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Impact of COVID-19 On Somalia’s Economy: Will the virus be a springboard to severe crisis?

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The COVID-19 pandemic imposed unprecedented challenges to global health systems and economies and transferred to Somalia one of the poorest and susceptible to crisis economies of the world. The economy of Somalia was already severing due to structural deficiencies and lack of unity. The federal-level economic institution such as the ministry of finance, ministry of trade, and central bank are mainly residing in Moqdisho and have no capacity to extend their services to other regions. The central bank is not yet ready to function properly. It does not have the capacity to innovate suitable economic policies to stabilize the country’s currency value, prevent hyperinflation, and keep unemployment lower. In addition, the nation’s taxation procedures and revenue collection policies are not unitary. The regional states have autonomous economic and political institutions with different taxation and revenue maximation policies. In terms of employment, the state employs to a small fraction of the nation’s labor force compared to the private sector. Therefore, considering all these facts one may conclude state plays a negligible role in the economic activities of the country.

The nation’s economy has been massively relying on foreign aid, remittance revenues, and import. The budget of the federal government and running costs are mainly financed through budget supports and other forms of assistance from donors. Almost every Somali household receives income from her overseas family member, especially Europe and the USA. Hence, remittance revenue is the lifeblood of the Somali household’s economy. On the other hand, Somalia is one of the countries with the largest trade deficit in the world, imports extremely surpass over exports. Since the livestock industry, the nation’s export backbone has been blemished by continual export bans from Saudi Arabia, the nation ended up an entirely import-dependent economy.

The foreign aid, remittance revenues, and import are not reliable sectors because they are prone to global shocks such as political clashes, trade wars, and pandemics. For instance, COVID-19 pandemic adversely affected Somali remittance firms. The Somali remittance firms source funds from western countries where COVID-19 is massively damaged both human and economic. These countries have been executing a complete lockdown to fight against and attenuate the spread of the virus among the community. The business, schools, universities, and public transportations were completely closed. So, this instigated Somali immigrants in Canada, the USA, and EU countries to lose their jobs and not able to send money back home. Remarkably, Somali immigrants in Europe and the USA are one of the highest deadly effected diasporas by COVID-19.

The World Bank estimates show that Somalia receives nearly US$1.4 billion remittance annually which contribute 23% of the nation’s GDP. Although Somali remittance firms in western countries have been victimized by money laundering and terrorism involvement allegations, however, still remain dominant in the nation’s basic financial service and recently annexed to banking and real estate. The lockdowns in western countries due to COVID-19 have reduced the smooth follow of remittance funds and this may have a deleterious effect on household’s livelihood, families may not able to pay utility expenses. The reduction of remittance funds means people will have no cash to buy things and small business which employ a significant share of the nation’s formal and informal workers will face critical financial crisis.

Most affected areas

It is very difficult to capture the impact of COVID-19 on economy like Somalia where financial data is hardly available in public. However, the World Bank expressed concern that the pandemic may reverse decades of economic progress and poverty alleviation in the world’s poorest regions like Sub-Saharan African countries. World Bank recently estimates projects that the Sub-Sahara region could lose around $79 billion in output in 2020. In fact, Somalia will be one of the highly affected states in the region. Somalia could not impose a complete lockdown strategy, but schools, universities, local and international flights have been closed. The Khat or Qat (stimulant and flowering plant native to East African and Arabian Peninsula) import was temporarily banned.

The education sector of Somalia which is 95% private has been extremely devastated by Corona Virus (Covid-19). The primary, intermediate, and secondary school teachers have lost their salaries since tuition fees are paid monthly. The Madarasa (Koranic School) teachers also have lost their jobs and the lives of their families are endangered to die for hunger and underfeeding. There are no safety packages, food, and cash distribution to ameliorate the deteriorating economic situation of Somali teachers.

The Federal government of Somalia has banned the import of Khat in a bid to reduce the spread of Corona Virus across borders with neighboring countries, this sends a paroxysm of anger and frustration to thousands Khat traders, and street based Khat small business. The Khat is a paradoxical business, on one hand, it employs a significant share of the nation’s informal workers, and it is the only source of income for many destitute and vulnerable families like internally displaced families, and widowed women with children. It is also the mainstay of the government’s source of tax revenue. On the other hand, anti-Khat campaigners argue that Khat drains the economy and destroys the family. In fact, the ban of Khat import policy immediately impoverished thousands of families whose livelihood depends on directly or indirectly to Khat business. The government has not yet come up with any initiative to refurbish the lives of these hopeless families and workers.

The health impact of COVID-19 on Somalia is not as nasty as predicted and expected. Somalia has confirmed only 2944 cases and 90 death cases so far, although the testing rate is very limited and some of the fatuous test result cases were reported in the media. However, a country like Somalia where social protection programs, unemployment insurance benefits, and other welfare schemes are not even in the dictionary of the society deep economic downtown is imminent and unavoidable amid COVID-19 pandemic. As long as the 23% of the GDP of the country is remittance revenues from the west so any possibility of second wave pandemic that can outburst and prolong lockdown in western countries will have a catastrophic short- and long-term impact on Somali Economy.

 China is the Africa’s main trade partner, especially Somalia’s business community extremely depend on Chinese markets. The full lockdown on Chinese economy and ban of international flights significantly reduced imports from china to Somalia. This skyrocketed the most of food and basic stuff prices. Somalia cansimply face food insecurity, if second wave of COVID-19 hits China again and Chinese officials prolong lockdown period. By the time I’m writing this opinion essay, china is struggling a new swine flu virus. This is not only bad news to Chinese economy but also to Somali economy.

Possible options for economy refurbishment  

COVID-19 pandemic presenting aberrant challenge to the Somali Economy amid Somalia is expecting full debt relief from the international creditors. The debt relief program will enable the country to get developmental aid, and non-concessional loans. The government should speed up the debt relief program to get loans and developmental aid to improve the lives of citizens impoverished by the COVID-19 pandemic.

The government should consult with individual donors and international financial institutions to design the kind of foreign assistance Somalia needs for economic recovery in the post-COVID-19 pandemic era. The government should allocate a significant amount of foreign assistance it received to income generation projects for internally displaced people (IDP). The government cooperating with local business communities and international NGOs should set food distribution packages to vulnerable workers such as teachers, unskilled construction workers, widowed women with children, Kat workers, and so on.

Policymakers should direct international NGOs to implement small business development and income generation projects in villages, districts, and regions where poor and susceptible communities are inhabited.

The government in partnership with international donors and local investment banks should prepare soft loans and investment mechanisms suitable to poor farmers to promote local production efficiency. Small business development, fishing and agriculture, training and skill development, and empowering women and poor farmers oriented international and local projects will lead to favorable economic growth in the post-pandemic era.

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The Monetary Policy of Pakistan: SBP Maintains the Policy Rate

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The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.

The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.

Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22. 

Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.

Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.

The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.

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Reforms Key to Romania’s Resilient Recovery

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Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

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US Economic Turmoil: The Paradox of Recovery and Inflation

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The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

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