Viewpoints | Oct 10,2020
Apr 4 , 2020.
In Addis Abeba, as in the rest of the world, there is less pollution in the air, less congestion on the roads and a reduced volume of noise on the streets. The concept of smart cities and smart economies is not the reason for this. Theatres, bars, restaurants, cafes and hotels are either closed or near empty. Business activities have all but ceased. Almost. People are staying home unless it is essential to carry out tasks.
Ironically, members of Ethiopia's legislative houses both at the federal and regional states appear to think theirs is not a job that is "essential" to advance their constituencies' interests. If there is any time members of the public need their foresight, leadership and guidance, it can only be now, a time of anxiety and fear.
The world has faced an epic battle in containing the deadly Novel Coronavirus (COVID-19) from spreading further and claiming lives. By Friday afternoon, over a million people had contracted the virus throughout almost all the countries of the world. Over 54,000 of them have died; and the number swings alarmingly high by the minute.
As is the rate of infection in Ethiopia. April 3 was registered as the day with the highest number of people reported for contracting the virus since the first case was identified on March 13. Out of the 76 people tested, six were found to be confirmed cases, an eight percent incidence that is much higher than the global average of three percent. The total number of people who have contracted the virus was 35 out of 1,222 people tested.
There is little doubt that these numbers will change soon. Unlike the pandemic though, which may drag on for months at most, the crisis the economy faces will stretch further into the future. In the glaring absence of the legislators, the economy stares directly into an abyss.
The social distancing measures currently being taken to contain the spread of the virus, in restricting physical transactions and the movement of people and goods, are severely impacting the economy. For a global economy that depends on mobility, disruption to production, distribution or consumption threatens the very fabric of society, leading to paralysis and leaving in its wake a socio-political upheaval.
All travel by land into the country has been curtailed. In contrast, everyone that enters its borders by air is quarantined for 14 days, a restrictive measure that severely discourages travel into the country.
Governments in regional states have been just as aggressive. They too have sidelined their legislators in doing whatever their executive branches deemed necessary. With a notable exception. The Tigray Regional State invoked its power from the region's legislative council to declare a state of emergency and ordered the closure of all cafes and restaurants. The Oromia, Amhara and Southern regional states have as well restricted inland road transport.
In Addis Abeba, the last time members of Ethiopia's parliament gathered was a day before the announcement of the first COVID-19 case was reported. An attempt to convene parliament a week later was cancelled owing to the risk a large gathering might spread the virus. It is baffling to see Speaker Tagesse Chafo and his Secretariate's lack of imagination to find many other ways to convene parliamentarians while avoiding the risk as several legislatures in many countries - poor or rich - do have. Why taxpayers are footing the payroll of legislators on leaves of absence during a time of desperate need for their constituencies is an issue Speaker Tagesse and his team should address to the public.
The country is effectively in partial quarantine.
The impact from this, however, is not equal. The disruption that results from social distancing measures will not be felt equally across industries. The hardest hit are those in the hospitality, export, manufacturing and financial sectors, while the agricultural and construction sectors are impacted less in relative terms.
No doubt this will have a macroeconomic implication of dire proportions.
Cepheus Capital, a private equity fund, projected for the GDP to contract by two percentage points from what was forecasted at seven percent. The impact on the balance of payments will run to 1.5 billion dollars, perhaps causing job losses of up to 1.5 million of the 7.5 million jobs there are.
Society will overcome such moments of difficulty. It is companies that will have their viability devastated and individuals who will have their lives shattered. Even then, firms with large capital bases or secure networks positioned among the sectors and industries the state considers deserving of priority, may not find it painless. But neither will it pose an existential threat.
In contrast, small businesses that neither have adequate savings nor networks will find it near impossible as partial lockdown stretches into weeks and entirely unbearable as it extends into months. Measures put in place to protect public health threaten the prospects of businesses that are medium-sized and small businesses. Of the latter only, there are around half a million that were established over the past years, employing almost two million across the country.
Legislators were supposed to pull their sleeves up and sweat to come up with a comprehensive, federal-level response plan to cushion the impact from COVID-19. They were meant to author and pass legislative instruments for the administration to employ on the monetary and fiscal fronts. They should have introduced a stimulus package and debated its merits. Such a package should be tied to the administration`s resolve to address the immediate concern on the spread of the virus; test the resilience of its policies; chart a course for a return to normalcy; reimagine the Ethiopian society beyond the epidemic; and reform its state to serve the new normal.
Such a towering task will not happen without a cost. Close to 37 countries across the world have passed an economic stimulus package in response to COVID-19, committing varying sizes of their respective GDPs from the UK's high of 25.1pc to Nigeria's 0.6pc and Dubai's 0.4pc. Ethiopia could follow suit, perhaps dedicating 2.3pc of its GDP to pay for fiscal and 1.2pc for monetary responses.
A country like Ethiopia is at its weakest during such a monumental crisis. Its healthcare system is fragile; it has limited fiscal space to manoeuver; the size of its small businesses and the informal economy three times larger than the fornal one; and its demography is young (70pc) and quickly urbanising.
Understandably, policy wonks are worried that fiscal and monetary responses in such context would exacerbate an already delicate situation on the macroeconomic front. They fear the worst menace to an economy: stagflation. It is a twin occurrence of inflation and high unemployment, where prices are high and consumers do not have money in their pockets.
Policymakers are between the rock and the hardstone. Under the current reality, they may not even have to worry about some of the negative externalities of fiscal expansionism, the most critical of which is inflation, running at 24pc. With a recession looming, depressed demand created as a result of millions staying home will significantly reduce spending, lessening inflation. Hopefully.
The administration of Prime Minister Abiy Ahmed (PhD) is justified in increasing its fiscal deficit to have the ability in tax intervention in several fronts. But this would mean that it has to get the blessing of the legislative body.
Armed with an expanded fiscal space and monetary flexibility, the administration should develop a response plan that takes as much of the burden away from the private sector as possible. Its response must recognise that small businesses, which typically have tiny profit margins, are the most at risk of running out of cash. To cushion them, it can reduce the percentage of value-added tax (VAT) and dividend tax while freezing withholding tax and income tax lower than a threshold level for a year.
The administration could also allow businesses that employ under a certain number of people to get meaningful tax reductions on annual profits. This can start from what the government itself considers to be micro and small businesses, which employ up to 30 people and have capital of under 1.5 million Br for manufacturers and half a million Birr for service providers.
Banks, with the proper backing, can also be encouraged to arrange more attractive loan packages for cash-starved businesses. This could be done by instituting certain expansionary monetary policies in place, such as a lower interest rate on deposits. Reducing this will allow banks to loan to their clients below the 15pc to 20pc interest rate common at the moment and still profit.
Such expansionary and fiscal policies, more than as the means with which to grease the economy by printing money, should be seen as instruments for stimulating businesses. The country, and the world, have entered an unprecedented and sudden economic turnaround. New challenges have arisen, and they demand new responses. Be creative and brave, of course!
PUBLISHED ON Apr 04,2020 [ VOL 21 , NO 1040]
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