What about the economy and finances after the blockade by Covid-19?ALTax
The closure measures after COVID-19 that are being implemented in Europe and in the world have quarantined the trade, which includes the export that results as the first shock in the economy. Tectonic crisis plates are moving in complex ways. COVID-19 is the main cause of crises, implying significant sacrifices in terms of keeping the economy at levels close to zero. Currently, over half of global GDP is in a very strange kind of blockage, thus creating also serious effects for Albania’s trade relations with big partners countries such as Greece, Italy and Germany.
The first month of the crisis has already shaken massively all sectors directly in communication with customers. As the weeks go by, it is expanding rapidly in those businesses, which are related to businesses that have not direct communication with customers. These sectors include accommodation, health services, other services, and retail trade, as well as transportation, energy and food processing.
The second month of the crisis is shaking the most financially fragile businesses, due to their exposure to liquidity risks. This second shock particularly weakens the energy sector and exports as a whole, including tourism.
The current period of crisis is increasing the risk of shortage and drying up of financial resources in all sectors. The least exposed and most resilient sectors to this crisis are telecommunications, pharmaceutical and IT services, including those services that have the ability to operate at home or operate by ordering to the customer.
The money supply signals very strong financial conditions for businesses. The sudden ban on the physical circulation of people, goods, services and money are the challenges that this blockade poses for the effectiveness of monetary policy have perverted every market actor. Financial stability is already reentering in difficulty again. After a cessation of liquidity flow, all groups of society are constantly affected and at an increasing rate of uncertainty.
The Albanian government is focused on easing the severity of the cash flow crisis (liquidity). The fiscal policies that have been declared and approved have been addressed to: (i) mitigate the pressures of the flow of business money through credit lines with sovereign guarantees, as well as postponing taxpayers’ spending to the budget and public companies (taxes, energy interest rates unpaid on time, various public services, etc.), as well as (ii) supporting family income by strengthening social security and implementing income subsidies. Public institutions are continuing to support families, firms and the labor market.
Monetary policy has begun to move away from its routine normality by attempting extraordinary measures and lowering the loans interest rate. Fiscal and monetary measures want to ease the shock wave of the recession.
While this is essential for a strong recovery, there is considerable uncertainty about what the economic landscape will look like when we emerge from this deadlock. Loss of employment will particularly affect temporary contract workers as well as employees themselves. Countries with limited fiscal space, as well as Albania, will seek assistance from the IMF and the World Bank, which in turn have announced that they will remain ready to support countries affected by COVID-19.
Just a few days ago, the Monetary Fund declared its readiness to provide € 174 million in aid for emergency support and public finances. The Council of Europe has also provided soft loan of 180m euros to limit the economic consequences of COVID-19.
In Europe, in principle, there is less room for aggressive monetary policy, as interest rates are already low and even real interest rates are negative in many countries. However, central banks have begun to lower rates, and some have also announced quantitative easing.
However, instead of aiming for cash assistance for businesses that have declared a liquidity crisis this time around, a right policy is to inject money directly into the touchable economy chain that works for export, as well as the ones that carries the bulk of employment. If so, there may be less inflation of raw material prices for export products, but there may be more inflation in the commodity and services markets. This new architecture may explain why the financial market does not have any uncertainty displayed at these times, at least given the recent movements of the central bank.
The difficulty in reviving the economy, may be the new approach, which is based on cooperation, transparency and precision in putting those parts of the circulation chain that need to be unlocked to put in place. on the move export. In fact for Albania, not being an industrialized economy, but rather an economy based on trade and services, of course, the current economic blockage will not have the effects that economics and finance experts discuss for developed countries.
But how did fiscal measures and the implementation of budget consolidation affect before the crisis?
The negative effects of growth tendency of economy signaled first with low level of consumer demand at least until 2 years ago. The slowest economic activity has led to weaker and uncertain budgets in the implementation phase. On the one hand, the basic interest rates from the Bank of Albania have followed the downward curve in the last 6 years. On the other hand, capital expenditures of the budget have maintained almost the same level to GDP. Reducing budget expenditures to GDP has given an impact on reducing the budget deficit by at least 2.2 percentage points. Economic growth has had a moderate climbing curve and in the past year, declining consumer demand and the impact of a lack of domestic investment have had a declining impact of at least 1.5 percentage points.
