Wednesday, April 1, 2020

Impact of COVID-19 in East Asia and the Pacific

In its latest East Asia and Pacific Economic Monitor (April 2020), the World Bank argues that COVID-19 presents an unusual combination of disruptive and mutually reinforcing events, and that significant economic pain seems unavoidable in countries with excessive indebtedness. It presents an unusual combination of a supply and demand shock due to the preventive behavior of individuals and the transmission control policies of governments. 

Three types of activities are immediately affected: (i) collective high-density production (workers work closely together in manufacturing factories); (ii) collective high-density consumption (services activities such as sport, music, restaurant, travel, etc); and (iii) proximate production and consumption (suppliers meeting consumers activities such as personal care, health care, restaurants, retails, etc). 

The immediate effect was first on the Chinese economy, where lockdown and transmission control policies disrupted supply and froze demand, and affected other countries through flows of trade and tourists. As the virus spread beyond China, other governments took similar actions, leading to severe dent in demand and supply. This is amplifying the mutual shocks through trade and tourist flows, and finance stress. 

Under a baseline scenario, developing EAP growth is projected at 2.5% for 2020, but -0.5% under lower case scenario. PRC’s is expected to grow at 2.3% and 0.1%, respectively under the two scenarios. Baseline refers to a scenario of severe growth slowdown followed by a strong recovery. Lower case refers to a scenario of deeper contraction followed by sluggish recovery. 

The COVID-19 shock will also have impact on poverty and welfare through illness, death and lost incomes. Under the baseline scenario. About 24 million fewer people are estimated to escape poverty across developing EAP in 2020. However, under the lower-case scenario, poverty is estimated to increase by about 11 million people. Poverty rate refers to US$5.50 per person per day (2011 PPP) threshold. 

Effect on households is country-specific: households in Vietnam linked to manufacturing reliant on imported inputs will see poverty rates double but households depending on tourism income will be the hardest hit in the Pacific Islands. Developing EAP refers to Cambodia, China, Indonesia, Lao People’s Democratic Republic (PDR), Malaysia, Mongolia, Myanmar, Papua New Guinea, the Philippines, Thailand, Timor-Leste, Vietnam, and the Pacific Island Countries.

The WB recommends countries to flatten two kinds of curves: (i) flatten the pandemic curve by limiting transmission through lockdowns and travel bans, and (ii) flatten the recession curve by taking appropriate monetary, fiscal and structural measures. It also recommends augmentation of health capacity to fulfill potentially overwhelming demand. 

On macroeconomic policy, it argues that an expansionary policy is less effective given that the lockdown and social distancing limit production and employment. So, fiscal measures should initially focus on social protection to cushion against shocks, especially for the most economically vulnerable. These include subsidies for sick pay, expenditure on healthcare, expanded safety nets, cash and in-kind transfers when the informal sector is large, schooling feeding programs, and employment support to reintegrate into the economy among others. These would help to limit long-term human capital losses due to temporary deprivations. Also note that marginal propensity to consume of low-income households is reasonably high. 

On financial sector, it recommends easier access to credit for households to smooth consumption, and easier access to liquidity for firms to help them survive the disruption. However, regulators should ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially when debt levels are high. For low-income countries, debt relief will be essential. 

On trade policy, the recommendation is to stay open and not resort to export restrictions, especially export of coronavirus-related medical products. 

IMF enhances debt relief trust to support low-income countries

The IMF enhanced its Catastrophe Containment and Relief Trust (CCRT) to enable the Fund to provide debt service relief for its poorest and most vulnerable members. The CCRT enables the IMF to deliver grants for debt relief benefitting eligible low-income countries in the wake of catastrophic natural disasters and major, fast-spreading public health emergencies. 

The IMF now allows all member countries with per capita income below the World Bank’s operational threshold for concessional support to qualify for debt service relief for up to two years. This would apply when a life-threatening global pandemic is inflicting severe economic disruption across the Fund’s membership and is creating balance of payments needs on such a scale to warrant a concerted international effort to support the poorest and most vulnerable countries.

The COVID-19 pandemic is bound to create balance of payments crisis (declining exports, remittances, FDI, etc) and fiscal stress (lower revenue, higher expenditure) in some low-income countries. 

Tuesday, March 31, 2020

Policy response to the COVID-19 economic impact

The IMF has a note on policy steps to address the COVID-19 crisis. It underscores the critical role of monitoring and containment measures to slowdown the spread of the virus and to lower the load on health systems. It calls for decisive and coordinated policy action to ensure global economic and financial stability.

Monitoring and containment measures
  • Ensuring sufficient paid sick leave will help to curb contagion
  • Targeting health interventions to reach informal sectors 
  • Systematic testing is essential along with ramping up public health expenditure
  • Coordinated industrial response to medical supplies production and to reduce negative cross-border spillovers from excessive hoarding

Monetary policy
  • Ease liquidity and funding stress through rate cuts, OMOs, expanded term lending, outright purchases and repo facilities (to also reduce borrowing costs for households and firms) 
  • Forward guidance about expected path of monetary policy, and expansion of asset purchases (including risky assets)
  • Temporary targeted measures to support hardest hit sectors
  • Balance cushioning growth with tackling external pressures, including commodity price shocks and capital flow reversals, in emerging and developing economies. Capital flow measures may need to be deployed for a temporary period. 

Fiscal policy
  • Provide sizable support for affected people and firms. These include wage subsidies for businesses to prevent bankruptcies and massive layoffs, and cash transfers to low-income households
  • Broad-based fiscal stimulus to support aggregate demand. These include boosting investment and economy-wide tax cuts (depending on fiscal space). Impact of broad fiscal stimulus may be small until the COVID-19 outbreak fades because of large supply disruptions.
  • A coordinated and synchronized global fiscal stimulus to enhance confidence as low-income countries with limited domestic policy options depend critically on global growth. Some LICs face multiple shocks on external demand, terms-of-trade, and financing conditions. Also, they are constrained by high debt and limited monetary or exchange rate flexibility. This calls for growth-friendly spending adjustments and financial support (especially timely concessional financing).

Regulatory and supervisory regime
  • These should be geared to maintaining the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.
  • Borrowers’ capacity to service loans will get affected, and banks will see earning plummet. Renegotiation of loans for stressed borrowers may be appropriate. But, easing of loan classification and provisioning rules will affect measurement of NPLs and potential losses.
  • Transparent risk disclosure and clear communication of supervisory expectations on dealing with the implications of the outbreak will be important. 
  • Banks should draw upon existing buffers to absorb cost of restructuring. Enhanced supervisory reporting could be introduced to monitor liquidity strains.
  • Subsidies and tax relief aimed at smaller borrowers, and credit guarantees and asset purchases programs are useful. It can be done through capital injections and broad deposit guarantees. 

