Ethiopia’s COVID-19 Response Economic Package: Neither Relief nor Stimulus!
Krugman, Nobel Laureate and New York Times Columnist, observed that “the economic contraction we’re experiencing is the fastest on record, by a large margin; we’ve probably lost as many jobs over the past two weeks as we did in the whole of the Great Recession. The policy response is also gigantic, several times as large a share of GDP as the Obama stimulus [in response to the financial crisis]”
This piece will analyse Ethiopia’s recent economic stabilization measures in response to the COVID-19 Pandemic. I start by briefly discussing the rationale for the policy response, essentially the nature of adverse economic consequences of the Coronavirus Pandemic.
Krugman invoked an expression we can comfortably use to explain the on-going economic response package:
… it seems to me that we’re still not having a very clear discussion of the economics of what’s happening, why we’re doing it, and what implications all this will have for the longer term, once the pandemic ends…. The main moral of this analysis is that what we should be doing — and to some extent what we are doing — is more like disaster relief than normal fiscal stimulus, although there’s a stimulus element too. This relief can and should be debt-financed. There may be a slight hangover from this borrowing, but it shouldn’t pose any major problems [emphasis is mine].
I concur with Krugman, throughout this piece I use the expression “disaster relief” rather than “economic stimulus”. If disaster relief is a preferred expression for the resilient USA economy, then it is even more so for the fragile Ethiopia economy. This conceptual clarity will play a critical role in understanding the nature of the problem at hand. The Ethiopian authorities would need to treat their policy response to Coronavirus related lockdown as disaster relief. After all, disaster relief is not something new to the Ethiopian society.
The Coronavirus rescue package should be seen pretty much as relief operations during Ethiopia’s recurring droughts and famines. What were the rationales for mobilizing resources from domestic and international sources to finance famine reliefs? The reasons were obvious. It was not raining, and hence farmers could not produce, and hence they could not feed their families. If there were no policy response through disaster relief, then all families in famine-stricken districts would have perished.
Coronavirus lockdown is a must to prevent spread of the disease. This disrupts economic activities. Employers cannot pay wages and salaries. The self-employed cannot continue operating due to movement restrictions, lack of inputs or lack of buyers for their outputs. Households will not be able to feed themselves. Also, they will not be able to meet their financial obligations, e.g. paying rents, mortgages or debts.
Adverse economic effects of Coronavirus is like those emanate from any other natural disaster, e.g. rainfall failures have often disrupted farming activities and caused famines at regular intervals throughout Ethiopian history.
However, there is a big difference between the two disasters. Famines caused by rainfall failures have often been confined to certain districts or regions, but Coronavirus’s adverse economic consequences will affect all families in all regions.
Government policy response to an economic disaster is analogous to loss minimizing decisions by businesses. The prime goal of a business enterprise is to maximize profits during normal times and minimize losses during bad times.
Similarly, during normal times, government economic policy would aim at accelerating GDP growth and enhancing improvements in social welfare. In times of economic disaster, however, governments would strive to avert catastrophic contractions in economic activities (decline in GDP), pre-empt cataclysmic losses of lives, as well as prevent considerable deteriorations in social welfare.
The bottom line is that a disaster occurring at a scale of Coronavirus Pandemic would inevitably cause contraction in GDP, losses of lives, and decline is social welfare. Policy responses would just aim at stopping a bad situation getting worse.
It is in here that we find elements of something akin to economic stimulus package within the overall package of disaster relief.
For the purpose of understanding and framing disaster relief packages, it is convenient to classify economic activities into non-essential or essential parts, depending on compelling needs for their continued operations during Coronavirus lockdown. The workforce in the non-essential services would be required to stay at home due to the need to enforce social distancing. Since they are not working, it follows that the employees would not receive wages and salaries.
It is the responsibility of the government to provide relief assistance to people whose livelihoods are dependent on those sectors, after all it is the government who enforced the lockdown! The amount of funds that the government would avail per household should be enough to cover their subsistence and other obligations. The intervention would be a combination of fiscal (cash or in-kind handouts) and leveraging outstanding loans (e.g. delays in debt payments).
