The economy post covid- 19

28 June 2020

Kemet Boutros Ghali Foundation for Peace and Knowledge (KBBGF) organized a webinar on the “Economy Post COVID 19”. Renowned national and international experts took part in the webinar which focused on the economic impact of the pandemic.

Mamdouh Abbas, Chairman of the Board of Trustees of kemet Boutros Ghali Foundation for Peace and Knowledge, welcomed the participants.

While there is no way to tell exactly what the economic damage stemming from the world lockdown will be, there are widespread agreements among economists that it will have severe negative effects on the global economy. The tight restriction put in place by world governments to stop the virus spread, though described by many as having similar economic repercussions as the one that took place in 2008, it is different and deeper. Quoting the distinguished economic expert Mohamed El- Erian, the 2008 crisis kept the world on its toes worrying about an economic heart attack.

However, the COVID- 19 crisis is more like the Great Depression threatens the world system with almost a standstill or complete paralysis as Abbas said. The economic damage of the pandemic is largely driven by a fall in supply and demand at the same time, Abbas said, adding that growth rates are falling- down coupled with an increase of unemployment rate, and lower labor productivity in the longer term. Governments have come between the hammer and the rock of the traditional economic convictions because governments’ spending which became a necessity has also been shaking their budgets that already suffered from sharp decline in remittances, the heavy burden of internal and external debts, and the financial disruptions, not to mention poor health system, Abbas said. However, the world governments should not be confronting the consequences of COVID-19 all by themselves. The seminar as Abbas puts it, is an attempt to foresee the economy post Corona virus.

Ambassador Dr. Khattab, Executive President of Boutros Ghali Foundation, opened the debate by highlighting the horrific repercussions of the lockdown imposed over 90 countries. Five months since its eruption and despite frantic efforts by scientists around the globe, the virus remained vague. Governments were left with no choice but resort to lockdown. Unprecedented restrictions have triggered deep recession globally, in advanced economies as well as developing economies (EBDES). The deep recession currently underway is likely to have lasting scars through multiple channels, including erosion of human investments, erosion of human capital and retreat from global trade and supply chain.

Ambassador Khattab said, those months had been an economic calamity of frightening proportions. On the health side, the virus infected almost nine million people along with nearly half a million lives lost and the cases still grow at frightening rates. Khattab said the economic side is equally scary with zero revenues for most businesses, a halt in capital expenditure and delinquency in debt repayment, and governments spending millions in stimulus packages while racing against the time to find a vaccine, have been among the endless repercussions of the disease.

Quoting world reports, Dr. Khattab said that the World Bank forecasts the global economy to shrink by 5.2%; the biggest recession since world war 2. The bank also projects that economic activity among advanced economies is anticipated to shrink by 7% in 2020 as domestic supply and demand trade, and finance have been severely disrupted. Emerging markets and developing economies are expecting their first contraction as a group in at least six years. Per capita incomes are expected to decline by 3.6% which will plunge millions of people to shrink by 2.5%; into extreme poverty. The world has thus changed because of COVID 19 and we must cope with its consequences. Therefore, we will discuss macro and micro- economics and the future of the small and medium-size enterprises. However, the discussion should focus economically on building more justice and fair economic system that lessen the gap among classes, decrease poverty in all its multiple facets and above all how policymakers will implement sustainable targeted fiscal and monetary measures to support the affected households and businesses domestically to make the best out of it especially investing in human capital , the SMEs enterprises, and the financial inclusion where a country like Egypt invested heavily on that, Dr. Khattab said, adding that several economic rules like budget deficits that should not exceed 3% of the GDP and the 60% ratio of debts to GDP will be revisited in the world economy post COVID -19. Politically, failing to contain the virus crisis both internally and externally, have raised eyebrows among the supporters of the rising populism trend in countries like the United Kingdom and the United States.