Global coordination and cooperation
  • Determined and coordinated actions by those with greater policy strength will serve as a public good for all others
  • Policy responses need to be tailored to existing administrative systems and capacity, including more attention to delivering assistance to hard-to-reach regions and communities. 
On the ongoing policy response tracker, here is one by the IMF and the OECD

Monday, March 30, 2020

NRB facilitates liquidity injection and unveils relief package

Nepal Rastra Bank has announced a series of measures to alleviate the impact of COVID-19 on businesses and banking sector. Here are the major highlights:
  • Loan installment payments postponed till mid-July 2020. Banks cannot impose penal interest or downgrade any loans for delays in repayment. If borrower pays by mid-April, then banks need to provide 10% exemption on interest. 
  • BFIs can extend repayment deadline of short-term working capital by 60 days. Application from tourism and transport sectors for short-term working capital needs to be processed within five days. They should not be charged feed exceeding 0.25% of the loan amount.
  • Prioritization of refinancing facilities for MSMEs.
  • Potential migrants who cannot go overseas for work and want to start own business, then loans extended to them by BFIs can be counted as deprived sector loan. 
  • CRR has been reduced by 100 bps to 3%. NRB says this will add NRS35 billion liquidity into the banking sector.

Nepal government announces economic package to address the impact of COVID-19

A Cabinet meeting on 29 March 2020 took a number of decisions to alleviate the impact of COVID-19 on households. These pertain to social protection, subsidy, employment, and compliance relief. There still is not much in terms of relief to MSMEs hit by COVID-19 pandemic. 

Here are the major highlights:

Food subsidy and quarantine
  • Local governments are responsible for supplying food to the needy and quarantine. For this they will have to prepare data on unorganized sector workers and establish fund to provide relief for them during the lockdown period. 
  • In case of insufficient funds, they can request budget from the central government. Households have to register their names at respective ward offices to get relief.
Employment protection
  • Employers are ordered to pay salaries of employees during the lockdown period. They can use welfare funds to make payments until the resumption of business. 
  • Nepal government will deposit SSF contribution by both workers and employers for the month of Chaitra (mid-March to mid-April).
  • Migrant workers who returned back but could not go again may register at employment service center at local level to avail employment opportunities through PM employment program.
Other measures
  • Exemption of one month of house rent if landlords exempt one month’s rent for workers in unorganized sectors. 
  • 10 percent discount on food items at government operated food companies
  • 25 percent discount in internet and electricity up to 150 units. Deadline for utility bill payment extended till May 13. Similarly, tax payment deadline has been extended till May 7. Vehicle registration and driver’s license renewal deadline extended till May 13.
  • NRs 2.5 million free insurance for medical personnel
  • Private schools must exempt all fees up to secondary level except boarding for a month
  • No customs duty for any government, private and community sector importing medical equipment
  • Import limit to prevent rapid depletion of forex: 10kg gold import limit; bank on vehicles worth over US$50,000; bank on import of betel nut, black pepper, peas among other
  • Procurement agreements and bank guarantee time extended by a month
Budget management
  • Government will use existing funds from the budget and those collected by the three tiers of government under various relief funds.
  • Government will accept NRs 3.48 billion concessional loan from the WB, NRs13.9 billion no-interest loan from the IMF, and US$50 million aid package from the ADB
The biggest challenge is on implementation right now. A majority of these packages are open-ended and lack ascertained budget. 
  • Given the lockdown, how are affected people going to go to local governments to register to get relief. Also, how ready are local governments on this regard? Who is going to identify a particular households as needy/poor?
  • Nepal’s public distribution system is in a shamble. The idea of selling lower priced goods from its stores is not going to much effective. Also, what about mobility restriction to reach the stores?
  • Tax exemption on rent is not a good enough incentive to encourage landlords to exempt rent of tenants. Tax on rent is far less than the rent amount.
  • The PM employment fund is not that effective. It remains to be seen how many workers will actually register for employment under the scheme.  
  • Many companies do not have their own welfare funds as they are required by law to make deposits in SSF.

Friday, March 27, 2020

RBI facilitates liquidity injection and relaxes regulations to boost Indian economy

A day after the Indian government announced about $23 billion of economic package (about 0.9% of GDP) consisting of cash transfers, food subsidy and employment protection, the Reserve Bank of India (RBI) has now added more to the stimulus package. The RBI has reduced policy repo rate and have maintained an accommodative monetary policy without jeopardizing inflation target. These monetary measures are expected to improve liquidity, reduce cost of funds and help businesses. According to the RBI, these measures will help inject an addition 1.8% of GDP equivalent of liquidity (combined with previous 1.4% of GDP from previous measures, the cumulative comes out to be 3.2% of GDP).

Here are the highlights of MPC’s decisions published today:

Policy rates

Policy repo rate, which is the rate of interest charged by RBI on the repurchase of securities, reduced by 75 basis points to 4.4%. It is a mechanism to increase liquidity in the market as commercial banks can now borrow money by selling their security to RBI at a lower rate.

Reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, was reduced by 90 basis points to 4%. Reverse report rate is the rate at which RBI borrows money from commercial banks. It is a mechanism to absorb liquidity from the market and lowering reverse repo rate means not limiting liquidity from the market. Banks find it relatively unattractive to park money at RBI if reverse repo rate is lower.

Liquidity facilities

Targeted long-term repo operations: Reserve Bank will conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to ₹ 1,00,000 crore at a floating rate, linked to the policy repo rate. Exposures under this facility will also not be reckoned under the large exposure framework.

Cash reserve ratio: CRR of all banks has been reduced by 100 basis points to 3% of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28, 2020 for a period of one year. The requirement of minimum daily CRR balance maintenance has been reduced from 90% to 80%. Available up to 26 June 2020.

Marginal Standing Facility: Increased the accommodation under the marginal standing facility (MSF) from 2% of the statutory liquidity ratio (SLR) to 3% with immediate effect. Applicable till 30 June 2020.

Monetary policy rate corridor: Widened the existing policy rate corridor from 50 bps to 65 bps. Now, the reverse repo rate under the liquidity adjustment facility (LAF) would be 40 bps lower than the policy repo rate, as against existing 25 bps. The marginal standing facility (MSF) rate would continue to be 25 bps above the policy repo rate.

Regulation and supervision

RBI has eased regulation and supervision concerning moratorium on term loans; deferring interest payments on working capital; easing of working capital financing; deferment of implementation of the net stable funding ratio; and the last tranche of the capital conservation buffer.

Moratorium on term loans: The moratorium on term loans and the deferring of interest payments on working capital will not result in asset classification downgrade.

All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. 

Interest deferment: Lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.

Easing of working capital: Lending institutions are allowed to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes will not result in asset classification downgrade

Compliance deferment: Implementation of net sable funding ratio and last tranche of capital conservation buffer are extended by around six months. NSFR reduces funding risk by requiring banks to fund their activities with sufficiently stable sources of funding over a time horizon of a year in order to mitigate the risk of future funding stress. CCB is designed to ensure that banks build up capital buffers during normal times (i.e., outside periods of stress) which can be drawn down as losses are incurred during a stressed period.

Earlier, RBI had also reduced policy repo rate in response to the slowdown in the economy; rolled out USD buy/sell swap auction; purchased in the open market, launched Operation Twist to ensure better monetary policy transmission through open market operation of government securities; engaged in LTROs; and exempted incremental retail loans for MSMEs, residential housing and automobiles from the maintenance of CRR, among others. These were all geared toward maintaining liquidity in the market. 

The central bank maintains that the outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. The second advance GDP growth estimate of 5% now looks unfeasible. The intensity, spread and duration of the COVID-19 pandemic will dictate FY2021 outlook (besides the resilience of agriculture and allied activities). However, slump in international crude prices will provide some relief in the external sector. 

The EIU has already downgraded India's GDP growth forecast for FY2021 to 2.1% (from 6%). 

The weakening aggregate demand and robust agricultural output (notwithstanding the onion price shock) would mean lower inflationary pressures in the economy. 


