By Justin Ram, Economist
Governments around the world are in the midst of trying to contain the Coronavirus disease 2019 (COVID-19) outbreak. Governments around the world have taken steps to reduce the rate of infection and morbidity associated with the virus by asking their citizens to refrain from congregating, or from going out, unnecessarily. Many have taken extreme steps including closing their borders and halting social and economic activity to encourage social distancing. This practice of social distancing, as it is now known, is meant to flatten the infection curve thereby reducing the probability and spike of infection, and the possibility of overburdening the healthcare system. Flattening the health pandemic curve is depicted in Figure 1, which shows the number of cases without Public Health Measures or social distancing (red line) and with Public Health Measures or with social distancing (blue line). The latter depicts the notion of flattening the curve.
Social distancing is not meant to eradicate all cases but to keep the amount of infections of the at˗risk population within the capacity of the healthcare system, until a vaccine becomes available, or enough of the population becomes immune to the virus. The Appendix gives a brief epidemiological discussion on social distancing.
It is important to understand that unless a significant amount of the population becomes immune to the virus or that a vaccine is developed soon, the need for social distancing might have to continue for a long time or there could be repeated episodes of viral outbreaks and hence prolonged or repeated episodes of social distancing over the next twelve to eighteen months. The mandate of policy makers at this time must be to permanently flatten the health pandemic curve and to return society to normal activity within the shortest possible time.
However, there will be trade-offs associated with the flattening of the pandemic curve. This note discusses the economic implications of COVID-19 for the Caribbean and the policy response that governments in collaboration with other domestic agencies, such as central banks and private sector chambers of commerce, other regional governments and regional organizations such as The Caribbean Community (CARICOM), The University of the West Indies (UWI) and the Organization of Eastern Caribbean States (OECS) should consider.
The financing requirements to support the economy during the initial phase of the pandemic crisis and then further financing requirements for the recovery will also be discussed. Here the international community including the multilateral financial institutions such as the International Monetary Fund, the World Bank, Inter-American Development Bank and Caribbean Development Bank must play a coordinated and significant role. Bilateral partnerships will also be necessary.
Finally the note discusses an implementation framework that governments in collaboration with all relevant stakeholders could use to deliver on the policy priorities that the COVID-19 crisis currently requires and the inevitable economic recovery and resuscitation plan that will need to be delivered after the health pandemic subsides.
Enforced social distancing will save lives. Inevitably, with public health measures or social distancing policies that are currently in place, economic activity will decline during this phase of trying to contain the transmission of COVID-19. The economic impacts of social distancing are not restricted to the effects of domestic social distancing, but include the wider global impacts of other countries implementing social distancing policies at the same time. With global social distancing taking place, Caribbean goods and services supply chains will be impacted. We have already begun to see the effects of this on the wider tourism industry, including the airline industry, cruise ship industry, hospitality industry and commodity sectors (the main industries and sectors of Caribbean economies). There will also be spillover effects on the retail and wholesale industries and eventually all other sectors of the economy. The impacts on the financial sector will need to be monitored closely as the percentage of loans that are non-performing could increase and capital requirements could also be strained. Government fiscal accounts will also be stressed as fiscal deficits expand due to a reduction in tax revenues and the necessary expansion of expenditure to fight the health pandemic and provide fiscal support for the economy. Therefore debt levels as a percent of GDP will increase. These macro stresses will lead to higher levels of unemployment and higher levels of poverty and other social deprivations.
Not only are supply chains expected to be compromised, but productivity in countries which practice social distancing will likely be severely undercut as a large swath of the labor force are at home and not fully engaged in productive activity. Even in cases where working from home is an option, the closing of schools means that parents who work from home would have to split their normal working time with parenting duties.
Therefore, both aggregate demand and eventually aggregate supply in the economy will shift inward leading to overall output reduction and a change in the overall price level. Figure 2 shows the likely impact on aggregate demand and aggregate supply in all Caribbean economies. Equilibrium would have initially been at E2 where the original aggregate demand curve (AD1) intersects with the original aggregate supply curve (AS1) and where output would have been Y1. Due to the COVID-19 shock, initially the AD curve shifts inward but as demand drops so too would supply causing the AS curve to also shift inward leading to a consequent fall in output to Y2 and a new lower level of equilibrium at E2, with a likely impact on the overall price level as well and employment.
This means that there would be a natural trade-off between economic activity and the preservation of life and the minimization of infection rates. There could be a sharp contraction of the economy because of social distancing and virus containment. The depth and length of the economic contraction would depend on how long containment must last and how long it would take to keep the virus at bay. The depth and longevity of the economic contraction or recession will also depend on the economic policies that are implemented during the social distancing phase of containment, and the economic stimulus provided after containment. Figure 3 describes how deep and long the economic contraction or recession could be without macroeconomic support measures (red line) and with macroeconomic support measures (blue line and area). Recovery from the containment phase of the virus will therefore depend on the economic support (mainly fiscal but also some monetary) policymakers provide to the economy during this time. The correct economic policy response during social distancing could reduce the depth and cost of the contraction by the orange shaded area in Figure 3.
In Caribbean economies, there is an additional constraint of foreign exchange reserves. Any support for the economy will have to be balanced against the need to maintain enough foreign exchange buffers since a large percentage of what is consumed, including the necessary medical supplies that are necessary to treat with COVID-19, are imported.
The impact on foreign exchange reserves will have to be monitored carefully since this important macroeconomic variable is vital for the proper functioning of Caribbean economies. In fact, sufficient foreign exchange reserves will need to be the anchor or benchmark macroeconomic variable against which any economic support that governments or the monetary authorities attempt to implement during and after the crisis.
Policymakers will have to respond in two phases. The first phase is during the containment period of social distancing, to keep their economies “above water”; and the second phase is after the health pandemic has subsided, to help kick start growth, with a particular focus on managing the demand and supply of foreign exchange reserves.