The impact of the quarantine on the economy: how to not lose the industry
Ukraine cannot afford an ongoing and strict quarantine. Otherwise, the country will lose 16–20% of its GDP
Lockdown measures taken by countries erode national economies. However, no one has yet figured out how to minimize the effects of the current pandemic on the economy. Ukraine and the world have faced such a huge challenge for the first time ever.
A decline in the U.S. gross domestic product is currently estimated on average at 35% in Q2 and 3.3% on a y-o-y basis. Developed economies can flood the economy with money without fear of inflation risks. In contrast, Ukraine cannot afford that.
In our country, GDP is expected to fall by 20–25% in Q2 and by 6–10% on a y-o-y basis. This means Ukraine has a chance to suffer less losses in Q2 than other countries, but more losses at the year end. It turns out that the country cannot afford an ongoing and strict quarantine, since our economy will not be able to recover after it.
The quarantine in its current form is causing enormous damage to the economy and to every Ukrainian. It would seem that nothing is impeding the operation of industrial companies. However, indirect effects should be taken into account. Specifically, companies are experiencing tremendous difficulties in bringing workers to and from work, transporting raw materials and goods.
What if the number of cases of disease does not decline in May? If the quarantine lasts for two months and fails to produce results, this would mean it was not properly organized. Do we need tougher measures, including suspension of industrial production?
In case of a strict quarantine, we could lose 16–20% of GDP, i.e. the share produced by processing and mining industries. A slowdown in the industry will affect other sectors. As a result, scenarios of a crisis looming on a catastrophic scale are not improbable.
It should be understood that some industries cannot be halted. And if they are, their restart would require colossal costs. I am now talking about steel works, coke plants, coal mines. The specifics of operation of coal mines, for instance, does not allow suspension of pits until they are completely exhausted, otherwise mining pressure may eventually crash equipment.
The same is true for the agro-industrial complex as well. Its uninterrupted operation is a matter of food security. Stable operation of the chemical industry is a basis for rhythmic operation of the agro-industrial complex.
Everything is interrelated in the economy. The strictness of quarantine measures in one production segment will inevitably lead to interruptions in other sectors of the economy.
So, it is necessary to think right away how to change an approach to combating the epidemic. I would recommend taking selective measures targeting both the public and the economy.
There is no need for sector-specific measures to support and develop the industry. Support measures should be in place for the entire industry and exporters: agro-industrial complex, mining&metals sector, energy, mechanical engineering, transport infrastructure, chemical industry and others.
The list of the most important, in my opinion, measures ranked in order of priority is given below:
- Ensure movement of employees to and from work (unimpeded access to workplaces).
- Ensure uninterrupted operation of logistics infrastructure (Ukrzaliznytsia (Ukrainian Railways), ports, river infrastructure) prioritizing domestic transport over transit.
- Reduce tax pressure on business: ensure real automatic VAT refunds without artificial delays for document checks; support producers by allowing deferral of single social security tax, land tax, environmental taxes. This will enable companies to retain liquidity and save jobs.
- Cut tariffs and ban a further increase in tariffs of state monopolies: set reasonable tariffs at ports; decrease tariffs of Ukrzaliznytsia, as the producer price index dropped by 7.4% last year.
To rebound the economy, it is necessary to create a domestic market and encourage investment. This needs to be done through the following steps:
- Implement the state target program of infrastructure project development (Ukrzaliznytsia, ports, river infrastructure, road fleet, energy).
- Step up the reform of Ukrzaliznytsia providing for its division into three operators.
- Launch a home loan program.
- Expand lending to purchase domestic machine engineering products.
- Increase government orders for Ukraine-made products of the military-industrial complex.
The crisis is a catalyst for reforms. Therefore, efforts should be focused on improving the investment climate to make it a key performance indicator (KPI) of the Cabinet of Ministers in the long term.
Even hints of default are not allowed in this context. The government and the population are interested in business development and investment. And the business is interested in borrowing at low rates. This is possible only given a high sovereign rating and a good investment climate in the country. Default will derail everything and deepen the economic crisis.
I am confident that laws needed to renew the cooperation program with the International Monetary Fund will be adopted despite some difficulties. Cooperation with the IMF will minimize the risk of sovereign default both this and next year.
Governments of advanced and emerging economies support the industry seeking to save and create jobs. According to the IMF, government loan guarantees have become an important tool of business support.
Besides, it is necessary to protect the domestic market against unfair competition and growing imports, because competition in foreign markets is becoming fairly intense. To protect business today means protect the employment.
Areas of focus are clear. Some of them do not require an increase in budget spending. These include reform-related and regulatory measures. It is necessary to set priorities for the rest, because the budget is limited. However, time is also a limited resource in this situation. The fight against the crisis requires prompt and decisive action.
Initially published by Іnterfax-Ukraine