Thursday, March 26, 2020

INR 1.75 trillion economic package in India to address the impact of COVID-19

Indian finance minister Niramla Sitharaman announced an economic package of INR 1.75 trillion (about US$23 billion at 1 USD = INR 75.4 exchange rate) today to address the impact of COVID-19 on the economy. It is mostly augmentation of existing social protection measures. It is tagged as ‘Pradhan Mantri Garib Kalyan Package’. The package amounts to 0.9% of GDP (FY2020RE) and includes:
  • Insurance scheme for healthcare workers fighting COVID-19 in government hospitals and healthcare centers
  • EPF payment of employees who earn less than INR 15,000 per month and work in companies with less than 100 employees
  • Cash transfers:
    • Each farmer gets INR 2000 in April 2020 as an advance installment from PM-KISAN scheme (total INR 16,000 crores or US$2.13 billion). [Each farmer owning a land gets INR 6,000 per year under the scheme] 
    • INR 31,000 crore (US$ 4.12 billion) under PMJDY women account-holders (INR 500 per month for the next three months)
    • INR 13,000 crore (US$ 1.73 billion) worth of cooking gas cylinders to 80 million households for the next three months (one each month)
    • INR 5,000 crore (US$ 0.66 billion) to prevent job losses in organized sector (govt to pay 24% of monthly wages into their PF accounts for the next three months)
    • INR 3,000 crore (US$ 0.4 billion) for senior citizens (INR 1000 per month for the next three months to about 30 million aged widows and people in Dviyang category)
  • Food subsidy:
    • INR 40,000 crore (US$ 5.31 billion) to double entitlements of food grains (5 kg rice extra) for the next three months to 800 million people
    • INR 5,000 crore (US$ 0.66 billion) to provide one-kilogram pulses per family for the next three months
  • Employment protection: INR 5,600 crore (US$ 0.74 billion) to cover increase in MNREGA wages (by INR 20 with effect from 01 April 2020) to benefit 136 million households. Wages per day will now become INR 202.
  • Other measures
    • Allow non-recoverable advance of 75% of amount or three months of wages from EPF accounts. 40 million registered families to benefit from this
    • Collateral free loans of INR 2 million (up from INR 1 million) to women organized 6.3 million self-help groups 
These measures are on top of the previously announced measures to help the business sector (mostly compliance relief) and state-specific measures.

Sunday, March 22, 2020

How does COVID-19 affect the economy?

The economic impact of COVID-19 is still an evolving topic. One thing for sure is that it will be a combination of supply and demand shocks and followed by a financial shock. A complex vortex of these three shocks will complicate policy response. Unconventional monetary as well as fiscal policies are required for quite some time. The most effective fiscal response for the immediate-term are those geared to boost consumer demand such as direct cash transfers to those losing jobs or facing reduced working hours. Similarly, any facility to improve cash flow or to cushion against rising debt of MSMEs is going to be a huge relief to businesses. This could be done through interest and principal moratorium, cheaper and easier line of credit, rapid on-lending facilities, government buy back of production for the interim period, tax incentives, etc. It will essentially be a combination of fiscal and monetary policies. 

Here some articles related to the underlying emerging economic dynamics and how to resolve it. 

1. Baldwin presents widespread disruption depicted through a circular flow of income diagram.

2. Fornaro and Wolf present a simple framework that shows how a demand-driven slump gives rise to a supply-demand doom loop, opening doors to stagnation traps induced by pessimistic animal spirits. The COVID-19 pandemic induces expectation-driven stagnation traps.


It follows a standard New Keynesian model where aggregate demand determines output and employment. So, aggregate demand depends positively on productivity growth as faster productivity growth boosts agent's expectation of future growth and induce them to spend more now. If the COVID-19 pandemic reduces productivity growth, then aggregate demand falls, resulting in involuntary unemployment and a demand-driven recession. However, since investment depends on aggregate demand (which remains suppressed in the face of slower productivity growth), firms will have less incentives to invest. This creates demand supply doom loop. Furthermore, if there is zero lower bound constraint on monetary policy, then an economy faces a kinked aggregate demand curve. A reduction in productivity growth (GG curve shifts downward) means lower productivity growth (g) and employment (l). Eventually, pessimistic animal spirits push the economy into a stagnation trap (lower equilibrium). Against this backdrop, conventional monetary policy is ineffective. Fiscal policy that is geared to boost aggregate demand (which incentives investment and leads to higher productivity) is helpful.


Jordi Gali argues that the time has come for helicopter money- direct, unrepayable funding by the central bank of additional fiscal transfers deemed necessary. It puts less burden on fiscal policy (if taxes are raised or government debt is increased).

The pandemic is reducing consumption of goods and services, which will hit GDP growth. It is also leading to a significant reduction in employment (which then lowers income and consumption). Firms may try to keep payroll unchanged but keep meeting other fixed costs (rent, interest, etc) by taking loans. But, banks may not lend more due to the probability of default and deterioration of balance sheets. This requires a swift and well targeted policy response. 

Government could cover payroll and other unavoidable expenses of affected firms. Ideally, this must be non-repayable transfer. But, this means government will have to raise taxes or to borrow from capital markets and increase debt burden. Gali argues that quantitative easing, a massive purchase of newly issued debt by central bank, could be helpful but this increases government debt too, putting public finances in unsustainable path. He proposes ‘helicopter money'- unrepayable funding by the central bank of the additional fiscal transfers deemed necessary. The central bank simply credits the government's account and it adjusts accounts by showing a reduction in its capital or insert a permanent annotation on the asset side of the balance sheet. This should be used only during emergencies. 

Friday, March 13, 2020

Economic crisis ensuing medical shock and flow of income

Richard Baldwin has a nice post on VoxEU on the effect of COVID-19 medical shock on economic crisis. He argues that this economic crisis is different because it has hit all the G7 economies and China at the same time and from multiple fronts. Here is his depiction of the famous circular flow of income diagram and how the medical shock is disrupting flow of goods & services and money. 
   
There is a combination of a supply and a demand shock. It is leading to expectations dampening and hysteresis. Bond prices and stock prices are moving in the same direction (not usual) and normally liquid assets are freezing up. Even gold futures have been falling. Risk averse behavior of households and business across investment and saving assets. Gripping uncertainty. 

