already been made on the possible impact of the crisis on the Maldivian economy. In an assessment with scenarios made by the Asian Development Bank, it estimated that the revenues of Maldives from tourism would decline, in the best case scenario, by 1.8 per cent of the gross domestic product (GDP); in the moderate case, the decline would be 2.8 per cent; and in the worst case losses would be equivalent to 5.5 per cent (ADB, March 2020). In numbers, these scenarios correspond to losses of USD 98 million in the best case, USD 147 million in the moderate case, and USD 294 million in the worst case. In remarks at a SAARC Video Conference on Sunday, 15 March, President Ibrahim Mohamed Solih said that “The decline in tourist arrivals has now become so sharp that if the current trend continues, we will have a 35 percent drop this year.”; he elaborated that the country faced a serious shortfall, estimated to be at USD 450 million, in foreign currency earning (the President’s Office, March 2020). Historical data shows that in 2005 when tourism dropped 35.5 per cent, GDP fell 11.5 per cent (chart 1). According to the Maldives Monetary Authority the “pandemic is expected to sharply reduce the GDP growth of Maldives for 2020” (MMA(a), March 2020). Based on the government’s estimated 35 per cent drop in tourist arrivals this year, revenue collection in USD could fall between 25.0 per cent and 27.6 per cent over the last year, resulting in a drop in USD revenue of USD 177 million, which is equivalent to 3.5 per cent of projected GDP for 2019.

How vulnerable are we? How have we fared in major global crises in recent years? In 2001, GDP growth fell into negative territory (-4.3 per cent) due to the EU/US recession in 2000/2001; in 2005 growth slumped to -11.5 per cent following the devastating tsunami of 26 December 2004 that swept Asia; and most recently in 2009 it dropped to -6 per cent in the aftermath of the global financial crisis in 2008 (Chart 1).

Chart 1 also compares the GDP growth rate with that of tourism (with pre-crisis 2019 and 2020 projections). A drop in the growth rate of tourism also corresponded with a fall in the GDP growth. It also shows that after every collapse, tourism lifted the economy up. This was most visible in 2006 when tourism leapt by 47.4 per cent and lifted GDP with it by 24.5 per cent. Each time the economy bounced back quickly, thanks to the resilience of the tourism sector. This is unsurprising because tourism is by far the largest contributor to the economy as is demonstrated in Chart 2. In 2018, the latest year for which sectoral GDP is available, tourism accounted for 25.2 percent of the GDP. For the length of time between 1995 and 2018, the average share of tourism in annual GDP was 26.9 per cent. Tourism contributed more than twice the share of transport and communication, which itself is largely dependent on tourism. The third largest contributor to GDP in 2018 was trade (8.5 per cent), followed by real estate (6.7 per cent).

A simple estimate based on numbers for tourism and GDP growth rates between 1995 and 2018 shows a correlation of 0.94 between the two. While this author has long been an advocate of diversification of the economy to reduce the precarious reliance on the tourism industry (and it must be a priority public policy issue), the immediate challenge before the nation is to try and limit the impact of the crisis and revive economic activity. Support measures The government has announced a host of measures taken (or that will be taken) to support businesses and individuals. At macroeconomic level, these include measures committed to by the Maldives Monetary Authority, and at fiscal and microeconomic levels, those announced by the Ministry of Finance jointly with the Ministry of Economic Development (Box 1).

At times like these central banks must and do act as anchors to maintain economic stability. Their ability to do so, however, depends on the strength of their balance sheets. MMA’s balance sheet stood at MVR 18.5 billion (USD 1.2 billion) at the end of February (MMA, February 2020). In February 2019, it was MVR 23.5 billion (USD 1.5 billion), and in February 2018, MVR 19.4 billion (USD 1.3 billion). MMA’s balance sheet strength appears to compare well with comparable central banks. For example, Barbados Central Bank’s balance sheet stood at USD 1.1 billion at the end of 2019; that of the Reserve Bank of Fiji was USD 1.2 billion (latest: July 2019). Conventionally central banks use banks and other regulated financial intermediaries to pass on the benefits of their measures. In the Maldives, there has been at least one unconventional measure (selling foreign exchange directly to public, effectively a one-way money changer role) practiced by the central bank to address the persistent foreign exchange pressures. Whether this is permissible under law is perhaps a debate for later, and the MMA may consider going further and take more unconventional measures to avoid an economic collapse. The MMA should identify any required amendments of the MMA Act 1981, Banking Act 2010, and other law, and ask the government to urgently propose the required changes to the Citizen’s Majlis for immediate passage. It is not always the case that a central bank has resources to make the commitments themselves alone; they may require support from other financial institutions, yet, they cannot and must not ask an institution that they regulate. This leaves only foreign financial institutions including multilateral institutions and bilateral ones. The good practice is to seek support from global financial institutions, most obviously the World Bank, the International Monetary Fund and others whose mandates provide that they support economies experiencing or facing economic shocks. Bilateral sources may well be approached. Given the gravity of the current crisis and the uphill challenge the country faces to be able to withstand and recover from the current crisis, the following, among many possible others, may be considered.

