The coronavirus pandemic is an unprecedented public health emergency in recent history. It is also an extreme economic shock that requires coordinated and vital policy reaction to support those at risk. As a result, health and fiscal policies must be at the centre of this response.
Unlike in the Global Financial Crisis, it is a universal shock common both across countries and across all sections of society. Consequently, for a temporary period, a large part of the economy is being switched off with both public and private spending being restricted, for as long as the containment measures last.
This pandemic is affecting both the supply and demand side of the economy: with factories and operations closing down and consumers cutting back on the consumption of non-essential products. This also impacts the demand for workers, which is declining due to the economic slow down. Until today, the main industries affected by this shock are the Tourism and Aviation Industries, Food and Beverages, and the Retail Industries. Moreover, the global financial market was drastically hit, almost to a greater extent when compared to the Global Financial Crisis.
As a result, it is vital for the Government to plan an economic budget that is aimed at helping those sectors that are impacted and those that could be impacted, in case of a prolonged scenario. Hence, they must have a plan that looks at the long-term and that is able to structure the economy to be more resilient than it already is.
Although fiscal policies cannot prevent this economic turmoil, a stimulus package ensures that the downturn is no longer and deeper than it needs to be. The current situation creates severe pressures on the cash flows of companies and employees, putting the survival of firms and jobs at risk. Hence, the Government must step in and introduce a number of policies and measures that targets the survival of firms as well as the well-being of employees.
One of the lessons learnt during the Global Financial Crisis was that the use of conventional monetary policy to inject liquidity into the financial system was instrumental up to a certain point – when the interest rate hits the zero-lower bound. At this point, non-standard monetary policy measures were introduced to safeguard the primary objective of price stability and ensure that the monetary policy transmission mechanism continues to work.
During the past few days, the ECB announced measures to support bank liquidity conditions and money market activity. To support its expansionary monetary policy transmission mechanism, the ECB has recently launched a temporary €750 billion emergency bond purchasing progamme until the end of the year, amounting to 7.3 per cent of euro area GDP. Additionally, the ECB has decided to purchase commercial 23 March 2020 papers of sufficient credit quality and has made available up to €3 trillion in liquidity by lowering the main refinancing operations rate to record low, -0.75 per cent. This rate is the interest rate that credit institutions pay when they borrow money from the ECB for one week, against a collateral as guarantee.
Apart from euro area response, the Maltese Government has also stepped in and introduced an aid package that provides some breathing space to economic operators impacted by the COVID-19 outbreak, with most of the package taking the form of loan guarantees and tax deferrals.
On 18th March 2020, the Maltese Government announced a €1.81 billion economic package amounting to an amount equal to 12.9 per cent of Malta’s GDP in 2019. This package is aimed to assist both sides of the labour market, by safeguarding the interests of the workers, while at the same time giving the necessary financial support to enterprises and companies, which are the backbone of the Maltese economy.
The package includes a number of measures linked to the economy and employment as well as other social measures. The below list is a summary of the most salient measures:
1. Tax deferrals due by employers and the self-employed persons.
2. Bank guarantees.
3. Capital injection into the Maltese economy.
4. Financial aid in the form of wages to support quarantine leave.
5. Family friendly measures to support families with children who have both parents/guardians working in the private sector and who are unable to telework.
6. Measures to alleviate financial pressures on businesses.
7. Temporary increase in unemployment benefit for dismissed individuals.
8. Special temporary benefit to all persons with disabilities who are unable to telework.
9. Housing subsidies granted to families where one dependent has his/her employment terminated, and
10. Third Country Nationals cannot be employed by enterprises that have recently dismissed Maltese workers.
All this underlines the Government’s commitment to play its role in supporting every Maltese citizen through this extremely challenging time. The Government must ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock.
The only thing that is certain at the moment is uncertainty. That is why the Government must be prepared to increase the size of its economic aid, by as much as necessary and for as long as needed. All options and all contingencies must be explored to support the economy throughout this difficult period.