The prime example for essential services is health and related service sectors on which the prevention, testing, monitoring and control measures of the Coronavirus would critically depend. Government support should not discriminate between public and private health institutions, since it will be a must to utilize full capacity of existing health professionals and institutions.
Contractions in economic activities can be minimized by assigning “essential status” to many small and medium enterprises (SMEs) and the farming sector, where economic activities can be undertaken. Owners and employees in these small economic units can exercise all the necessary precautions to prevent spread of the virus but continue to operate.
The only reason they may be forced to close their economic activities would be lack of demand for their produce. For instance, financial support for households engaged in non-essential activities would not only serve a social purpose by saving lives but also an economic purpose, by enhancing their spending power, and then viability of market for outputs of essential economic activities such as farming and other SMEs.
Neither Relief nor Stimulus
On March 27, 2020, the COVID-19 Ministerial Committee had a virtual meeting to discuss progress on the containment measures. It was stated in the press release that the “macro-economic sub-committee has been undertaking dialogue with key industry stakeholders in various sectors to craft a way forward in safeguarding the economy”. The macroeconomic sub-committee listed about seven items which they referred to as measures to “stabilize the economy”.
The best way to assess the suitability of the economic stabilization measure would be to compare it with relief packages of other countries that have formulated thorough packages to combat adverse impacts of COVID-19.
I found it appropriate to use India’s policy response package as a yardstick. The choice of India is deliberate in that the structure of the Indian economy has close similarities with that of Ethiopia. Specifically, SMEs and the informal economy provide employment to a considerably large proportion of the labour force in both economies.
Ethiopia’s “economic stabilization” measures and India’s disaster relief package are presented side by side in columns in the table below.
Since the information outlined in the table speaks for itself, perhaps there is no need to delve into details in comparing the two packages. I limit my discussion here to a few contrasting features.
First, the India’s package comes across clearly as a disaster relief package. On the contrary, Ethiopia’s so-called stabilization measure is completely devoid of any element of preparedness for disaster relief.
Second, each element of the relief package for India is accompanied with figures, carefully formulated budget with commitment to individual relief measures. India “announced a $22.5 billion spending plan to help the nation’s poor better cope with the pandemic.” For Ethiopia, the announced stabilization package was not accompanied with budgets.
Third, the Indian government designed their disaster relief package primarily to put cash in the hand of Indians, particularly poor households. On the contrary, the Ethiopian authorities have inclined towards rich businesses, e.g. importers and exporters. There was no mention of relief to poor households, and small businesses, or the farming sector.
Getting Real, Getting Serious!
POLITICO claimed to have had access to Ethiopia’s Health Ministry which is working with a projections that outlines “a worst-case scenario for Ethiopia predicting that 28 million people are at risk of contracting the virus.” That is about a quarter of country’s population. This confirms that the authorities are pretty much aware of the scale of the looming disaster, and yet they went ahead with putting in place a rather feeble economic rescue package.
I have always been intrigued by strange behaviour of Ethiopian authorities who often think about a country’s budget pretty much like head of a household unit. If citizens ask for improvements in some public services, a typical answer from the authorities would be “the government does not have money!”, the same way a household head would respond to a family member who asked for certain items.
It is time that the authorities depart from that mindset. There is a big difference between households and governments as decision-making units. Households cannot vary family “money supply”, but governments can increase of decrease the country’s money supply depending on the economic circumstances! That is what governments in most countries have done to finance their disaster relief or economic stimulus packages in response to the Coronavirus Pandemic.
I have to hasten to say that I understand if any mention of money supply-based response measure would raise many eyebrows. Irresponsible government policies have generated recurring inflation episodes over the years.
However, bear with me and let me explain. The supply of birr in the Ethiopian economy is measured by two things: the quantity of money (the amount of money already printed and put in circulation) and money velocity (the number of times each birr circulates in the economy). If any one of the two, quantity or velocity, is reduced, then the effective money supply falls.
The Coronavirus lockdown would considerably reduce the amount money changing hand in the Ethiopian economy. Imagine how busy a restaurant or hotel in your neighbourhood has been during normal times, the number of customers visiting them and the amount of money each pay, customers lining up at the cashier desk.