Fiscal policy 1. Utilise resources available in the Sovereign Wealth Fund. 2. Consider easing taxes as a time-bound stimulus. 3. Shelve plans to impose minimum wage and any other planned taxes until economic growth is restored at a sustainable level. 4. Seek debt forgiving (in total or partial) and refinancing from existing creditors. 5. Reduce government expenditure in areas that would not have a significant impact on the government’s payments to the general public. For example, reducing the number of working hours of the government by two hours (for two months), cutting down on travel and budget contingency by half could save up to MVR 1.7 billion. These savings could be used to provide direct or indirect support and subsidies to people and businesses. 6. Seek financial support from international financial institutions and bilateral sources. Such support is being made available from multiple international financial institutions. For example, the World Bank has committed USD 14 billion to help sustain economies and protect jobs (The World Bank, March 2020). The Asian Development Bank has committed USD 6.5 billion as an initial response to the crisis (ADB, March 2020). The Islamic Development Bank has committed a “special ‘Strategic Preparedness and Response Facility’ of USD 730 million to mitigate the negative health and socio-economic impact of the COVID-19 pandemic” to support its member countries (IsDB(a), March 2020). IsDB commits that “The facility will extend financing to both the public and private sector in minimizing the spread and impact of the pandemic in IsDB member countries and to build their resilience. Financing will be extended in the form of grants, concessional resources, trade finance, private sector lending and political and risk insurance coverage. The IsDB Group will deploy all the available financing instruments to channel the funds in a fast track manner to support its member countries”. In a second announcement by IsDB President, the organisation committed to a response package worth up to USD 2 Billion (IsDB(b), March 2020).

Monetary and exchange rate policy 1. Seek financial assistance from international financial institutions and bilateral sources as support against pressures on balance of payments and the currency. The IMF has arranged to make about USD 50 billion through its rapid-disbursing emergency financing facilities; of this, $10 billion is available at zero interest for the poorest members through the Rapid Credit Facility; these rapid-disbursing emergency financing facilities are available to low income and emerging market countries (IMF, March 2020). Governments sometimes do hesitate to seek IMF support due to stringent conditions attached to it. There are times that IMF support really helps. For example, if a country wishes to issue a sovereign bond in the international money market, or if it seeks support from another international financial institution or even a bilateral source. This time around, conditions might not be so stringent. 2. Intervene in the foreign exchange market to manage demand. (Being done.) For such interventions to have a meaningful impact on successfully maintaining stability in the foreign exchange market, the intensity of the intervention is key. As an indication of the economy’s foreign exchange needs, some USD 351 million is required per month for importing goods and services. According to the latest available figures, MMA’s usable reserves stand around USD 310 million. This covers 1.3 months of import of goods, and 0.9 months of import of goods and services. An important factor to keep in mind is that as the economy slows down due to the crisis, the amount of foreign exchange required is also likely to decline, thus making it hopefully less demanding to authorities to manage the situation. The MMA has usually refrained from imposing other direct measures. There may be instances where direct foreign exchange measures may be deemed as appropriate by authorities. For example, the Central Bank of Sri Lanka has imposed three direct measures in response to the COVID-19 crisis: (i) suspension of facilitation [by banks] in importing motor vehicles; (ii) suspension of facilitation [by banks] in importing non-essential goods; and (iii) suspension of the purchase of Sri Lanka International Sovereign Bonds by banks in Sri Lanka (Central Bank of Sri Lanka, March 2020). 3. Consider lowering the minimum reserve requirement to 0 if the necessity to pump in more liquidity into the financial system arises. 4. Reduce the overnight deposit facility rate to 0-0.25 per cent and the Lombard facility to 0-5 per cent. This is to be more a signaling measure. Financial sector 1. Relax asset classification requirements and single borrower limits to a level commensurate with the current crisis, or provide for exceptions to allow financial institutions to support businesses. 2. Introduce a moratorium on mortgage and commercial loan repayments. (This is being done.) 3. Cap lending rates at a commensurate level for a fixed period. 4. Monitor and support the insurance industry. Government administration 1. Ease administrative measures on businesses and individuals in access to services such as application for business and other registrations, tax payment and reporting, and other requirements that act as shoe leather costs to firms and individuals. This crisis may be taken as an opportunity to introduce more e-government services so that over-the-counter demand for services at government institutions can be reduced to a minimum and speed up the government’s service delivery. Concluding thoughts The above measures should only be phased out gradually at the opportune times. In crisis situations, policy makers and public officials must rise above conventional thinking and be prepared to be creative and bold. To maintain the government’s fiscal ability to commit to expenditures on the one hand, and to raise resources to fund those commitments is always a precarious balance. In a crisis like the one we are currently going through, everyone (the government, industry, businesses, other organisations, individuals) must take a fair share of the burden. However, it is governments that should shoulder the greatest burden. Nonetheless, there must also be a restraint on expectations on the government.

This crisis has also highlighted once again, at best, the existing inadequacies in the hitherto practiced global economic system, or at worst, its unsuitability for the current century. Perhaps a more pragmatic view might be that while the system is far from perfect and in the absence of a proven alternative, life has to go on, fixing the inadequacies of the existing system as we go along