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Quarantine and implications for economy

Author : Oleksandr Koshovyi

Source : 112 Ukraine

From an economic point of view, quarantine already existing today helps stop millions of transactions and generally slows down the exchange between economic agents
20:59, 7 April 2020

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From an economic point of view, quarantine already existing today helps stop millions of transactions and generally slows down the exchange between economic agents: all those who produce and consume goods and services. The result is simple: the amount of money working in the economy is reduced. The quarantine will inevitably be replaced by a liquidity crisis. Where will the money disappear?

At worst, against the background of uncontrolled inflation (the National Bank’s reserves are not infinite), having lost their purchasing power, they will cease to fulfill the functioning of the economy. For example, without waiting for the economy to shrink, now we can see how the US authorities instantly switched to the use of proven recipes, including monetarist ones. The recipes are not too complicated: the amount of money in the economy should be sufficient for its functioning. The United States injects over $ 6 trillion into the economy in various ways: 2.2 trillion for measures to support citizens and businesses, and 4 trillion for targeted measures to support liquidity.

Related: Peak of Covid-19 coming up in Ukraine, too early to lift lockdown, - Healthcare Ministry

The tasks of the monetary authorities and Ukraine’s government, of course, have different quantitative dimensions, but no less important. What are they like? The background is important here. The short-sighted policy of the National Bank (NBU) and the government in the period before the introduction of quarantine, which actually led to an artificial depreciation of the dollar against the background of an inappropriate decrease in inflation, led to a contraction of the Ukrainian economy and its artificial depreciation, one of the clear and vivid examples of which was the shortfall in the budget of billions of hryvnias planned in the form of revenue from customs.

Now the short-sighted and reflex policy of the monetary authorities is not only inappropriate but can also lead to a catastrophe in the economy. Strategically sound and planned solutions are needed.

It is important to understand that the economic consequences of quarantine, as a trigger for the economic crisis, will not be linear, and the hopes that the economy will get out of the crisis as quickly as it is sliding into a recession are not only small but insignificant: there are no fundamental economic prerequisites. Therefore, they need to be created by the government and rely on adequate actions of the National Bank. But, unfortunately, we see the NBU's ambivalent behavior against the backdrop of the unfolding crisis: the recommendations of the NBU liquidity support council are actually rejected by the board, and the NBU does not propose any effective monetary or other monetary measures relevant to the depth of the unfolding crisis.

Related: 574 protocols drawn up against violators of self-isolation in Kyiv

While the economic authorities are not busy with crisis management, the crisis, once it has already begun, will develop according to its own rules. As is customary in a crisis period, the cyclical nature of business processes will be irreparably broken, there will be an acute shortage of liquidity, and all assets and resources will be re-evaluated: from prices for the most significant assets to labor costs. All this will inevitably result in a rapid increase in unemployment. When and at what level a new equilibrium will arise is still unknown. All this time, economic agents will frantically grope its borders, sometimes touching the bottom. Failing to manage this process at all, which now seems to be happening, is the worst thing a government can choose. The macroeconomic forecast of the government, announced last week, confirms and discourages its isolation from the realities. While many businesses - from airlines and travel agencies to street vendors of coffee and shopping centers - unexpectedly discovered vulnerability and dependence on consumer demand and consumer sentiment and are now either closing down or planning to close their businesses, the government seems to seriously consider that as quickly as it collapses, everything will return to square one and even expects economic growth. However, perhaps this is an optimistic scenario, but this has not been announced?

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