Fiscal stimulus to prevent the coronavirus shock

The coronavirus pandemic that broke out in China just by the end of the last year has spread across the globe. It has infected more than 2.6 million people worldwide in about four months – and stays strong. Life has come to a near-halt with every aspect of it – social, political and economic – jolted to the core. Where protecting life is at the heart of global efforts to tame the mushrooming virus, the sinking world economy is a major concern as well. Financial markets remain turbulent due to a massive economic slowdown across Europe and the US. Global stock markets have sunk despite the central banks around the world making a coordinated effort to ease the drift of the coronavirus. According to the data published by the Economist Intelligent Unit, there has been a fall in the growth rate of every country – roughly by 5-6%.

Pakistan’s economy has also been infected by the coronavirus despite serious government efforts to control the damage. Volatility continues to grip the stock market. The graph below shows a substantial decline in returns over the last two months. A number of steps taken by the government, which are pretty commendable, include (a) cut in policy rate by 4.25% bringing it down to 9%, (b) a significant decrease in the prices of gasoline and diesel, (c) provision of tax rebate worth Rs100 billion ($630 million) for the export sector, (d) cash handout of Rs4,000 per month for three months to low income families, (e) ease in submission of electricity and gas bills, (f) reduced taxes on items such as sugar and wheat, (g) closure of borders for two weeks to prevent the virus, (h) suspension of all international flights to and from the country, and (i) establishment of a Corona Tiger Force to cater to the locked down people.


[caption id="" align="alignnone" width="714"] Impact of coronavirus on the Pakistani Stock Market[/caption]

The government, however, needs to do more to provide fiscal stimulus to offset the coronavirus shocks. As a foremost step, the interest rate is proposed to be brought down to 6-7% in order to promote financing. Cheaper working capital will spur business activities in the country and help raise the growth rate. It will also serve to reduce the budget deficit by bringing down the cost of debt servicing. The fiscal space thus obtained will help the government provide subsidies to people on food items and ensure availability of necessary items in the marketplace.

In order to support government spending, ‘corona bond’ can be issued meant for purchase only by the central bank to cater to emergency government spending. The corona bond can be a zero-coupon bond which will serve to reduce interest burden on the central bank. To create loan against the proposed bonds, they should be clearly year-marked as corona spending by the government. Any extra spending by the government can also be financed through the proposed corona bonds which can be purchased by the central bank. And when this crisis is over, these bonds can be financed by the taxpayers’ money. The government can provide emergency loans to the services and manufacturing sectors whose sales have fallen due to the coronavirus.



The proposed corona bond can also be used to provide financing to other sectors of the economy. Banks must comply with the Basel capital requirements. However, in case of emergency, borrowers face difficulties in fulfilling their obligations, with the banks running the risk of default. These risks can be managed by the State Bank of Pakistan by exempting borrowers from the Basel capital requirements. Such loans can also be categorised as special corona bank loans and year-marked under different modes of loan. Direct compensation should be made to workers in various companies who are forced to stay at home due to the coronavirus outbreak.

Education delivery pattern can also be changed drastically. Government agencies are required to develop guidelines for this new mode of teaching. Moreover, the stock market should be allowed for two to three hours of trading, for lesser volatility in the market.

The impact of the coronavirus is expected to start diluting in a couple of months from now. Special government spending and loans have to be identified as corona emergency spending. When the coronavirus problem is over and the economy starts recovering, those having received subsides and special loans should return the same to the central government. Emergency government spending is urgently needed at the same time on how to return those corona bonds in order to bring back the huge government debt to a normal level. These measures may cause fiscal stimulus and prevent the coronavirus shocks in Pakistan.



The writers are associated with the School of Social Sciences and Humanities, National University of Sciences & Technology (NUST), Islamabad and Keio University, Tokyo, Japan.