How to Address the COVID-19 Crisis

“The Economy in Times of COVID-19” is an online talk promoted by representative leader Laura Rojas and held with the participation of CAF—development bank of Latin America—, the IDB, the World Bank and ECLAC, where participants urged countries to take action to contain the spread of the pandemic and safeguard the health of the population, as well as minimize the economic and social effects of the health emergency by implementing measures to secure income for informal workers, preventing formal companies from shutting down and firing workers, in addition to incentivizing the financial system to maintain the chain of payments, fostering liquidity and access to credit for businesses and families.

The crisis affecting the region and the rest of the world will drive changes in development agendas across Latin American countries, in an effort to perfect their social safety nets, which are clearly failing to reach important sectors of the most vulnerable residents. Improving the functioning of the labor market will also need to be prioritized in order to drive informal workers towards the formal sector of the economy once recovery has been achieved.

CAF’s knowledge vice president Pablo Sanguinetti has proposed a series of actions to deal with the strong recession facing Latin America due to a combination of an external shock (fall in export price and volume, increased country risk, lower tourism flows and remittances) and the domestic supply shock resulting from social distancing measures that strongly affect the services sector (e.g. transport, tourism, retail sales).  

Among other issues, Sanguinetti highlights the focus on the formal sector, through direct subsidies to SMEs for wage payments, temporary exemptions from corporate and payroll taxes, support for unemployment insurance and the easing of some relevant issues, including employment contracts. 

On the other hand, the informal sector is very important to the region, with Mexico among the top five countries in Latin America in terms of share of total employment (57.6 percent). To this end, greater attention is proposed for this sector through increased social transfers, payments to freelancers and public service payment credits.

On the subject of monetary policy, Sanguinetti emphasized having leeway to mitigate liquidity risks and prevent breaking the payment chain, while highlighting the importance of supporting the banking system in terms of solvency.

After the peak of the healthcare crisis and social distancing, there will be a period of uncertainty, driving banks to remain very conservative in terms of taking new risks and expanding credit to companies, who will now see the opportunity to expand their production and sales. 

This requires policies that transform the liquidity of the financial system—facilitated by the measures taken by central banks—into a real increase in credit. To that end, the guarantees programs rolled out by tax authorities through national development banking agencies can play a pivotal role, Sanguinetti added.

As a final note, Pablo Sanguinetti added that, even in the context of future economic recovery, some industries will be gravely impacted, specifically tourism and air travel, which will see a slower recovery due to travel restrictions, in which case the measures to support such businesses should be implemented in the form of tax exemptions and longer-term capital contributions. On the other hand, after the crisis, states will be larger in size, and thus, nations must ensure their efficiency through greater controls and transparency resulting from internal control actions within governments as well as citizen participation. This can be achieved through using and fostering new technologies. The digitalization of services and the use of open data will be of greater consequence in public management.

The event also featured CAF representative in Mexico Emilio Uquillas, as well as World Bank Director in Mexico Pablo Saavedra, Inter-American Development Bank (IDB), Mexican branch head Tomás Bermúdez, and ECLAC sub-regional headquarters director Hugo Eduardo Beteta.