Dr. Hala Al Saiid, Minister of Planning and Head of the Advisers’ board at Boutros Ghali’s foundation, said decision makers and local governments have dominated the scene worldwide through the strict measures set to protect their citizens from the virus, the precautionary measures, and the economic stimulus packages. It affected almost all facets of life including the supply and demand, tourism, civil aviation, and the retail chains, besides small and medium- size enterprises. It is beyond any doubt that whatever affects the peoples’ health would have an enormous impact on the economic processes, Dr. Saiid said. However, some sectors like the medical and agricultural have benefited during the economic lockdown. Despite all odds, the agricultural sector in Egypt enjoyed a 34% increase in exports during the crisis, Saiid added.

The precautionary measures taken by the government in Egypt were unprecedented. The Central Bank of Egypt (CBE) resumed its monetary easing cycle throughout the first half of fiscal year 2020. The CBE cut policy rates successively, in March 2020, the bank undertook an additional 300 base- points policy rates cut to support credit extension, especially to the private sector in the face of the negative repercussions of the pandemic. During the same month, the government announced the allocation of LE 100 billion; almost 2% of the GDP as an emergency response package to combat the COVID- 19 pandemic. The government took to several social safety net measures, including scaling up the existing cash transfer program, Tkaful and Karama, adding a 60.000 households in March. It also introduced a one time- off cash payment to irregular workers affected by the lockdown because of the pandemic, targeting 1.5 million workers with LE500/ month for three consecutive months starting April 2020, Saiid said. It has also extended post office working hours, used schools as payment sites, staggered payments over several days, and is trying to innovate with e- payments to promote social distancing. The government has introduced, according to Dr. Saiid, exceptional wage and pension increases, revised tax exemption thresholds, and raised the minimum wage.

The pandemic aside, the country’s fiscal account has improved, the government debt-to- GDP ratio has dropped and foreign reserves at comfortable levels covering 8 months of merchandise imports. Saiid said that real GDP growth increased in Egypt to 5.6% in fiscal year 2019 (ending June 2019), compared to 4.6% in the previous three years. The robust performance was sustained throughout the first half of the fiscal year 2020, driven mainly by investments and the improving balance of net exports securing 5.8%, 5% respectively, yet -1% in the first quarter of 2020 due to the pandemic. However, the overall growth rate for the fiscal year 2019-2020 rests at 3.7%, Saiid said.

The minister of planning pointed to the dynamic nature of the government adopted plan to confront the pandemic. “The plan has always been revisited and our priorities were adapted in accordance to our needs,” she said. Therefore, when the government has to take restrained measures to protect its citizens, it has also undertaken stimulus measures that come within the framework of the UN Sustainable Development Goals (SDGs) which is part of Egypt’s 2030 strategy.

In Egypt, like in other countries, a good portion of the population suffers from the multi- facets of poverty which practically means poverty in the educational and health services and the financial ones, Dr. Saiid said. Therefore, the government has been working on locally implementing the SDGs on a geographical level to fill the development gaps among the governorates and secure better life- style for all Egyptians, she added.

Ambassador Khattab invited the renowned expert Dr. Mahmoud Mohieldin UNSC special Envoy on Financing the SDGs, to present his view on the status of the world economy, asking if it is possible to improve the economic scene by fully implementing the SDGs as one package? On the financial policies to redress the negative impact of the pandemic on implementing SDGs, he said that post COVID- 19 economy is the one of fear. The world had to confront three shocks in one go… “The health, economic and financial shocks.” In earlier cases of crises, experts were typically worried about the economic performance, whether it will negatively impact human lives, “but this time we are all worried about human beings and how they will survive the pandemic,” Mohieldin said.

Moreover, the contraction as calculated by the world experts is yet to be seen realistically. Dr. Moheildin said that we should calculate the foreseen growth prior to the pandemic, which was forecasted at 3% then add on the expected contraction of the world economy. According to this scenario we will face almost -10% which practically means an army of the unemployed, a huge number of people pushed beyond the poverty line and a serious impact on income and wealth distribution.