Thursday, March 12, 2020

कोरोना भाइरसपीडित अर्थतन्त्र

यो विचार फाल्गुण २७, २०७६  गते नयाँ पत्रिका दैनिकमा प्रकाशीत भएको थियो.  English version is here



कोरोनाका कारण देखा परेको विश्वव्यापी आर्थिक मन्दीले हाम्रो कमजोर निर्यात क्षेत्रलाई झन् ठूलो धक्का पु-याउनेछ

कोरोना भाइरस प्रकोप (कोभिड-१९) ले क्षेत्रीय र विश्व अर्थ व्यवस्थामा गम्भीर असर पारिराखेको छ । भाइरसको महामारी कहिले रोकिने हो, ठेगान छैन । धेरै देशसँग त यसलाई जाँच्ने उपकरणसमेत अभाव छ । अहिले यस रोगको खोप पत्ता लगाउन वैज्ञानिक लागिपरेका छन् । छोटो समयमै विश्वव्यापी रूपमा फैलिएको यो भाइरसले दशकौँदेखि स्थापित आपूर्ति शृंखलामा अवरोध ल्याएको छ । 

यसले गर्दा विश्व अर्थतन्त्रमा मन्दी आउन सक्ने प्रारम्भिक पूर्वानुमान गरिएको छ । चिनियाँ सामान र पर्यटकको ठूलो महत्व रहेको हाम्रो अर्थतन्त्रमा सोझै नकारात्मक असर पर्ने देखिन्छ । चीनको हुबेई प्रान्तको राजधानी वुहानमा डिसेम्बर २०१९ मा भाइरस पहिचान भएको थियो । यसले चिनियाँ उत्पादन, आपूर्ति संयन्त्र र अर्थ व्यवस्थामाथि त गम्भीर चोट पु-याइसक्यो नै, भाइरसको विश्वव्यापी फैलावटबाट पैदा हुने अनिश्चितता र वैकल्पिक आपूर्ति शृंखलामा अचानक आघात आएपछि विश्वकै अर्थतन्त्र अहिले जोखिममा छ । विश्वव्यापी कारोबार हुने मध्यवर्ती उत्पादनको २० प्रतिशत चीनमा उत्पादन हुन्छ । सन् २००२ मा यो केबल चार प्रतिशत थियो । 

विश्वव्यापी आपूर्ति शृंखलामा कोरोना भाइरस महामारीको प्रभावबारे ‘युएनसिटिएडी’द्वारा गरिएको प्रारम्भिक विश्लेषणअनुसार सबैभन्दा बढी प्रभावित उत्पादनमा सटीक उपकरण, मेसिनरी, मोटरबाहन, सञ्चार उपकरण, विद्युतीय मेसिनरी, रबर र प्लास्टिक, छालाका सामान, धातु, कागज, पेट्रोरसायन र कपडालगायत पर्छन् । युरोपियन युनियन, अमेरिका, जापान, कोरिया र भियतनाम यसबाट सबैभन्दा बढी प्रभावित हुने अर्थतन्त्र हुन् । कच्चा माल र मध्यवर्ती सामान उत्पादनका लागि चीनमा निर्भर अन्य देश पनि प्रभावित छन् ।

यसबाहेक, कोरोना भाइरसको फैलावटका कारण श्रम, पुँजी र व्यापारमा अवरोध आउँदा धेरै देशमा उत्पादन क्षमता कम हुनेछ । ‘यसैगरी, प्रकोप विकसितहुने ट्रेन्डका आधारमा एशियाई विकास बैंकले विश्वव्यापी प्रभाव ७७ अर्ब डलर देखि ३४६ अर्ब डलरको बीचमा हुन सक्ने प्रारम्भिक आनुमन गरेको छ।  र्ती सामानको निर्यातमा दुई प्रतिशतको कटौतीले विश्वव्यापी पचास अरब डलरको उत्पादनमा गिरावट निम्त्याउँछ।

चार मुख्य प्रभाव

महामारीले सन् २००८ को विश्वव्यापी वित्तीय संकट र २०१० मा खाद्यान्नको मुद्रास्र्फीतिको भन्दा बढी नकारात्मक प्रभाव नेपाली अर्थतन्त्रमा पार्ने देखिन्छ । नेपाली अर्थव्यवस्था चार प्रमुख मोर्चामा प्रभावित हुने देखिन्छ । यसले आर्थिक वृद्धि र रोजगारीको अवसरलाई असर गर्नेछ । पहिलो, यात्रा र पर्यटन उद्योग, जुन २०२० मा अपेक्षित वृद्धिका लागि तयारीहुँदै थियो । 

यात्रा प्रतिबन्धले सन् २०२० मा नेपालमा  बीस लाख पर्यटक आगमनको आशा अब सपना मात्रै हुनेछ । पर्यटन पूर्वाधार र सेवाका आधारमा बीस लाख पर्यटक लक्ष्य सुरुमै अवास्तविक लक्ष्य थियो । बीस लाख पर्यटक आउने आशामा नयाँ स्थापना गरिएका, निर्माणाधीन र सञ्चालनमा रहेका होटेल र रेस्टुरेन्टका लगानीकर्तालाई ऋण नवीकरण गर्नुपर्ने समस्याले पिरोल्न थालिसकेको छ । 

चीनबाट सबै उडान निलम्बित छन् नै, अन्य देशबाट आउने पर्यटकमा पनि भारी गिरावट आएको छ । गत साल आएका बाह्र लाख पर्यटकमध्ये चौँध प्रतिशत चीनबाट आएका थिए । चिनियाँ पर्यटककै कारण मुलुकको पर्यटन क्षेत्रमा ‘अफ सिजन’ महिना नै घटेको थियो । वर्षभरि कारोबार चलायमान पारी आर्थिक गतिविधि र रोजगारी वृद्धि गर्न अहम भूमिका खेलेको थियो । भाइरसबाट संक्रमित हुने डरले अहिले पर्यटक आगमन ठप्पजस्तै छ । होटेलको औसत ‘अकुपेन्सी’ पैतालीस प्रतिशतभन्दा तल झरेको छ । 

अघिल्ला वर्षमा यो समयमा पचासी प्रतिशतभन्दा धेरै ‘अकुपेन्सी’ हुने गथ्र्यो । मुलुकमा आउने पाहुनामध्ये सत्तरी प्रतिशत छुट्टी र मनोरन्जनका लागि आउ“छन् भने आठ प्रतिशत पदयात्रा र पर्वतारोहण तथा पन्ध्र प्रतिशत तीर्थयात्रा गर्न आउँछन् । यात्रा र पर्यटन उद्योगमा गम्भीर प्रभावका कारण अन्ततः यस वर्ष सेवा क्षेत्रको वृद्धि अनुमान गरेभन्दा धेरै कम हुनेछ । यात्रा र पर्यटन क्षेत्रको प्रत्यक्ष योगदान (होटेल, ट्राभल एजेन्ट, एयरलाइन्स र यात्री यातायात सेवाद्वारा उत्पन्न आर्थिक गतिविधि) को अनुमानित कुल गार्हस्थ उत्पादनको चार प्रतिशतजति छ । यस क्षेत्रले पनि कुल वैदेशिक मुद्रा आयमा ६ प्रतिशत जति योगदान गर्दै आएको छ ।

दोस्रो, आयोजना कार्यान्वयन र समापनमा अवरोध आउनेछ । विशेषगरी, विमानस्थल, जलविद्युत्, सडक यातायातलगायत क्षेत्रका ठूला पूर्वाधार परियोजना समय र लागत वृद्धिका समस्याले पिरोलिनेछन् । केही चिनियाँ कामदार र प्रबन्धकलाई रोजगारी दिइरहेका चिनियाँ ठेकेदारले बनाइरहेका आयोजनामा समस्या देखिसकेको छ । जस्तैः नारायणघाट–बुटवल सडक सुधार परियोजना, रसुवागढी–स्याफ्रुबेँसी सडक परियोजना र काठमाडौं बाहिरी चक्रपथको विस्तृत परियोजना समीक्षालगायत कार्य प्रभावित भइसकेको सूचीमा पर्छन् । 

