The political economy of COVID-19

By: Fernando Fajardo - Columnist/CDN Digital | April 15,2020 - 07:41 AM

Post Prandium logo of the column of Fernando Fajardo where today he discusses about the political economy of COVID-19.


No country in the world, both rich and poor, is immune from the onslaught that comes with the recent coronavirus outbreak that began in Wuhan, China, in December 2019.

Known as SARS-Cov-2, the virus has already resulted, in more than 1,930,000 infections and 120,000 deaths. SARS-CoV-2 infection causes a respiratory illness called COVID-19 (coronavirus disease 2019), which is now reported in every continent in the world except Antarctica.

As background, coronaviruses are types of viruses that typically affect the respiratory tracts of birds and mammals, including humans. Doctors associate them with the common cold, bronchitis, pneumonia, severe acute respiratory syndrome (SARS), and COVID-19. They can also affect the gut. 

These viruses are typically responsible for common colds more than serious diseases. However, coronaviruses are also behind some more severe outbreaks.

Over the last 70 years, scientists have found that coronaviruses can infect mice, rats, dogs, cats, turkeys, horses, pigs, and cattle. Sometimes, these animals can transmit coronaviruses to humans.

Most recently, authorities identified a new coronavirus outbreak in China that has now reached other countries. It has the name coronavirus disease 2019 or COVID-19.

Now considered as a pandemic, the coronavirus according to the IMF (International Monetary Fund) in its April 2020 World Economic Outlook (WEO) is inflicting high and rising human costs worldwide and the necessary protection measures are severely affecting economic activity.

Because of the pandemic, the IMF is projecting the global economy to contract sharply by –3 percent in 2020, which is much worse than during the 2008–09 financial crisis.

In a baseline scenario–which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support. 

The IMF, however, fears that the risks for even more severe outcomes are substantial.

To forestall the possibility of worse outcomes, the IMF says that effective policies are essential and the necessary measures to reduce contagion and protect lives are an important investment in long-term human and economic health.

Because the economic fallout is acute in specific sectors, the IMF suggested that policymakers need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses domestically as well as internationally with strong multilateral cooperation to overcome the effects of the pandemic. This includes providing help to financially constrained countries facing twin health and funding shocks, and for channeling aid to countries with weak health care systems.

The Philippines is perhaps one of the most financially constrained because of our limited budget, which presently is just 20 percent of our Gross Domestic Product (GDP). Our position is in contrast to China with 34 percent, India 26 percent, the US with 35 percent, Japan with 37 percent, Germany with 45 percent, or South Korea with 43 percent.

The contrast is even more telling when we consider that compared to the GDP  of these countries, our GDP is relatively much smaller; thus, putting us in a more tight position to face the new challenges brought about by COVID-19.

The most logical immediate response to COVID-19 is its containment. This requires us to address directly the health issues of those infected and to confine our people in their respective homes to avoid widespread infection.

I would say that along with donations from some countries abroad and donations coming from private local sources, the much talked about P275 billion earmarked for use against COVID-19 is sufficient to meet the immediate requirements in the health aspect and the promised emergency subsidy for those families who lost their means of income because of the lockdown.

At P5,000 to P8,000 or an average of P6,500 per household for two months, we can cover the 18 million target households at a cost of P234 billion. This would still leave something for the health aspects out of the P275 billion that can still be augmented from other sources.

Presently, for example, the government is negotiating with ADB (Asian Development Bank) and WB (World Bank) for a 5.6 billion US dollar loan. This is equivalent to P285 billion, enough to replenish the P275 billion in COVID-19 funds supposedly taken by the national government from its current budget and what remains of the budget in the past year.

Given that loan, there is no more reason for the government to sacrifice many of its programs, projects, and activities. Doing so would only create more problems to the economy and our people.

After the two immediate budgetary needs for the health aspects and emergency assistance for badly affected households, the next important concern lies in the business side, especially the micro enterprises and the small and medium industries affected by the lockdown.

They need to recover their losses during the lockdown, but to do that they will now need more funds to restart their operation. Their need, however, including that of large business enterprises, can be meet easily by the central bank or the BSP (Bangko Sentral ng Pilipinas) by enabling the banks to have more liquidity and provide loans to the business sector at lower rates. In fact, the BSP is already doing this when it did the following:

1. Lowering its policy rates by reducing its overnight reverse repurchase facility to 3.25 percent effective March 20, 2020; and thus, effectively reducing its overnight lending and deposit facilities to 3.75 percent and 2.75 percent, respectively. The BSP policy rates greatly influence the lending rates of banks.

2. Cutting the required reserves of commercial and universal banks against their deposits to 12 percent from a high of 20 percent a couple of years ago. Bringing down the reserve requirement by one-percentage point will make available some P100 billion in new liquidity that can be loaned to private borrowers that still grow by a certain multiple through the bank multiplier process. 

3. Expand its open market operation to include not only the purchase of treasury bills but also the much larger amounts in treasury bonds.

This is the politics and economics of COVID-19./dbs

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TAGS: BSP, coronavirus, COVID-19, GDP, IMF, Philippines, SARS-Cov-2, World Economic Outlook

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