Borrowing the K letter used by the Financial Times newspaper to describe the crisis of households post the pandemic, Dr. Moheildin pointed to the fact that there will be a good number of people who will manage the upward part of the letter K. However, from the same point of the crisis (mid of the K letter) many people will go downward. This means that many will go back to their normal consumption and income, meantime many others will lose a lot.

Inviting Dr. Rola Dashti, Head of the Economic and Social Commission for Western Asia (ESCWA), Ambassador Khattab said that what we need to know is how to deal with the current situation on the regional level. According to her, ESCWA issued several recommendations with specific measures for the regional states to implement and thus it is important to focus on that and recognize women status especially that they have weak economic and political participation. Dr. Rola agrees with Moheildin that all aspects of economic growth notably its social and humanitarian issues, should be an unbiased comprehensive and inclusive process, capable of striking sectoral and regional balance, besides all elements related to the social and humanitarian issues. The unprecedented humanitarian crisis of COVID- 19 hit hard women and irregular workers especially on the regional level. According to her the world governments’ response was as equally tremendous since they have allocated 9.6 trillion dollars which is almost 11% of their GDP to meet the needs of the confrontation process.

Dashti lamented that the Arab region’s share of this figure was $100 billion, representing only 4% of the Arab countries’ GDP, adding that the region needs an extra $100 billion to be able to reverse the impact of COVID- 19 crisis. Medium and low income countries have appropriated the equivalent of 6.3% of their GDP to counter the repercussion of the virus which reflects how heavily indebted Arab countries are. She called upon Arab governments to widen their financial space and adopt smart spending mechanism. They are also in need of establishing social spending monitor for more transparency and to control financial waste.

According to Dashti almost 10% of the people in Arab countries own 76% of the region’s wealth, while 50% of the poor own only 2% of the wealth. Establishing the social solidarity fund reinforces the concept of social responsibility between the rich and the poor. She urged Arab countries to adopt the concept of shared responsibility through entrepreneurship and start- ups that can benefit from large corporations and engage SMEs in their value chains, in addition to exempting them from paying a number of financial obligations for the sake of applying sustainable development in its broadest sense.

Asia Infrastructure and Investment Bank (AIIB) has also been involved in financing development projects throughout the Continent. Ambassador Khattab, asked The Right Honorable Sir Danny Alexander, on the lessons to be learned from Asia in confronting the pandemic and if the AIIB considers education as part of its investment in infrastructure since many decision- makers refrain from investing in that field which has only long term results.

On the role played by the International Financial Institutions (IFIs) during the crisis, Sir Alexander said that the pandemic has its toll across Asia on several sectors of the economy. The disproportionate impact on low income sectors, countries with weak health systems, and the negative impact on inter-state trade, have made coordination among the IFIs an essential tool to mitigate the negative consequences of the pandemic.

Prior to the pandemic the AIIB has focused on and prioritized investing in the economic infrastructure in terms of roads, railway networks and solar power facilities. However, with the pandemic knocking at our doors in Asia the bank has to shift part of its resources to help its member states respond to the crisis. “In concert with the World Bank and Asia Bank, the AIIB established an emergency facility which funded emergency public health responses, including the development of health system capacity and provide essential medical equipment, supplies to combat COVID- 19 as well as long term sustainable development of health sector.” Sir Alexander said.

The bank has extended assistance to the health sector in India and Bangladesh. It offered a loan of $650 million to support the budget of Kazakhstan, another $500 million were offered to two development banks in Turkey, and $165 million loans to enhance Uzbekistan transport connectivity. A billion- dollar loan was also approved to Indonesia as part of a coordinated international efforts to support the Government’s plans to strengthen the country’s social safety nets and bolster its health response to the pandemic.

According to Sir. alexander, the AIIB which is funding three energy projects in Egypt; a founding member of the bank, has also coordinated its efforts with the National Bank of Egypt to finance the private and public sectors’ needs.