बिस्तारै अन्य आयोजनाले पनि कच्चा माल र मेसिनरी आभावका कारण समयमै सम्पन्न गर्न नसक्ने सकस व्यहोर्नेछन् । यसले सार्वजनिक पुँजीगत खर्चमा सोझै असर पार्नेछ । परिणामस्वरूप सिमेन्ट र डन्डी उद्योग उत्पादन कटौती गर्न बाध्य हुनेछन् । सरकारले पुँजीगत खर्च बाचा गरेझै बढाउने आशामा धेरै उद्योगले स्थापित क्षमतामा वृद्धि गरेका छन् । पुँजीगत खर्च सोचेभन्दा कम भयो भने ती उद्योग झन् समस्यामा पर्नेछन् । उदाहरणका लागि सिमेन्ट उद्योगको क्षमता उपयोग चालीस प्रतिशतमा झरेको छ । औद्योगिक र पर्यटन क्षेत्रमा उत्पादन र व्यापार कम भई बैंकको ऋण तिर्न नसक्ने अवस्थामा पुग्ने सम्भावना बढेको छ ।

तेस्रो, विश्वव्यापी आपूर्ति शृंखलामा चीनको केन्द्रीय भूमिका रहेको हुँदा प्रकोपले कच्चा माल र मध्यवर्ती सामानको आपूर्तिमा बाधा पु-याउँछ । नेपालका उद्योग तथा सेवा क्षेत्रले उत्पादन गर्ने मालसामानमा कच्चा माल, मध्यवर्ती वा तयारी सामानमा चीन निर्भरता धेरै छ । मुलुकको कुल व्यापारमा चीनबाट आउने सामानको पन्ध्र प्रतिशत हिस्सा छ । अरू देशमा चिनियाँ कच्चा माल र मध्यवर्ती सामान प्रयोग गरेर बनाइएका सामान पनि नेपाली उद्योगले प्रयोग गर्छन् । चीन निर्यात हुने शीर्ष वस्तुमा हस्तशिल्प, ऊनी कार्पेट, चाउचाउ र तयारी पोसाक पर्छन् । यस्तै, दूरसञ्चार उपकरण, तयारी पोसाक, विद्युतीय सामान, मेसिनरी पार्ट्स र रसायनिक मल चीनबाट आयात हुने शीर्ष वस्तु हुन् । विश्वव्यापी आर्थिक मन्दीले चीनबाहेक हाम्रा वस्तु र सेवाको मागलाई पनि कमजोर बनाउने पक्का छ । यसले हाम्रो कमजोर निर्यात क्षेत्रलाई झन् ठूलो धक्का पुग्नेछ ।

चौथो, ‘माइग्रेसन’ र रेमिट्यान्स प्रवाह प्रभावित हुनेछन् । सरकारले दक्षिण कोरियाजस्तो आकर्षक गन्तव्यमा बहिर्गमन निलम्बित गरिसकेको छ । त्यस्तै, खाडी देशमा वैदेशिक रोजगारीमा कडाइ गरेको छ । यी देशमा आपूर्ति र आर्थिक अवरोधका साथै विश्व आर्थिक मन्दीले लगानी घट्ने सम्भावना छ । यस्तो भयो भने हाम्रो रेमिट्यान्स आयमा ठूलो धक्का लाग्नेछ र बाह्य क्षेत्र झन् कमजोर हुनेछ । रेमिट्यान्सको आडमा धानिएको हाम्रो अर्थतन्त्रमा कत्रो धक्का लाग्छ, अहिल्यै अनुमान गर्न गाह्रो छ । यसका अलावा वित्तीय, मौद्रिक र बाह्य क्षेत्रमा पनि प्रभाव पर्नेछ । जस्तै, आयात कम हुनेबित्तिकै सरकारको राजस्व घट्छ । 

कर राजस्वको पैतालिस प्रतिशत त भन्सार र अन्तर्राष्ट्रिय व्यापारमा असुलिने करबाट संकलन हुन्छ । यस्तो हुँदा वित्तीय घाटा बढ्ने सम्भावना बढ्छ । उद्योगीले लिएको ऋण समयमै तिर्न नसक्दा खराब कर्जाको अनुपात बढ्न जान्छ । रेमिट्यान्स प्रवाहमा कमी आउँदा बैंकमा तरलताको समस्या हुन्छ । उद्योगले ऋण तिर्न नसक्दा खराब ऋणको मात्रा बढेर तरलतामै समस्या आउन सक्छ । 

आर्थिक वृद्धिमा धक्का 

आर्थिक वर्ष ०७६ र ७७ को बजेटको मध्यावधि समीक्षाको क्रममा अर्थमन्त्री डा. युवराज खतिवडाले सरकारले जसरी पनि आठ दशमलव पाँच प्रतिशत आर्थिक वृद्धि लक्ष्यलाई भेट्ने अथवा त्यसैको नजिक रहने ठोकुवा गरेका थिए । उनले सरकारले खर्च गर्छु भनेर विनियोजन गरेको पुँजीगत खर्चको लक्ष्य घटाउँदा पनि आर्थिक वृद्धिको लक्ष्य नघटाउँदा अर्थशास्त्रीहरू कुनचाहिँ आर्थिक मोडेलको आडमा उनले यस्तो ठोकुवा गर्दैछन् भनेर अचम्मित भएका छन् । 

अरू कुनै उल्लेखनीय आर्थिक काम नभए पनि र निजी क्षेत्र अझै चलायमान नभएको अवस्थामा अब झन् अर्थिक वृद्धिदरको लक्ष्यमा यथार्थवादी हुन जरुरी छ । वास्तवमा कोरोना भाइरसको प्रकोपअघि पनि आर्थिक गतिविधि अपेक्षाभन्दा कमजोर नै थियो । यस वर्ष कृषि उत्पादन खासगरी धानको उत्पादन घट्ने पूर्वानुमान सरकारले नै गरेको छ । ढिलो मनसुन, मलको अभाव, गुणस्तरहीन बिउको प्रयोग र फौजी कीराको आक्रमणले कृषि उत्पादनमा नकारात्मक असर पर्नेछ । सार्वजनिक खर्चमा ढिलासुस्तीले औद्योगिक उत्पादनमा असर पारेको छ । विशेषगरी, निर्माण र खानी तथा उत्खनन गतिविधि प्रभावित भएको छ । चालू आर्थिक वर्षको पहिलो ६ महिनामा सरकारले चार खर्ब आठ अर्ब पुँजीगत बजेटको पन्ध्र प्रतिशत मात्र खर्च गर्न सकेको छ । यो अघिल्लो वर्षको भन्दा सुधार होइन । 

यी कारणका साथै भारतीय अर्थतन्त्रमा पनि आर्थिक मन्दी आएका वेला अब यथार्थवादी भएर आर्थिक वृद्धिको लक्ष्य नघटाइ हुन्न । एसियाली विकास बैंक, अन्तर्राष्ट्रिय मुद्राकोष र विश्व बैंकले नेपालको आर्थिक वृद्धि ६ प्रतिशतको सेरोफेरोमा हुने पूर्वानुमान महामारी फैलिनुअघि गरेका थिए । अबको अद्यावधिक पूर्वानुमान पाँच प्रतिशतको सेरोफेरोमा हुने सम्भावना प्रबल छ । छिट्टै कोरोना भाइरसको महामारी नियन्त्रणमा नआई विश्व अर्थतन्त्रमा प्रभाव गहिरिँदै गए अर्को आर्थिक वर्ष पनि आर्थिक वृद्धिमा धक्का लाग्नेछ ।

