Author: Kori Udovički, PhD
The economic measures that the Government has taken or announced so far in response to the consequences of the Covid crisis are not as „generous“ as many believe. Fresh liquidity must be injected into the system now, within a timeframe measured in days, not weeks. The Government must make up for lost time through efficient and, if necessary, creative administrative solutions that will enable the immediate activation of guaranteed loans, as well as the prompt payment of minimum wages, for example, as a „negative tax“. Money must be „printed“ and now, while it can still be effective. Serbia has „reserves“ of both foreign currency and trust, the purpose of which is precisely to be used at such a moment. The Government must already prepare new measures clearly aimed at saving the healthy fabric of the economy (e.g., through the purchase of receivables), as well as clearly express solidarity from the less to the more affected citizens. Instead of a universal payment of EUR 100 and promises that public sector wages will not be touched, an increase in unemployment benefits and social assistance is needed.
A package of measures in a country whose anti-contagion measures are among the most drastic, and which „shoots at needs with a shotgun,“ i.e., through a broad scope of target groups, must be extensive. Our measures cover broader groups than those who need assistance because our institutional apparatus is not prepared for quick and precise targeting of funds. But the extent to which the measures, even when activated, will actually reach those who need help seems quite limited. Increased budget expenditures and deferred tax collection increase the budget deficit by only 6.7% of GDP (about EUR 3.1 billion), which, along with the estimated autonomous effects of the crisis on revenues, and with the reduction of previously planned expenditures (despite increased healthcare costs!), increases the total deficit by 8.6% of GDP (about EUR 4 billion). Such deficits can be seen even in far less crisis conditions. Moreover, a portion will be returned when business entities that successfully overcome the crisis repay deferred tax obligations. Furthermore, if the measures, when implemented, succeed in stimulating lending to the economy by 4.8% of GDP (about EUR 2.2 billion), this would be a significant amount for Serbia, which has shallow financial markets. In more developed markets, these amounts are much larger – for example, the Czech Republic plans to inject loans amounting to 14% of GDP. In any case, bank lending certainly does not burden the deficit this year, and in the future, it will only burden it by the amount of activated guarantees.
Credit liquidity will not reach many soon (or at all). Although the NBS began seriously injecting liquidity into the financial system as early as the beginning of March, new liquidity has so far only reached a limited number of the most reliable banking clients with open credit lines. New liquidity will not flow from banks to the economy until state guarantees are in place, which will reduce the risk for banks to an acceptable level, especially since the early and broad moratorium on debt repayment has increased uncertainty. This will certainly take some more time, and special administrative agility will be needed for loans to reach deep into the SME sector. As many as 50% of micro, small, and medium-sized enterprises (SMEs) in Serbia do not use bank loans, and a good portion of those who do use them are not regular clients. Can a mechanism be devised, similar to the one established by Switzerland, whereby banks, or at least the Development Fund, would issue loans up to a certain percentage of reported last year's revenues – in one day?
It is necessary for the Government to reconsider the intention to make concrete „minimum wage“ payments only in May, as they are the surest way to get help to those who need it, and quickly. This refers to the payment of the minimum wage for every employee of entrepreneurs in the lump-sum taxation system and in the business books system (those who pay tax on actual income) SMEs, as well as half of the minimum wage for those on forced leave in large companies. This measure, if successfully implemented, will inject a significant 1.8% of GDP (about EUR 800 million), unfortunately spread across a large number of entities, including those that are already doing well. Only, for unknown and hard-to-imagine reasons, entrepreneurs in the VAT system will be excluded (?!). There must be a way to make the payment promptly, for example, through the tax administration, at least as a „negative tax“. Administration, for any reason, for example, to legally ensure ex-ante that the funds are actually paid to employees—is an inadmissible reason for delay.
The administrative limitation of „minimum wage“ payments to those who have not laid off more than 10% of employees is unnecessary and will burden precisely those who need help the most among the more productive companies. The intention to protect employment as much as possible is, of course, appropriate, but the mere fact that assistance is paid in proportion to the number of employees already significantly helps to achieve this goal. For those who already pay minimum wages, retaining employees under these conditions will not make a difference, so that 10% will not have an effect. However, for companies with higher wages, i.e., those that have so far been able to achieve higher wages per employee, the limitation means that they will not receive assistance if they are in greater difficulties. If they are also denied access to liquidity, the lack of working capital will push them into non-payment, and possibly insolvency.