The bank’s motto which goes ‘Clean, Green and Lean’ has also been opting to financially support projects in trade, help its 102- members meet their needs as far as the climate change agreement is concerned, in addition to mobilizing the private sectors’ capital get more involved in infrastructure projects, Sir. alexander said… “In a period like this, the bank’s efforts are focused on the fact that the recovery process should be inclusive as its members have difficulties accessing the international market as they used to do before the pandemic. The geopolitical tension made it even harder for countries to work closely in response to this crisis, as they did in 2008…That is where the IFIs should interfere and find a common theme.” He added.

Ambassador Khattab, referred a question asked by Dr. Ambassador Waleed Abdel to Sir. Alexander on whether the current crisis is worse because of the spillover of the 2008-2009 financial crisis or as Khattab said it is worse because the IFIs are under pressure since countries around the world are seeking help? However, Sir Alexander believes that the current economic crisis is not due to the spillover of the 2008 financial crisis. At the time, several measures were taken to strengthen and enable the IFIs to cope with similar events. “I would not describe the IFIs as being over- stretched. We see crisis response as part of the services we provide to our members and thus part of our resources are put aside to meet their needs. However, the current situation is difficult because we don’t know how long it would last and what sort of new requests and needs we should meet. We have to keep an eye on that and continue to have all our tools handy,” he said

You can’t make the poor richer by making the rich poor, was the opening statement commenting on the projections of the global economy post COVID -19, Hesham Ezz El- Arab, CEO at the Commercial International Bank (CIB), said. He believes that the redistribution of wealth and imposing higher taxes on the rich will not solve the problems of the poor. However, enabling people to have quality education and democratizing the health care services will give the poor a better chance to improve their economic status.

On the impact of Covid- 19 pandemic, Ezz El- Arab said that the pandemic has caused viable business models to collapse leading to financial distress, job losses, increase in non-performing loans, sale of assets and insolvency. To contain the Covid-19 recession, governments and central banks have allocated significant funds to businesses in the form of loans, leveraging further balance sheets and increasing risks, as higher debt-to-equity ratios are not sustainable. According to Ezz El- Arab, this becomes more complex for Emerging Markets and Developing Economies (EMDEs) as they are prone to be at greater risk because of the limitations of their financial systems and resources. The Covid crisis has impacted 90% of employment for private businesses in developing countries and is projected to cause the first recession in Sub-Saharan Africa in 25 years, undoing hard- fought progress in reducing extreme poverty. In developing countries, Ezz El- Arab said, the damage may be amplified by insolvency regimes that disproportionately result in liquidating firms—even when they are viable—and return less than 30 percent, on average, to creditors.

In the Covid-19 crisis, governments and central banks understandably focused on cash-flows and provided liquidity to firms, firefighting with ad hoc solutions, however in a systemic crisis, solvency needs much more attention as there is a risk of forcing viable businesses into liquidation. In addition, caution should be provided in stress environments towards Zombie firms that continue operating and servicing debt, but cannot repay the principal, which diverts support away from healthy businesses.

According to Ezz El- Arab, all stakeholders have to be creative and adapt to new response tools for the Covid recession. An alternative to debt financing is equity capital that may prevent potential insolvency, as it later provides funding for business continuity, and protects business models from further potential shocks. He explained that historically, existing shareholders and sometimes governments have provided equity injections for firms in distress situations, however with Covid-19 (1 in every 100-year event) where the shocks are exponential and explosive, the option of capital funding needs to be expanded to lenders due to limited resources, especially in EMDEs. But, timing is critical for better optimization of equity capital, as lenders are cornered at a later stage, often with limited options as there is overall deterioration (liquidity squeeze, financial losses, etc.) in the company.

The aim of this discussion, as Ezz El- Arab puts it, is to reform insolvency frameworks to prevent unnecessary liquidation of sound companies and secondly for governments, central banks and shareholders to consider alternative tools such as equity financing from lenders and the private sector, thus mitigating risks such as distressed asset prices and unemployment and ensuring faster economic recovery once the crisis recedes. Shareholders will continue to be at the forefront; however other stakeholders, such as employees and lenders are also essential for a faster economic recovery.