नीतिगत औजार 

संकुचित वित्तीय अवस्था र बजेट कार्यान्वयनमा कमजोर क्षमताका कारण सरकारले तत्काल आर्थिक वृद्धि बढाउन गर्न सक्ने काम थोरै छ । वित्तीय प्रोत्साहन गर्ने नीतिभन्दा पनि तत्कालका लागि कोरोना भाइरस संक्रमण बढ्न नदिनका लागि सम्बन्धित निकायलाई चाहिएजति बजेट विनियोजन र रकमान्तर प्राथमिकता हुनुपर्छ । बजार अनिश्चितताको फाइदा लिई आपूर्तिकर्ताले कृत्रिम मूल्यवृद्धि गर्दैनन् भन्ने सुनिश्चित गर्न सरकारले बजार अनुगमन तीव्र पार्नुपर्छ । कोरोना भाइरसको असरले माग र आपूर्ति दुवै पक्षमा धक्का दिरहेको छ । घट्दो रेमिट्यान्स र आर्थिक मन्दीका कारण श्रमिकको आय कम हुन्छ भने उपभोग र लगानीमा पनि ह्रास आउँछ ।

विश्वव्यापी आर्थिक मन्दीले हाम्रो वस्तु र सेवाको माग कम गर्नेछ । यस्तो ‘डिमान्ड सक’ निराकरण गर्न वित्तीय प्रोत्साहन नीति चाहिन्छ । वित्तीय नीतिले प्रकोपविरुद्ध अझ राम्रो तयारी गर्न र स्वास्थ्य सेवाका लागि उपलब्ध वित्तीय स्रोतको खोजीमा महत्वपूर्ण भूमिका खेल्न सक्छ । तर, हाम्रो वित्तीय अनुशासन त्यति राम्रो नभएका कारण सरकारले केही गर्न सक्ने अवस्था देखिँदैन । अहिले गर्न सक्ने भनेको स्वास्थ्य क्षेत्रमा सक्दो धेरै आपतकालीन बजेट विनियोजन अथवा रकमान्तर नै हो । 

वाणिज्य मन्त्रालयले बजार अनुगमन गर्न आवश्यक जनशक्ति तथा रकम विनियोजन गर्न सक्छ । सरकारले व्यापारमा मन्दी आएका उद्योगलाई कर प्रोत्साहनका साथै मास्क र औषधि उत्पादनमा प्रत्यक्ष अनुदान दिन सक्छ । निजी अस्पताललाई उपचारका लागि तयार रहन प्रोत्साहित गर्न सक्छ । ‘आइसोलेसन’ को बन्दोबस्त गर्न कर सुविधा वा सहुलियत दिन सक्छ । प्रभावित परियोजनाका लागि समय र लागत बढ्न नदिन सरकारले विशेष व्यवस्था गर्न सक्छ ।

त्यस्तै, हाम्रा उद्योग र सेवा क्षेत्रले प्रयोग गर्ने आयातीत कच्चा माल, मध्यवर्ती सामान वा अन्तिम सामानको आपूर्तिमा समस्या आएर उत्पादन गर्न नसक्दा आपूर्ति सक (सप्लाई सक) आउन सक्छ । क्षमता उपयोग र उत्पादन सीमित पार्न सक्छ । परम्परागत मौद्रिक नीतिका उपकरणले गर्न सक्ने कमै छ । अपरम्परागत मौद्रिक नीतिका औजारले उत्पादन तत्काल नबढाए पनि व्यापार र व्यापारीलाई सहजता प्रदान गर्न सक्छ । उदाहरणका लागि राष्ट्र बैंकले क्रेडिट र ऋणको बोझ कम गर्न सक्ने मौद्रिक औजार ल्याउन सक्छ ।

रोलिङ पुनर्वृत्त सुविधा र ऋणको ब्याज तिर्न केही समयका लागि स्थगित वा माफीजस्ता औजार भूकम्पपछि पनि ल्याइएको थियो । राष्ट्र बैंकले लघु र मझौला उद्यमका लागि किफायती र पहुँचयोग्य कर्जा सुविधा घोषणा गर्न सक्छ । अन्तर्राष्ट्रिय विकास संस्थाद्वारा प्रदान गरिएको आपतकालीन ऋण सुविधा उपयोग गरेर वित्तीय र बाह्य तनावलाई सम्बोधन गर्न सकिन्छ । 

उदाहरणका लागि एसियाली विकास बैंकले नेपाललगायत धेरै देशमा प्राकृतिक प्रकोपपछि थप ऋण र अनुदान स्वीकृत गर्छ । आइएमएफले द्रुत ऋण सुविधा प्रदान गर्छ र अवस्था हेरर ऋण मिनाहा तथा देशको कोटाभन्दा थप धेरै ऋण प्रदान गर्छ । यसैगरी, विश्व बैंकले विकासशील सदस्य देशहरूलाई आवश्यक पर्ने वित्त पोषणका लागि प्रतिक्रिया दिन बाह्र अर्ब डलर प्रतिबद्धता गरिरहेको छ ।

Wednesday, March 11, 2020

Impact of COVID-19 on Nepali economy

It was published in The Kathmandu Post, 09 March 2020.



It makes sense for the government to lower its GDP growth target in light of the impact of the outbreak.

During the mid-year review of the 2019-20 budget, Finance Minister Yuba Raj Khatiwada asserted that the government would meet the 8.5 percent growth target despite acknowledging that actual public spending would fall short of the earmarked budget for this fiscal. However, he did not explain the reasons behind the unchanged growth target in the face of lower capital spending and agricultural output. The recent outbreak of Covid-19—a new disease caused by novel coronavirus that originated in Wuhan, the capital city of Hubei province in China—and its effect on the economy is making the growth target more elusive than ever.

In fact, economic performance was already below expectation before the coronavirus outbreak, which is wreaking havoc on global value chains and threatening the global economic outlook. Agricultural output, especially paddy production, is expected to decrease this year due to a delayed monsoon, shortage of fertilisers, use of substandard seeds and an armyworm invasion. Slow public spending has hit industrial output, especially construction, and mining and quarrying activities. During the first half of this fiscal, the government was able to spend only 15 percent of the Rs408 billion capital budget. These factors coupled with the continuing slowdown in the Indian economy—the largest source of investment commitment and inbound international tourists, and to whose currency the Nepali rupee is pegged—mean that a growth target higher than the provisional growth in 2018-19 is ambitious in the first place.

Four effects

The coronavirus outbreak is severely affecting global as well as regional economic outlooks. This epidemic is bound to affect the Nepali economy much more than the effect of the global financial crisis in 2008 and the food price spikes in 2010. Specifically, the Nepali economy will be impacted on four major fronts, affecting economic growth and employment opportunities.

First, the travel and tourism industry, which was gearing up for an expected tourist surge in 2020, is feeling the brunt of Covid-19. This has put a lid on any chance of achieving the ambitious two-million tourist target in 2020, an ill-conceived numerical target that was not in sync with the state of the tourism infrastructure. Investors who borrowed money from financial institutions to establish new hotels and restaurants or refurbish the existing ones will likely face cash flow problems. The expected business bonanza has almost evaporated with the slump in tourist arrivals. All flights from China are suspended now, and inbound visitors from the country have come to a screeching halt. It was partly because of the surge in Chinese tourists—who accounted for 14 percent of the 1.2 million visitors in 2019—that Nepal's travel and tourism industry did not really have an offseason market. The year-round business supported economic activities and employment.

