Post-coronavirus economic policies

The coronavirus epidemic has sent many of the economic activities into a tailspin.

Post-coronavirus economic policies

Consumers helping farmers failing to export their products to China by buying some of them 

Nonetheless, like any other outbreaks of disease, be it long or short, Covid-19 will be over sooner or later. How should the Government come up with policies on helping recuperate the economic health?

An epidemic which lasts for a short duration, two or three months for instance, may cause sections of an economy to sputter on, or even halt. A case in point is the ongoing coronavirus outbreak. The normal operations of a host of services—such as tourism, transportation, food services and education—have been drastically curtailed.

Furthermore, the economic sectors that are closely attached to China have been adversely affected in one way or another, either input or output. Notably, local farm produce traditionally exported to China—like watermelon and dragon fruit—and local assemblers using parts made in China have experienced the bad consequences. To an economy such as Vietnam, whose bilateral trade with China rose to US$117 billion in 2019 [out of the year’s total of US$517 billion], the repercussions can be said to be widespread.

If the coronavirus outbreak lasts for two or three months, the majority of local enterprises may be able to cushion the blow. Some smaller ones may have to stop operation as they can no longer afford enough working capital to cover labor costs and space rent. However, proprietors of big corporations whose capital is sustainable may afford the minimum pay for their staff with a labor contract. Most employees have to spend frugally instead of seeking a new job. All nurture hope for normalcy to come back. The effect on the demand in the rest of the economy is marginal.

However, the economy may sag if the epidemic prolongs. Financially weak businesses may fail to withstand the storm and may have to lay off part of their work force. The subsequent unemployment will inevitably further dent demand in the economy, exerting negative impact on enterprises in other industries. If the number of shutdowns keeps growing, inflating dud loans in the banking sector will significantly reduce the supply of credit for other sectors. The economic slump may exacerbate and morph into an economic recession.

Meanwhile, public spending for epidemic combat is growing all the time. In contrast, public collection keeps shrinking. The State funding for post-Covid-19 economic revival efforts is therefore limited.

Optimal solutions

Different scenarios of Vietnam’s economy are possible following the coronavirus outbreak, depending on the time the outbreak ends and how severely it affects the global economy.

In line with the lucky scenario in which the outbreak terminates after March in Vietnam and is contained on the global scale, the majority of economic operations will be back to normal. Enterprises previously working perfunctorily will restore their production capacity. It is every likely that in such a backdrop, demand, after suffering from the coronavirus outbreak, will exceed their normal growth pace and spur the growth rate of the entire sector in question faster enough to offset the plunge during the time of the outbreak.

As a matter of fact, plenty of companies will bear the brunt of the outbreak. Yet such a loss should be considered a kind of risk faced by any enterprise during its course of doing business. The Government should not in any circumstance extend financial assistance to an enterprise in such a backdrop. The best policy pursued by the Government following the termination of the epidemic is to launch effective communication campaigns to instill hope in consumers, both at home and abroad.

 

If the Wuhan-originated coronavirus outbreak continues to spread in China, the Government should focus on measures for supporting domestic enterprises in their endeavor to find supplies of materials and new markets to reinstate production. This move should be started by the Government without delay from now on.

If the worst scenario plays out, the coronavirus outbreak extends globally until the end of the second quarter or even longer, tax break and tax exemption should be given by the central Government, or provincial authorities are allowed to use their reserve funds to support local credit institutions to provide financial help for enterprises in affected industries.

In case the entire economy suffers so enormously that it is about to enter a recession, the Government may mull a reshuffle of the effective tax system toward drastically reducing the corporate income tax, raising the brackets of the personal income tax and compensating for the tax loss by raising the value-added tax.

This measure will both ensure budget balance and encourage citizens to practice thrift and invest their money in production. It will also attract better foreign investment. All will help the economy be back to its normal track. What’s more, such a reform will indefinitely provoke outright confrontation in normal conditions, but it may be easily acceptable when the outbreak comes to an end.

In short, in any scenario, the Government must be determined to stay away from the abuse of the monetary policy to stimulate the economy. Over the years, the Vietnamese economy has recovered and obtained a stable growth due partly to the Government’s steadfastness in stabilizing macroeconomy and cutting annual inflation below the 4% level.

What matters most in the economic recovery after the Covid-19 outbreak relates to engender confidence of citizens and the corporate circle. Any price shock will prompt consumers to cut spending and investment, which will adversely affect the economic recovery. SGT

Dinh Minh Tuan

(*) CRO, Market-based Solutions Center for Social and Economic Issues - MASSEI

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