Stimulating sluggish post-Covid-19 economies

Among the key economic issues of discussion across the world from 2020 has been the corona virus pandemic causing Covid-19. This has led to sluggish economies across the world. There has been sluggishness in the global economy. Among the signs of sluggish economy include reductions in sales volumes, revenues and associated profits, production, employment and associated incomes and consumption. Other signs are increased foreclosures, non-performing loans, loans restructuring, reduced tax and non-tax revenues, liquidity crunch, reduced credit appetite and many others along this line. This piece outlines some possible strategies to stimulate sluggish economy caused by Covid-19 among others.

Government expenditure

Government expenditure is very central in stimulating a sluggish economy. Their expenditure of public goods and services facilitate vibrancy and dynamism in the economy.

The more the government expenditure, the more the aggregate demand and vice versa - ceteris paribus (i.e. other things being equal). If public goods and services demanded by the government are supplied from within the economy in general and private sector in particular, there will be more stimulation in the economy.

When the government spends, incomes are earned by its service providers. Part of these incomes are consumed, part saved and part invested thereby stimulating the economy more. Government expenditure is an injection in the circular flow of income.

Avoid excess austerity economics

If the government embraces excess austerity economic measures it risks to make the economy more sluggish.

Too much austerity is bad economics. In times of sluggish economic situation in general and recessions and economic crisis in particular, countries should spend more to kiss sluggishness goodbye. Countries may even build ‘roads going to nowhere’ in their bid to stimulate sluggish economies.

Private sector spending

Private sector expenditure is very important in stimulating sluggish economy. The expenditure can be on consumption and investment goods and services. The more the expenditure especially within the local economy, the more the chances of making the economy more vibrant and dynamic, ceteris paribus.

Such expenditures generate demand that have to be met with supply. This in turn stimulates production which calls for employment and associated wages and salaries that stimulate more consumption. This is positive multiplier effect.

Fiscal policy

Fiscal policy and fiscal policy instruments are very important determinants of vibrancy and dynamism in an economy. Expansionary fiscal policies and associated instruments are healthy for the economy. They leave higher disposal incomes in the general public. They are characterized by low tax rates and fewer tax types. Other expansionary fiscal policy instruments include less fees and more subsidies.

They have injection characteristics in the circular flow of income thereby encouraging more expenditure, dynamism and vibrancy in the economy and keeping sluggishness at bay.

Contractionary fiscal policies are the mirror image of the expansionary ones. They are characterized by inter alia, multiplicity of taxes, fines and fees. They are also characterized by high tax rates and few subsidies if at all. They are withdrawals in the circular flow of income equation.

They reduce or even remove spending appetites by the economic agents especially in the private sector, households and individuals. To tame sluggish economy therefore the government should practice more expansionary and less contractionary fiscal policy and fiscal policy instruments.

In the 2008 global economic crisis, for example, governments across the world reduced number and rates of taxes. Tanzania reduced VAT from 20 to 18 percent in 2009 as a fiscal measure to address the 2008 global financial and economic crisis.

Monetary policy

As is the case with fiscal policy, monetary policies and monetary policy instruments are very important determinants of vibrating and stimulating a country’s economy. Key issues of monetary policy instruments revolve around the axis of interest rate.

Borrowing interest rate is the price paid by borrowers to lenders. The higher the interest rate the lower the appetite and therefore demand for credit. Less credit implies less investments. By extension, this implies less employments, less incomes and then less consumption. Expansionary monetary policies including lower borrowing rates are better than contractionary ones in stimulating the economy.

Monetary policy on its part is macroeconomic policy of governments through central banks. It revolves around the axes of money supply management and interest rate. It is a demand side economic policy used by governments to achieve macroeconomic objectives including inflation, consumption, investments, growth and liquidity.

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The author is Associate Professor of Economics at Mzumbe University and Principal Mzumbe University, Dar es Salaam Campus College