Note that of the total visitors, 70 percent come for holiday and recreation, 8 percent for trekking and mountaineering, and 15 percent for pilgrimage. The increasing fear of catching Covid-19 as it spreads globally will limit visitors from other countries too. Some researchers are already predicting an outbreak in Kathmandu soon, partly owing to Nepal’s poor ability to manage infectious disease. This is going to specifically affect economic growth through a lower than expected services output. The direct contribution of the travel and tourism sector (economy activity generated by hotels, travel agents, airlines, and passenger transportation services) is estimated to be about 4-5 percent of GDP. The sector also contributes about 6 percent of the total foreign exchange earnings.

Second, setbacks in project execution and completion is likely in several large infrastructure projects in the airport, hydropower and road transport sectors. In the immediate term, it will affect projects led by Chinese contractors that are employing some Chinese workers and managers. They include the Narayanghat-Butwal road improvement project supported by the Asian Development Bank, Rasuwagadhi-Syabrubesi road project and detailed project review of the Kathmandu outer ring road supported by the Chinese government, and hydropower projects such as Khimti-2 and Langtang Khola, among others. It will directly affect public capital spending, which in turn will exacerbate the finances of some companies saddled with excess installed capacity (anticipating accelerated capital spending), but low capacity utilisation (in reality slow capital spending). It includes the cement industry, whose capacity utilisation had already dropped to 40 percent in 2018-19. Accommodating requests for time and cost overruns for the affected projects may be warranted.

Third, the coronavirus outbreak will disrupt supplies of raw materials and intermediate goods because of China’s central role in global value chains. The manufacturing and services sectors in Nepal too will feel the brunt because of reliance on imported goods—be it raw materials, intermediate or final goods. China accounts for about 15 percent of Nepal’s total trade. Nepal’s top exports to China are handicraft, woollen carpets, noodles and readymade garments. Meanwhile, the top imports from China are telecommunication equipment, readymade garments, electrical goods, machinery parts and chemical fertilisers. Nepal’s flagging exports sector will further suffer as a synchronised global economic slowdown will weaken demand for our goods and services beyond China.

Fourth, outmigration for work and remittance inflows will get affected. Outmigration to attractive destinations like South Korea is already suspended. A sharp global economic slowdown due to supplies and economic disruptions will gradually lower investment in migration destinations (such as the Middle East). This will eventually decrease demand for Nepali migrant workers, leading to a deceleration of remittance inflows and potential external sector stress. It happened already when global fuel prices tanked a few years ago.

What next

Unlike in the past, the Nepali economy is not immune to the global outbreak of Covid-19. Unfortunately, there is little the government can do to mitigate the economic impact owing to limited fiscal space and budget execution capacity.

For now, prioritising preparedness and vigilance by deploying resources as well as allocating more funds to the concerned agencies must be the priority. The goal should be to effectively contain the spread within the country in the most cost-effective way, but without compromising quality and standard healthcare procedures. The government will also have to intensify market monitoring to ensure that suppliers and sectoral cartels do not artificially raise prices taking advantage of market uncertainty. It will aggravate cost-push inflation in the face of supply disruption. Perhaps it also makes sense for the government to lower its GDP growth target in light of the impact of the coronavirus, and lower than anticipated capital spending and agricultural output. 

Tuesday, March 3, 2020

Incentives to make India a hub for manufacturing of electronics and components


In one of the biggest incentive schemes to boost domestic manufacturing of mobile phones and their components, the government has worked out a production-linked incentive (PLI) package of nearly Rs 42,000 crore for those making in India, planning to offer a benefit of 4-6% on incremental sales (of goods manufactured locally) for a period of five years.
[...]The electronics hardware manufacturing sector faces the lack of a level-playing field vis-à-vis competing nations… (and) suffers from a disability of 8.5% to 11% on account of lack of adequate infrastructure, domestic supply chain and logistics; high cost of finance; inadequate availability of quality power; limited design capabilities and focus on R&D by the industry; and inadequacies in skill development...
[...]The government plans to offer incentives under the scheme to large contract manufacturers (as defined in the FDI policy circular of 2017) on sale of phones above the invoice value of $200 (a little over Rs 14,000). Those to benefit will include global contract manufacturers such as Foxconn, Flex and Wistron, all of whom are making products in India. However, some companies such as Oppo, Vivo and even Samsung are not too happy as the incentive is for devices with ex-factory price of above $200, and the majority of phones sold by them are below this cost.
[...]The government wants to cut the ballooning bill of electronics imports. It hopes that incentives through the scheme will help create incremental production of Rs 8.2 lakh crore worth of mobile phones and their parts, generate exports of Rs 5.8 lakh crore, while creating 2 lakh fresh jobs and contributing Rs 4,782 crore to the exchequer through direct tax revenue.
[...]The total incentive planned to be given in the first year is around Rs 4,030 crore, in second Rs 6,395 crore, in third Rs 8,760 crore, in fourth Rs 11,790 crore and in fifth Rs 10,820 crore. “With the demand for electronics hardware expected to rise rapidly to approximately $400 billion (approximately Rs 26 lakh crore) by 2025, India cannot afford to bear the rapidly increasing foreign exchange outgo on account of electronics imports...

Monday, March 2, 2020

Coronavirus affects travel, trade and supply chains worldwide

Eswar Prasad writes in NYT that there is little hope for a global economic rebound in 2020.  Excerpts:

The spread of the virus is hurting travel, trade and supply chains worldwide. The Baltic Dry Index, a forward-looking indicator of global trade, has fallen by half and oil prices are down by about a quarter so far this year. U.S. stock markets, after initially taking the epidemic’s fallout in stride, are now experiencing a major sell-off.
[...]Financial markets are prone to large, sentiment-driven swings that sometimes seem out of line with economic fundamentals. But the news of the last few days suggests that, rather than coming under control and being confined to China, the outbreak is spreading and could get far worse. Stock markets in the United States and elsewhere are reflecting this reassessment of the epidemic’s future trajectory and the risks it poses.
The notion of this outbreak being a short-lived negative shock to global demand now looks unrealistic. It is not just spending on restaurants and travel that is suffering, but also investment by businesses while they wait for the uncertainty to be resolved. This will have long-term effects on growth even if the outbreak proves short-lived.
The disruption of supply chains, especially those that pass through Asia, is hurting businesses in multiple dimensions. Countries such as China, South Korea and Japan are critical to the supply chains for products ranging from plastic toys to iPhones to high-tech machinery. In these countries, manufacturers can’t get raw materials delivered reliably, are facing worker shortages and are having difficulty shipping out products. Rejiggering supply chains takes months, if not years. If the coronavirus spreads and causes disruptions to other major economies, it could wreak further havoc on supply chains.
[...]There is no easy way out. The Federal Reserve and other central banks could cut interest rates. This might not do much good, as uncertainty will restrain consumer spending and business investment even if cheap loans were available. Government spending might be more potent. Any assistance that reaches small businesses and allows them to stay afloat or goes directly into the hands of low-income consumers will help. But consumers and businesses are as likely to stash away any extra cash as they are to spend it.

Monday, February 24, 2020

Rethinking advise to emerging markets

In an opinion piece for the Financial Times, IMF's managing director Kristalina Georgieva highlights the Fund's new approach to advising emerging markets given their unique context and diversity of policies pursued by them. Initially, the integrated policy framework will focus on monetary policy, macroprudential policy, exchange rate interventions and capital flow measures. It will be expanded to include fiscal policy. Excerpts from the FT piece.