In these conditions, where fiscal governance is problematic even without the current health crisis, there is a need to study and communicate with experts on other ways to recover the economy, in addition to the declared economic plans until now from government.
When it comes the discussion to economic recovery, the government has two main tools at its disposal: monetary stimulus and fiscal stimulus. Although these approaches are not the only options that a dedicated government can implement, in reality most economic aid packages in different countries are being oriented in these two categories.
If a proper solution is to be considered fiscal stimulus in the first place it is necessary for policy makers to agree, but in the second place it must be required that it take the form of creating new stabilizers.
From the information provided until now for the public, the Government is not really looking for fiscal stimulus, as an address to the expected situation. But if it does, on the one hand it is a good idea and on the other hand, in fact is not so good, because it has limited fiscal space, especially because of previous experiences that did not help stimulate and recover the economy as expected.
The fiscal stimulus has historically been successful in preventing or recovering economic decline. Consumers have (or are expected to have) a little money on hand these days, so they can’t buy products or services.
The government can replace this missing money by directly lending to subsidies businesses that are directly related to employment (massive consumers) and maintaining productivity in exports, or even by seeking cooperation with the Bank of Albania to launch a previously unseen policy of quantitative easing. Although this seems quite difficult to implement for Albania, this cannot be a reason not to engage some efforts, at least at the level of a comprehensive analysis and policy formulation.
The fiscal stimulus was in some ways welcome to occur when the government was directly involved in starting infrastructure projects some years ago. However, a negative fiscal situation and debts to be paid to businesses for public works done, among other things, did not allow to move towards fiscal stimulation, through increased public spending. On the other hand, the reduction of personal income tax rates and small business tax was implemented with confusion in the business environment, as well as with the non-reduction of the level of corruption.
Meanwhile, the monetary stimulus to date has no official information. So, there is no information that new money has been thrown into the economy or an increase in the possibility of easy business lending. Although basic interest rates have decreased year after year, this policy, uncoordinated with fiscal policy, has not lowered cost of loans from the previous period, at least according to surveys and declarations by the business itself.
Anyhow, if the money is not printed, it must come from somewhere, which means that (a) internal or external borrowing will be taken, (b) certain taxes will be increased and (c) less expenditure will be attempted. If the government borrows from the citizen, this is money that is not spent by the citizen or by the private sector.
Meanwhile, during the last 5 years, additional money has been injected into the economy, through the Eurobond and the receipt of some interest-bearing loans from public enterprises, mainly in the electricity sector. On the one hand, this policy has operated at the level of the ceiling of the public debt ceiling, always creating stress in the financial market. But even that hasn’t made money cheaper to reduce the cost of doing business. And in the meantime, the instability and lack of capacity to fight evasion and limit informality also play a role.
In this case, monetary policy should be revived and put amounts of money in the hands of people in need through reductions in minimum levels of lending costs, but especially by applying quantitative easing policies for the first time. By making loans cheaper or if injected through additional quantitative capital relief, the government will try to make it easier for businesses and consumers to spend money.
In short, fiscal stimulus if pursued in practice according to a co-ordination of monetary and fiscal policies can replace the business activity lost during this complex health crisis. If it works, the government continues these spending until consumers regain sufficient confidence and spending power to support demand without interference.
The politicians do not seem to be currently concerned about the short-term effects of this economic stalemate. But, when the crisis is over and the accumulated debt has increased, it will be a problem, as we will start spending extra money to pay for the service of this debt. In other words, we will be called again to tighten the belt for public spending on the great needs that the whole life of the country has.
So, the solution is not just a program, a policy or a recovery plan and some government and parliamentary structures to oversee all of this.
Of course, the recovery program can be valuable. The fiscal policies can help the consumer demand side by directly helping businesses and hiring people. But on the other hand, it must intervene directly (even in the case of the announced amnesty) in the balance sheets of the private sector, in order to consolidate and repair them from mutual debts between businesses, but also from various legal and financial issues carried in years.
But implementing these approaches requires a political consensus to have a moratorium on paying off debts between businesses and their balance sheet system.
Effective multilateral cooperation between government-civil society-private sector is vital to the country’s economic health and recovery.
Where can we go?
Increase debts but with limited fiscal space, quantitative easing with implementation problems or expect the IMF and EU support?
The fiscal and monetary response together not only address weaknesses in the financial and economic sectors, but can also stimulate domestic demand to stop further weakening of economic activity and the well-being of citizens.