The case for stimulus packages

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One does not need to be an economist to appreciate the difficulties brought by COVID-19 to national and household economies.

The pandemic has created an environment where governments have had to shelve their broader economic plans and simply focus on mitigation and containment.

The economic objectives nations generally contend with can be categorised within the domains of fiscal consolidation, internal price stabilisation, trade balancing, infrastructure development and positive economic growth.  

Firstly, fiscal consolidation can hardly be implemented as governments have had to expend unbudgeted expenditure on health.

Governments have had to channel money they did not have towards medical and personal protective equipment, quarantine facilities and related expenditure tied to combatting COVID-19.

Moreover, many governments have had to increase – and in some cases introduce from scratch - welfare and social protection grants to help households augment depleted incomes and stimulate consumption.

While spending more on unbudgeted items, governments have seen their revenues declining because of lower tax collections from individuals, companies and exports.

As such, fiscal deficits/imbalances are set to grow because of COVID-19.

On top of this, the novel coronavirus has disrupted distribution chains.

The movement of goods and services has been thrown into chaos and business cannot be conducted as usual. This is something governments and the private sector had not planned for.

This means governments and companies have had to incur losses from the inability to provide goods and services as they were accustomed to, as well as to spend unbudgeted money on alternative ways of moving goods and providing services.

The effect of this is that prices go up as governments and the private sector try to absorb the cost of suddenly doing things in a new way.

Where prices do not go up, there can be a shortage of goods and services, which in itself is another economic headache. In essence, countries now have to choose between inflation and disruption in the supply goods and services.

But that is not all.

People have to contend with reduced revenue from exports because of the supply disruptions and attendant inflationary pressures.

For countries that have historically been net importers, this means bigger import bills and widens trade deficits, which is a real possibility for emerging economies such as those in Southern Africa.

What all of this amounts to is reduced spending on planned development infrastructure, or in the worst case scenario, a total freeze on such capital expenditure by public and private sector entities.

GDP will drastically decline due a reduction in disposal income and consumption. Additionally, there is the possibility of the “crowding out effect” as governments increasingly borrow, leaving little money for private sector credit, which also means less exports.

The bottom line is there is an urgent need for well-structured, robust stimulus packages that factor in the short, medium and long-term needs of both companies and households.

 

Lukas Kumonika is an Economics tutor with the University of Namibia in Windhoek

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