Dont let economic stability be a pay off in social distancing

Encouraging free trade and promoting the flow of goods that move inside and beyond borders are essential now to maintain the survival of the production chain and to help the economy from falling off.
Analysis06.04.2020
Hanoi during lockdown
Empty streets in the centre of Hanoi during lockdown (Photo from Zing)

On March 31, 2020, the Prime Minister of Vietnam issued Directive No. 16/CT-TTg, which mandates strict social distancing throughout the country for 15 days, only factories, production facilities and  business related to essential goods and services are allowed to open.

First of all, it is necessary to reaffirm that public health is at the forefront of at this time. Like many countries such as the United States, the United Kingdom, Germany, Iran, etc. social distancing even lockdown is essential and urgent to preserve human resources. However, how long mankind has to fight against Covid is not known yet, so social distancing needs to implemented at a certain time and in parallel with a series of economic appropriate policies so that the economy is not a trade-off for the health, and the nation always maintains essential economic resources to fight a pandemic. That will be the key points in our discussion today.

Signs of recession are warning us about not-so-bright future

Currently, some signs of recession have appeared in the world. According to Standard & Poor's forecast, global growth will drop to only 0.4% this year, the lowest level ever in nearly four decades. The US economy is absolutely on the verge of recession: unemployment reached 3.2 million people which is five times higher than the record number in October 1982, economic growth is forecasted to decrease by 2% (according to Moody) and 3.8% (according to Goldman Sachs). The European economy, in general, will also witness a downward acceleration; Germany, in particular, reckoned to decline to 7.2 – 11.2% or even more according to the German Think Tank named CESifo.

In Vietnam, although growth in the first quarter of 2020 was at the brightest level in the region at 3.82%, some signs of instability appeared. In particular, export and import growth dropped sharply compared to the same period in 2019; the trade surplus from the both FDI and domestic sectors was the lowest in the past 2 years; and the stock market fluctuated unexpectedly, foreign net sell consecutively.

Social distancing is necessary but the optimal duration of the Directive should be considered

Social distancing in the major cities of an economy such as New York, Berlin or Hanoi, and Ho Chi Minh City is sanding the economic wheel and probably to freeze a number of commercial and production activities. Human interaction is the driving force to push flows of goods, services and capital. Although digital platforms have played a significant role on encouraging the free movement of goods, human is still the main and irreplaceable entity in service sector. It has been almost a week since Hanoi and Ho Chi Minh City officially shut down part of businesses, and it will be another 15 days until the request for social distancing ends. For an economy containing up to 5 million business households (according to the General Statistics Office) which account for roughly 30% of GDP, the shutdown in at least three weeks leaves a severe effect on each individual. This is because no opening means no profits, no buying intermediate products and no supporting items as well. Most production chains are at the edge of broken. The limited national supports by cash or interest-free loans only ensure that households can survive at the most basic level in few months, not strengthen then to fight instability in Covid-19 or at least getting small savings for worse scenarios. So handing cash free while requiring shutdown as the way US did is just a temporary solution at this time to ease the severe shocks of Covid-19 but should not a wise choice for long term.

So what government should do in long term? The right thing politicians should seriously consider is to maintain the regular trade and free capital movement while grouping and quarantining a number of people at risks of Covid-19, which means that operating economy and health care system need to be done at the same time. Economic growth will be a buffer to facilitate good health care services, otherwise all national budget might be burned just for subsiding and paying long bills for ventilators.

If we have to fight against Covid-19 longer, we seem to have no choice except for accepting the participation of all economic entities especially 5 million business household to join our battle, their shutdown will cost us a huge loss in long term. So, turning back to solutions for now, governments should take more actions rather than supporting cash of around 1 million VND to remain their survival. Referring to goods and services, despite ensuring food security in domestic markets, policy makers should encourage the export of agricultural and aquatic products which underwent an increase in output in the last three months such as vegetables, coffee, pepper, etc. especially when some competitors from Brazil, China are having problems due to Covid-19 pandemic. This is a way to directly support farmers, the most vulnerable group during a pandemic, to manage their living costs. In the capital market, the current credit support packages are prudent, but most are directed towards SMEs or larger scale business, the economy needs another credit package aiming at household businesses. Because letting business households borrow is a risky option, the credit should come with requirements on formalizing business activities. This is an opportunity to encourage 3.4 million unregistered business households to formalize their economic activities to be subsided through difficulties.

Controlling inflation is an ultimately important goal at this time

Similar to other countries, a series of support packages have been launched by the government, such as VND 250 trillion credit support package, VND 30 trillion fiscal package for businesses and more than VND 61.5 trillion for citizen in loss due to Covid-19 launched on 1st April. However, for stable lives in the pandemic and more effective support packages, the inflation need to be curbed at a low level for at least the next three months. Assuming that inflation increases, the nation's support packages immediately decrease in real value because people have to pay more to survive and businesses suffer from higher costs while the operation stops.

In Quarter 1/2020, the average CPI increased by 5.56% over the same period last year, of which some essential commodities sharply went up such as food increased by 13.21%, meat increased by 58.81%, vegetables increased by 4.14%, prices of medical drugs, electricity and water increased by 1.43%, 9.89% and 4.75% respectively. If the situation continues, all efforts to maintain the welfare of the people will be in vain.

CPI in Vietnam

Social distancing, although, is an obstacle for goods transport, the current situation is still favorable to curb inflation when world gasoline and oil prices are low, and the state holds the power in electric prices. What needs to be done now is to ensure the stable supply of foods even the government can encourage foreign sellers entering the market to bring the current price of basic supplies down, for example, in meat price. Secondly, the local authorities should be required to create favorable conditions for transporting goods and supporting the logistic industry to lower shipping fee.

Reaffirming that social distancing in pandemic is essential, but the government needs to carry it out in tandem with a number of appropriate policies to ensure the economy was traded off for health goals. Encouraging free trade and promoting the flow of goods that move inside and beyond borders are essential now to maintain the survival of the production chain and to help the economy from falling off. That is also what the Friedrich Naumann Foundation in Vietnam along with our partners always aim at, regardless of any circumstances.

* (Graph) Source : GSO Vietnam (2020)

- Ha Linh -