All that is not happening now, not just in the one in your neighbourhood but those located everywhere else in Ethiopia. So, it is easy to imagine how the circulation of birr falls. The velocity falls partly because of the lockdown, the bars won’t open and/or people cannot visit, but most importantly, the greatest majority do not have money to spend, even if bars were open.
The relief package would mean putting money in people’s hands and pockets so that they would be able to spend it somewhere, if not at the bars or restaurants. What matters most is that money is put back in the economy and it would resume circulating.
The government has ample choices in terms of monetary or fiscal policy instruments to put cash in the hands of households and business enterprises.
The first one is government borrowing, this time sensibly and justifiable, unlike in the past! Circumstances are right for government to borrow. Lockdown means considerably large amount of forced saving, deposits sitting idle in bank accounts, or under mattresses! It is this idle money that would be released and put back in the economy by other means, this time through government expenditure.
The other mechanism is by lowering National Bank of Ethiopia’s reserve ratios, which is casually mentioned in the second bullet point in the table above. However, the way the government attempted to use this instrument to expand credit sounds half-hearted. It would not be enough for the NBE to just reduce reserve ratios and give a nod to commercial banks to lend.
For the money made available for credit to reach households and businesses, the government has to do one of the following two things:
(a) regulate the commercial banks to lend at much lower interest rates than the currently prevailing lending rates; and/or
(b) leverage the credit system, that is to say government covering the difference between the reduced interest rate and the lending interest rate that commercial banks charge their customers.
Finally, we know that certainly the Ethiopian government will not entirely rely on domestic resources to finance the disaster relief package. There have already been sizeable amounts of funds committed by G20 and the multilateral agencies to assist developing countries. Ethiopia expects to receive a reasonable share. For instance, in addition to new funds they are making available, the World Bank has encouraged countries to relocate funds previously committed to various projects and finance Coronavirus disaster relief packages.
A Double Whammy
The arrival of Coronavirus has created a double whammy situation, the natural disaster aggravating an already volatile social and political environment. It is possible to think of the following scenarios, depending on how the government would plan to enforce the Coronavirus lockdown and allocate a disaster relief budget and its management (see the table below).
On the one hand, the government may enforce a full and extensive Coronavirus lockdown or may opt for a partial and loose one. On the other hand, the government may mitigate a nationwide disaster relief by allocating reasonably high budget and put in place an effective management of the funds or the government may allocate a low budget and/or ineffective management.
A combination of each lockdown option with the disaster relief options would give possible outcomes in the immediate future. Full Coronavirus lockdown supported by a reasonably high disaster relief budget and its effective management would minimize loss of human life and pre-empt the social and political backlash. The low mortality in this case is due to a combination of both effective control of the spread of Coronavirus and provision of food relief, pre-empting death from hunger.
It is important to note that the combination of full lockdown with low and ineffective management would lead to a catastrophic outcome: loss of human lives (more from hunger but also some from disease) and high social unrest, because people would inevitably protest the lockdown and take matters into their own hand to feed themselves and their families. The other two scenarios are straight forward, each leading to high and catastrophic scale mortalities.
The “social unrest” scenarios against partial lockdown are assessed based the assumption that people, particularly the unemployed youth would resort to violence in order to satisfy their material needs. However, it is possible to think of social unrest also being motivated to high mortality as well, in which case, even partial lockdown can be accompanied with high social unrest scenarios. A young man who just lost his mother to Coronavirus due to inadequate public health measures is likely to be as infuriated to take actions.
There are millions of unemployed labour force who have so far survived doing odd jobs, e.g. day labourers, washing cars, loading unloading, etc. As residents of Addis Ababa may attest, the authorities have often encouraged the unemployed youth to organize themselves and fight for any job opportunity, e.g. loading and unloading, even if that meant intimidating clients. This was irresponsible governance, a mechanism by which the authorities have failed to create jobs and hence they resorted to make desperate attempt to deflect blame away from themselves.
Coronavirus lockdown means no opportunity for odd jobs for such extremely vulnerable youth who would go hungry the very day the lockdown will be strictly enforced. How they will attempt to feed themselves will not be difficult to guess.
Disaster relief package and its effective management would prove to be a litmus test for continued existence of Ethiopia as a country. Ethiopia’s veteran politician, Professor Merera Gudina, has once famously said “if people have nothing to eat, then they would turn around and consume their government.”