While the dispersion of aid to the economy was probably unavoidable, the generosity and dispersion of aid measures to the population are harder to justify. The measure currently called „fiscal stimulus“, according to which a subsidy is paid to citizens (100 EUR each), will have no stimulating effect for a long time, until a way is devised to make such a payment. When it does have an effect, it will be small because payments to wealthier households, besides being unfair, have no effect. It will be saved, or largely spent on imported goods. On the other hand, protecting the most vulnerable, especially those who worked „off the books“ before the crisis, is necessary. Better targeting of needs in the civic segment is entirely possible. Serbia has established channels for providing social assistance, and it should now expand and strengthen them.
The hesitation to enter into a large deficit and obligations is understandable, but money must be „printed“, and that now, while printing can still help. The longer we wait, the more of the economy will become insolvent, and then it will be too late to „print“. Given Serbia's decades-long inability to fit within its financial capabilities, it is understandable that the authorities and many economists now want to protect hard-won „stability“. However, a „firm hand“ can now become self-harming. Money, from a macroeconomic perspective, is fiction. It circulates from one economic entity to another and at any given moment serves to ensure that produced goods „reach“ those who want i can to buy them. With the decline in economic activity, the „circulation“ of money decreases, so the state must inject it through its interventions and influence the quantity circulating, and thus how much is demanded and purchased. This prevents further decline in production and mitigates both the fall in public revenues and the rise in insolvency of economic entities.
„Printing“ money will produce some inflation, and this time (to a reasonable extent) it is desirable. A price increase is now needed to prevent an excessive fall in some prices (meaning a fall in demand), although this will cause the prices of other products to rise. If there were no need to pay for imports with foreign currency, inflation should be allowed to rise until it seriously disrupts business calculations (I won't speculate on what that level is, economists can debate that for a long time). The problem may be the unwillingness, or inability, of the domestic financial sector to mediate the necessary liquidity from the NBS (printing house) to the state. In that case, global financial markets or the IMF are available.
One should not shy away from increasing debt either. Everyone will emerge from this crisis more indebted. Foreign debt is a transfer of Serbia's purchasing power from the future to the present, and domestic debt is a transfer of purchasing power from some citizens (future taxpayers, or all citizens, due to inflation) to others (those who receive assistance today). In any case, such a redistribution of purchasing power is undertaken in order to produce more today, i.e., so that, with today's and tomorrow's production combined, we have more to spend.
Of course, a small country like Serbia must pay close attention to the exchange rate and reserves, first and foremost, by maintaining confidence in its external payment capacity. What exactly that means under these conditions is not entirely clear, because the whole world has been thrown off balance – dollars and euros are being printed. Everyone will be affected by inflation to some extent. One just needs to instill more confidence than others somehow. Certainly, the strong macroeconomic and financial discipline shown until recently has created „capital“ in built-up trust, which should now be „kept in reserve“ in case we have to borrow to strengthen real reserves. Hasty populist measures and a lack of transparency, however, do not help us. It is a pity that the NBS stopped publishing data on daily interventions in the foreign exchange market (back in early January, for unconvincing reasons).
However, even for maintaining external balance, excessive rigidity in these unusual historical conditions is not desirable. Namely, the Covid crisis has eroded the production capacity of the entire world. Each country's import demand will decrease due to its own reduced economic activity, and exports will decrease proportionally to the decline in activity among trading partners. In principle, the more successful a country is in maintaining production, the milder the negative impact on the trade balance will be. If, as a result, imports fall less than exports, it is necessary to direct demand towards the domestic, rather than the foreign market, through a certain depreciation. However, the decline in exports also depends on its commodity structure. In our case, fortunately, we do not depend much on tourism, and we export food as well as many „invisible“ services that are still in demand and can be produced – especially IT, and entertainment and media programs. On the other hand, some sectors that are now severely affected are represented in our exports: Belgrade exports logistics and transport services, and the production of automotive equipment (global demand for cars has stalled) is important for many small towns.
Under these conditions, the trade balance is best defended by fine structural measures (not trade barriers). In an effort to maintain production, the state should focus particularly on helping exporters, both with liquidity and in maintaining their value chains uninterrupted. Also, measures that can reduce the import of luxury goods should be considered, possibly through tax policy, but certainly by not increasing the purchasing power of the already wealthy. In this regard, measures aimed at increasing civic solidarity would also benefit the trade balance.
One more thing is certain at this moment. Even if the Government succeeds in „improving the weather“ and successfully injecting liquidity now, it faces the task of resolving the inevitably growing insolvency in the economy. In addition to all the aforementioned tasks, the Government will have to increasingly carefully and finely distinguish which entities it provides assistance to, as well as prepare for deeper and more complex „surgical interventions“. The Ministry of Economy must already strengthen the channels through which it will remove bottlenecks, support critical players and cut where necessary, as well as public oversight mechanisms. The synergistic and coordinated performance of such a multitude of tasks will require different parts of the state to function as a system – with clear tasks, rules of the game, but also autonomy for each player in the system – without improvisation.
