The measures outlined by Finance Minister Colm Imbert to mitigate the impact of covid19 have been described as a “reasonable start” by economist Dr Vanus James but inadequate.
James said Imbert’s outline of policy measures to address the cash flow problems created by covid19 fall short in some crucial ways.
“I don’t think the Government has covered the spectrum that has to covered to save the economy,” he said.
If not addressed, he said, the omissions could result in widespread job losses and bankruptcies that will make economic recovery very difficult after the covid19 pandemic is under some control.
“The key policy adopted was to cut the rate of interest on loans, lower the Central Bank’s reserve ratio and increase the supply of cheaper credit to businesses. This was accompanied by a one-month deferral of business debt repayment obligations negotiated with commercial banks. That is an important part of the needed package designed to lower cash outflows to meet interest and debt obligations,” he said but added it ignores a major challenge.
“Despite the lower cost, many businesses will be unable to quickly access the increased credit through the banking system, because of collateral requirements. In the absence of a programme of loan guarantees, the policy will prove to be blunt, taking too long to generate the desired effects relative to the short time available to provide an urgent response to the immediate cash flow problems created by social distancing,” he said.
Secondly, he noted that the largest and most important of the immediate cash obligation of businesses is the wage bill, which is tied to the level of employment.
“Instead of relying on slow-access, cheaper credit to address this outflow, policy-makers around the world have been opting to provide businesses with direct (conditional) cash transfers proportional to the number of workers they want businesses to keep. This is a key component of the policy of bailout being adopted around the world, including in Jamaica. It is completely missing from the Government’s policy response,” he said adding that in its place, the Government is simply asking businesses to delay layoffs.
“In the midst of a crisis of demand created by social distancing, that missing element will only result in widespread layoffs and business failure, which would also make recovery difficult after the crisis is over. It is far too costly for Government to leave this key element out of its policy package, and it should move urgently to make the change.”
James said it is from this perspective that the initiative to support hotel renovations during the crisis will prove to be inadequate.
“Every effort has to be made to keep businesses solvent until customers return and sales begin to recover, and conditional cash transfers will be immediately effective in doing this.”
The third major element of the immediate cash outflows from businesses, as outlined by the economist is tax obligations: income tax, green fund, unemployment levy, customs duties and the like.
“Most countries recognise the immediate threat these tax outflow poses to businesses in the crisis and have moved to cut taxes or defer tax obligations.
“Indeed, this was the first policy step Jamaica took to reduce the risk of business failure. It is very puzzling that our Government has not included this measure in its policy response, even given its own budget challenges which it is addressing by borrowing. Right now, other than life itself, nothing is more important than keeping the businesses afloat by all possible means, even if Government has to borrow to do that.”
James said the Government has to set the example for businesses and citizens.
“Government must move immediately to introduce the tax cuts and deferrals that address the threat of business failure, before it is too late.”
On Monday’s announcement that Government will be expediting the payment of VAT and income tax refunds, James said this still was insufficient.
“Even if the Government pays those arrears and expedites those things, that’s a tiny share of the cash flow challenge these businesses would face. The businesses that the Government would owe (a lot), would tend to be large businesses. The vast majority of the risk the country faces is the risk to the medium and small business that are employing the vast majority of the population. What they need goes beyond the measures the Government is taking now.”
– with reporting by STEPHON NICHOLAS