Recovering Economic Productivity During Pandemic Times
Having implemented measures to contain the spread of COVID-19 and alleviate the public health crisis, the natural concern is how to maintain societal well-being and reduce the economic costs associated with the pandemic.
Right now, there are two challenges: in the short-term, ensuring people have enough financial resources to comply with containment measures and a gradual reopening, and in the long term, once the emergency is over, working toward replacing these resources invested by society and return to growth. For this to happen, it is essential that economic productivity remains intact—that is, the capacity to create value through companies and labor opportunities.
For this, we must mitigate the risk of losing physical and human capital, as their creation requires significant time and resources. Specifically, workers have had to secure formal technical education as well as the distinct knowledge of the technology and processes used differently in each company.
In addition to the financial resources they have invested, companies have developed business relationships with clients and suppliers over time. Maintaining them will help the recovery be more efficient and quicker once the emergency is over, making it possible to reach previous production and employment levels.
This is particularly true for certain emerging countries where less capital is available, like in Central America and the Dominican Republic. In addition, the small and medium-sized enterprise (SME) segment is particularly important, as it generates an average of 70% of all jobs in the region, yet has very limited financial resources in an emergency. These companies are dealing with low liquidity as a result of a decline in income from sales, preventing them from fulfilling their commitments to suppliers, the government, workers, and lending institutions. In anticipation of this possibility, the latter could limit refinancing and the credit supply. All of this could lead to insolvency among SME and a permanent loss of jobs.
Implementing Measures and SME
During this emergency, the countries of the region implemented measures to protect SME and jobs. They also moved to push back the date of payment for taxes and Social Security contributions, develop measures to support the tourism and retail sectors, and prioritize government purchasing of agricultural goods. In addition, they have reduced monetary and swap rates, as well as capital and liquidity requirements for banks; implemented foreign exchange auctions; and allowed the purchase of public debt by the central bank on the secondary market. Public procurement processes have also been streamlined.
However, if closure of the economy extends over a long period of time, putting liquidity or solvency pressure on some financial institutions, they could tighten lending standards over the next few months despite the aforementioned measures. For the recovery, it would be a good idea to evaluate the creation of a potential guarantee fund to support new lending, especially to SME. In the medium-term, measures should be taken to strengthen financial stability protections, including bankruptcy laws, deposit insurance and lender of last resort.
In addition to the public policy actions aimed at supporting liquidity and employment, the private sector financial system plays an important role in contributing to the survival of economic productivity. Private banks can be very useful vehicles for providing lines of credit to alleviate the liquidity crunches faced by companies and homes.
Financing for the recovery
First, private banks can facilitate financing for foreign trade and strengthening supply chains, which is important for imports of basic goods for the family basket, as well as for inputs for companies and safeguarding export income.
Second, short-term financing provided by banks to the corporate sector can facilitate the acquisition of working capital, the repayment of existing debt, and supplier diversification in a context in which global value chains are being disrupted. Additionally, support for small enterprises can be provided through "anchor" companies, or larger companies, alleviating the liquidity crunch faced by their base of suppliers.
Lastly, financial entities can work hand-in-hand with governments to ensure that lower income homes that receive conditional or other types of transfers can receive loans based on future transfers, with defined conditions in terms of interest rates and amounts.
Essentially, preserving economic productivity to ensure the recovery from the pandemic can be a quicker means by using all approaches available: workers, companies, and financial entities.■
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