Solidarity, as Dr. Dashti insisted to comment and explain the idea of solidarity fund for the poor. It is not about making the rich poor, but rather an opportunity for the rich to uplift and support the poor through a fund outside the governments’ fiscal space. In such a case, the government has a coordinating role with the rich contributing to the fund, she said. Governments around the region would like to create jobs and develop better education and health care services which are not an easy task. Therefore, that fund is an opportunity to revisit the issues of the DSGs and get a new approach to implement them outside the governments’ space, Dashti said.

Ambassador Majed Abdel Fattah, raised the question of the financial repercussions of the pandemic on countries like Lebanon and Jordan. According to him, the credit classification of the two countries made it difficult to get international grants or loans from the international financial institutions like the World Bank and the IMF which in turn will limit their capabilities to confront the pandemic or any financial crisis. Therefore, he was wondering whether it is possible to change the classifications adopted by those institutions to make it easier for a country like Lebanon to get assistance?

Dr. Moheildin said that the capabilities of IFIs are limited. Quoting a report issued by the Group of 20, before the pandemic crisis, Moheildin said that the IFIs funding of the SDGs was almost 10% out of $2.5 trillion needed. He added that managing the world debt is not an easy task and therefore the contribution of the private sector should be a duty and a commitment. Ambassador Khattab invited President of Cairo University, Dr. Mohamed Othman El Khoshet, to present the findings and recommendations of a study he led, and conducted by a number of faculties on the “Repercussions of Covid- 19”. Dr. Khoshet pointed to what he calls the failing of political and medical systems globally in countering the impact of Corona virus. He said the lockdown imposed by governments played a leading role in decreasing the number of infected individuals. The study which was completed end of April 2020, expected an increase in inflation by almost 1% from 8.2%, irregular workers will be the hard hit due to this crisis. The same goes to the agricultural sector which will suffer a contraction of 5.4%.

The study referred to the urgent need to bail out tourism and civil aviation sectors to help mitigate the impact of the lockdown and the measures imposed by governments worldwide to slow the spread of the virus.

The study recommended the government to keep its stimulus packages in place after opening the economy along with the strict measures of social distancing and wearing masks.

As far as the educational system is concerned, Dr. Khoset said that Cairo university has been working hard to enhance its online system since 2017. The university which is one of the third generation of educational institutions, has thus managed successfully to adapt to the situation… “online lectures, researches and exams are put in place and students and professors helped each other get out of this crisis peacefully,” he said.

Cairo university has also shared part of the societal responsibility when its leading educational hospital “Qasr Al Ainy” devoted some 400 beds for the COVID- 19 patients. Five teams of science researchers who practically produced a quarter of the country’s science researches exploring the genetic code of the virus and its genome, Khoshet said.

Dr. Hossam Badrawy, member of Boutros Ghali Foundation board of experts, was among the few who found that COVID- 19 will change the educational process positively and that Egypt should have its well- designed approach. According to him, the pandemic proved that investing in IT is a necessity. The online learning has also been an opportunity where our students and many professors proved successful. However, we still need to come up with a special blend between the traditional and the online education to be able to produce well- educated and strong students,” Badrawi said.

The need to incorporate our young people in the post pandemic culture was also introduced by Ambassador Alaa Yousef, member of the advisory board of Boutros Ghali foundation, but from a different perspective when he discussed means of introducing stimulus packages to international pharmaceutical corporations to produce the COVID- 19 vaccine in Egypt to become the regional hub for marketing the new drug. He also recommended that Egypt that rank as the sixth world producer of vegetables and fruits, should enhance its participation in world trade chains.

Closing the session on the “Economy post COVID-19”, Ambassador Khattab hailed the efforts of all involved in the discussion who enriched the debate which is one of the very first organized on the impact of COVID- 19 on the economy.

 

Arabic version