Our goal is to provide country-specific advice on the appropriate mix of policies needed to preserve growth and financial stability.
Our new “integrated policy framework” will reassess the costs and benefits of four tools — monetary policy, macroprudential policy, exchange rate interventions and capital flow measures — to help stabilise economies exposed to domestic and external shocks. Importantly, the “integrated” aspect of the new framework will capture how these tools interact with each other and with country circumstances.
The IMF’s current framework, grounded in more conventional economic thinking, broadly steers members towards using the exchange rate as a shock absorber. This approach provides a good approximation of how advanced economies adjust to external shocks and exchange rate movements. But it can miss important characteristics of emerging markets that alter their economies’ response to external shocks and may call for a different policy prescription.
New research indicates that while emerging markets are deeply integrated in global trade, their trade is disproportionately invoiced in dollars and consequently flexible exchange rates provide limited insulation. Similarly, while emerging markets are substantially integrated in global capital markets, their foreign debt is denominated extensively in dollars. That can cause exchange rates to become shock amplifiers as they can suddenly increase debt service costs and liabilities.
In fact, the striking diversity of policies pursued among economies could reflect their differing exposure to external shocks. Emerging markets also differ widely in the liquidity of their foreign exchange markets, which could affect the range of tools available to them for stabilisation.

Thursday, February 20, 2020

PPP in infrastructure: How and when to use?

In a recent NBER working paper, Engel, Fischer and Galetovic outline when and how to use public private partnerships (PPPs) in infrastructure. Broadly, they argue that PPPs can be used to increase spending and efficiency gains— better maintenance, reduced bureaucratic costs, and filtering white elephants among others. However, governance of PPPs is important, especially appropriate risk allocation and avoiding opportunistic renegotiations.  

PPPs allow governments to increase spending in infrastructure because: (i) investment via PPPs does not contribute to fiscal deficit and add to public debt in the short run, and (ii) such investment is not subject to regulatory oversight and budgetary controls. 

There are tradeoffs too as government has to forgo future stream of tax/toll revenue from projects that are financed via PPPs, which do not require large upfront investment by the government. PPPs are also used to promote private investment in infrastructure to replace an incompetent public sector. Large infrastructure projects require stronger capabilities to mange contracts and execute projects. 

According to the authors of the working paper, the main reasons for opting for PPPs over public provision are:
  • Narrow focus and dedicated management (contract with employees governed by private law, incentives to manage infrastructure per contract with public authority, SPV to build and manage projects)
  • Bundling (quality of service is contractible and life-cycle approach toward maintenance reduces maintenance and operations costs
  • Fewer construction delays (because of the opportunity to charge user feeds or receive government transfers once project is operations)   
  • Filtering white elephants (private players will not opt for projects where user fees cannot pay for capital and operational expenditures)
  • Avoiding bureaucratic costs (related to rigidities in public spending and corruption)
  • Advantages of private financing (mitigate moral hazard by tightly controlling changes in the project’s design and disbursing funds by banks according to project construction timeline/stages)
  • Better and less expensive maintenance (continuous maintenance is efficient as intermittent maintenance incurs 1.5 to 3 times the cost of continuous maintenance)
For PPPs to succeed, government should have higher capabilities as financing is more complex and there is scope for opportunistic behavior (long-term contract and dealing with government entities). 

Sometimes government has to bail out PPP projects, thus absorbing all the downside risks. There are also cases of contract renegotiation, which opens up avenue for corrupt practices. This can be avoided by using contracts with better risk allocation (concessionaire bears all the exogenous demand risks but renegotiation is allowed in the case of low realization of demand). For instance, Present-Value-of-Revenue (PVR) contracts have built-in renegotiation condition if demand realization is low, in which case contract term is extended but contract itself is not modified. They authors suggest that careful planning, project design, and project management are vital for successful PPPs. 

On the fiscal implications of PPP projects, they argue that PPPs have been used as a means of evading fiscal spending constraints. The use of off-balance sheet expenditure is often termed as “fiscal illusion”. The debt is recorded as financial liability but does not become a part of budget itself over short to medium term. The authors argue that the advantage of PPPs should lie in efficiency gains, not only fiscal accounting gimmickry to increase spending.

Monday, February 17, 2020

India’s GVC integration

Despite having immense possibilities in manufacturing sector (large and relatively cost competitive workforce, domestic market, etc), India is still lagging behind and is not well integrated into global value chains. Manufacturing sector accounts for about 18% of GDP. 

A recent ICRIER working paper asserts that the low integration into GVCs is due to the focus on domestic market, and the limited role played by lead firms. On a flipside, since India is less integrated in GVCs, it is also relatively less affected by the GVC disruptions caused by the COVID-19 outbreak. However, second round investment effects may still affect the Indian economy. 

GVC forms the bedrock of trade in intermediate goods and services and fragmentation of production across factories and countries. Trade in intermediate goods account for about two-third of international trade. However, only a limited number of emerging economies take a lead in supplying intermediate inputs. Size of a country and natural resources endowment, skills and competitiveness, industrialization level and structure, exports composition, standards, policy and institutional environment (including trade and infrastructure) and the positioning in value chain determines how well a country is integrated in GVC. 

The authors use findings from primary survey of 98 firms across six states conducted between August 2014 and February 2015 in India to argue that the reasons for low participation in GVC are policy focus on the domestic market and the weak lead firms, which essentially define the entire value chain (backward or forward linkages) and sales of final goods and services. Government policy also does not actively promote lead firms. They argue that in 2011 India’s domestic value added in exports was 20% (forward linkages) and foreign value added in gross exports was 25% (backward linkages). Participation index (a combination of the two indicators) was 40%. Unlike its competitors India is not heavily involved in international supply chains of countries such as Japan and the US.  

Integration into and upgrading of GVC is industry-specific. For instance, in chemical industry transfer of production processes and knowledge of technical know-how is proprietary and upgrading requires direct investment in research and development. But in garment industry production processes are standardized and upgrading is enabled by the use of new inputs/raw materials. That said, also note that labor cost arbitrage accounts for only 18% of global goods trade, implying that knowledge-based trade of goods and services is crucial to stay competitive.

The chart below depicts integration and upgrading across sectors and the role of lead firms.


Lead firms speed up lead time (time between placing of order and delivery), standardize production process, and secure preferential transportation and logistics by forging long-term relationship.  They form a network of forward and backward linkages with micro, small and medium enterprises (MSMEs). Think of this one as MNCs such as Ford in automobile and Levi’s in garment. These lead firms nurture backward linked firms by helping them enhance production that meets global standards and is competitive. They do this by supplying product, market and technical information along with skills, specialization and innovation. Better integration into GVCs triggers structural transformation, whereby developing countries move from low value-added to high value-added production (both in terms of output and employment). 

Based on the survey, the authors list some of the barriers to integrating into GVC. These include:
  • Regulatory processes: Unfavorable business environment, long delays at ports
  • Lack of incentives: Logistics inefficiency, inverted duty structure, access to finance, lack of stable and regular power supply
  • Approvals regime: Environment approvals, standards regime
  • Others: Labor laws, high taxes, skills shortage
Here is an earlier blog post on services-driven global value chains.