Keeping the economy running in time of health crisis

6 May 2020
The Jakarta Post
By Arwin Rasyid Jakarta Founder and chairman of TEZ Capital Group and former banker

The loan relaxation measures for small and medium enterprises (SMEs) and big businesses are not enough as what they really need is fresh liquidity.

Given the fallout from the COVID-19 pandemic, the national economy has come under severe strain. This is evident from a range of indicators, all of which point to a growing economic crisis.

First, the number of workers in the formal sector who have lost their jobs is increasing, while many millions in the informal sector have lost their only sources of income. Hotel, café and restaurant, shopping center and mall owners, and taxi, bus and other transportation companies have laid off workers. Those that have lost jobs are often the only breadwinners in their families.

Second, ever more sectors are being affected. The micro, small and medium enterprise (MSME) sector, which saved the Indonesian economy from calamity during the 1998 crisis, is now the worst hit.

But the pain is felt everywhere. Even companies with a global brand have been brought low – for example, Kentucky Fried Chicken has shut 100 outlets and laid off 450 staff members here. Indeed, according to the Indonesian Hotel and Restaurant Association (PHRI), some 7,000 food and beverage outlets have closed thus far, with losses upward of Rp 2 trillion (US$125 million).

Third, pressure is building on the financial sector due to the many borrowers who are now unable to pay the interest and principal of their debts. This means that many financial institutions will have to resort to restructuring programs.

With the signs of an impending economic crisis, the nation faces challenges on two fronts.

First, on the public health front, we have to contain the spread of COVID -19, cure patients, provide social assistance, procure the necessary health equipment, build special COVID-19 hospitals and so on. All of this is essential and must have our unstinting support as it involves people’s lives.

Second, on the economic front, we should keep the economic wheels turning by providing “life support” to individuals, MSMEs and large businesses so that they can survive.

It is not only a matter of striking a balance between the public health and economic challenges, but also ensuring equity in the distribution of assistance. The government’s efforts to help those who are most vulnerable in society, such as app-based ojek (motorcycle taxi) drivers, is most welcome.

Similarly, the stimulus measures and regulatory relaxations introduced in certain sectors, such as the hospitality/tourism and financial-services industries, need to be extended to all sectors because sooner or later everyone is going to be hit.

That all sectors are being affected reflects the basic economics. The economy is made up of a chain of mutually interconnected activities. In fact, it may be said that the economy is the sum of millions, even billions, of transactions taking place at a certain period of time.

With the imposition of partial-lock-downs in various parts of the country, financial transactions have plummeted by between 40 to 60 percent as many people have lost their income sources and many companies have suspended operations. If all transaction activities stop, then all economic actors in the country, even in the world, will be affected.

In a country’s economy, the government is the biggest spender and biggest economic actor, especially in times of crisis. In some 200 countries affected by COVID-19, a common thread is the efforts by governments to save their economies by launching economic stimulus packages.

The United States government provides assistance to companies that employ less than 500 people through a paycheck protection program of up to $10 million so as to avoid layoffs. In Italy, tax payments have been postponed until the total amounts to 10 percent of gross domestic product. In Germany, the government will purchase the shares of companies affected by the crisis, then pay the salaries of their employees and get a return on its equity investments in the future.

Measures can be taken quickly to keep the wheels of our economy running.

First, the loan relaxation measures for small and medium enterprises (SMEs) and big businesses are not enough as what they really need is fresh liquidity or new loans to cover routine operational costs and to keep paying their workers and avoid layoffs. Without fresh liquidity, they may only able to survive until the end of June at the most. Given this, the government needs to quickly introduce a stimulus in the form of soft, unsecured loans of up to, say, Rp 10 billion, with tenors of two years, to be channeled through sound banks based on prudential lending principles.

Second, banks, especially the largest ones, should develop a scheme so as to avail of government stimulus programs as a source of low-cost funds. The assumption here is that the government will provide stimulus funds to the banks at an interest rate of 3 percent per year for three years. The banks can then “blend” the money with their own and lend it out to businesses at an interest rate of 6 to 8 percent per year for two years.

Such a scheme would mean that the stimulus funds will not be grants, and that banks would be able to provide new loans (with the risk resting squarely with the banks) at special interest rates that should not unduly burden either SMEs or big companies in need.

Third, the banks can be creative without increasing credit risk in the case of, for example, individual borrowers or companies that were properly fulfilling their loan repayment obligations before the COVID-19 pandemic. Such borrowers should not only be entitled to a six-month relaxation on their principal and interest payments, but should also be entitled to new loans, such as up to a maximum of 20 to 25 percent of the principal under an existing loan that is being repaid.

Fourth, when it comes to people who have lost their livelihoods, the government should transfer money directly to their bank accounts to cover their monthly basic needs. The government data in 2018 found average monthly household expenditure on basic needs in Indonesia stood in a range of Rp 1.5 millionRp 2 million. Let’s just take the low figure.

If around 30 million people lose their jobs, the government will need to provide at least Rp 45 trillion per month in assistance and some Rp 270 trillion for six months.

Nevertheless, transferring money directly to a person’s bank account is far more effective than directly handing out basic essentials, which is not only inefficient but also vulnerable to abuses. However, in order to ensure the aid goes to the right people, accurate data is imperative.

Fifth, given that stimulus needs to be provided promptly and on a massive scale, the distribution process should involve not only banks but also peer-to-peer lending fintech platforms registered with the Financial Services Authority (OJK). Digital banking technology and fintech platforms are reliable. With big data analytical technology, the government can cooperate with the fintech sector to distribute funds online. The fintech sector continues to operate normally.

Indeed, with a fully digital business model and non-physical contact e-Know Your Customer scheme, loan applications have increased by more than 40 percent over the past two months. Given this, the government should consider providing registered fintech companies with liquidity injections so that they can distribute assistance funds directly to the bank accounts of MSMEs and those who have lost their livelihoods.