Could we put the economy on hibernation mode?

Covid-19 comes with a brutal double whammy. If we go out and work, it makes us sick, if we stay home our economy crumbles. With no end in sight to this disease anytime soon, it has everyone worried about how long we can remain cooped up and if we can sustain an extended distancing behind closed doors . Across the globe as countries miss the early window of containment, the virus rages on and so does the economic contingent. Both are equally deadly. If the German finance minister has to take his own life, unable to cope with the gravity of the situation, it speaks volumes about how deep our troubles really are.

Hibernation, a colleague proposed recently.  Put the economy on hibernation. Arctic frogs remain suspended in frozen environment with minimal energy expense. When the conditions become right they come to life and hop on with their usual business. Can we do this to our economy? We have a small experience from our rupee crisis period when many restrictions were put in place. But this time it would be on an unprecedented scale.

Thanks to the quick responses of our leaders, Bhutan has been highly effective with our containment efforts until now.  We are also blessed with a strong leadership and low population density. Our partial restrictions look far better than full lockdowns of many other countries. Partial restrictions if managed properly may be better because we need to keep our vitals running while maintaining a flattened infection curve. Although, given the available health facilities in the country,  the curve may have to be quite flat. Our health workers, civil servants, teachers, power plants, banks, telcos, police, army, farmers, transport and such other vital activities have to be kept functional. Many of these jobs can be also carried out from home maintaining the required distance. While these life giving activities are currently sustained, we have already shut down many of our economic activities. As things slow down we will have to start tightening our belts.

Our taste for imported liquor has to change and we may have to give up our dreams of a new Prado. Pay cuts and  job losses will be the new normal. As things slow down, the first institutions to be impacted will be the Banks and they are vital to the economy. As much as many hate them, we also need them. With no income from tourism and increasing loss of jobs, our Banks biggest credit basket that comprises tourism, housing and industries will be hit hard. As NPL sky rockets, their capital and reserves will not be able to support such losses. This can lead to insolvency tradings and run on the banks in the worst possible time.

However, a silver lining arises from three factors. Much to the dismay of the World Bank, IMF and pressure from the business sector, banks in Bhutan carry a hold on a significant amount of property mostly in the form of land and building as security. They have stubbornly held on to this practice. Another cushion comes from RMA refusing to adopt IFRS accounting system and their stringent requirements on provisioning. Because of this, the NPL amount is not netted off against the value of the properties held towards bad loans. The third factor is our high lending rates. This is where the Government and RMA can step in. Now these stumbling blocks of economic growth has the potential to become the building blocks to prop up the economy. The Government can leverage on the properties and provide sovereign guarantee. RMA can then relax on the NPL and make coordinated efforts with all Banks to bring down interest rates, on both lending and deposits at the same time. RMA can also relax guidelines on defer payments, reamortization, extension of repayment terms, all designed to reduce EMI. Suspension of interest where required may be also enforced. Government can then mandate landlords to reduce rents by the same proportion. To make it sustainable, Banks may have to reduce salaries of their own but this would be indirectly compensated by reduced house rents and reduced EMI.

Everyone needs a shelter. With dwindling income of individuals and landlords pressed by banks for repayment, it would be impossible to maintain extended stay home policies without causing too much social distress. Affordable housing may be one of the most effective and immediate ways of easing the economic burden on individuals. All without the Government having to spend a Cheltrum.

Covid-19 has taught us how vulnerable we are in terms of food shortage. We have huge employment opportunities in farming, but we need strong policies and our workforce needs to be reskilled. We have our construction sector presenting even bigger opportunities. Unfortunately, we are all in the unchartered territories, and no one is quite sure what to do or how this will end. Psychologists say there are three kinds of people. Those who panic and go on hoarding toilet papers on one end. At the other end are those who are scared but the only way they know how to deal with it is to defy it and they are the ones who ignore social distancing.  The best are the one in the Goldilocks zone who are cautious, prepared and willing to deal with it. Unlike the US, we do not have 2 trillion, that could sustain Bhutan for a thousand years at our current GDP, but we may be able to slow down and partially hibernate.

Contributed by

Namgay Phuntsho

Thimphu