Economic crises do not call for half measures. As the impact of the virus makes its way throughout the world economy, government after government will be forced to react in extreme ways to counter the after-effects of this carnage. Most will simply be overwhelmed.
However, there are a few measures that can be implemented quickly that can inspire confidence and get liquidity flowing throughout the system again. It is clear that the banks have to play a major role, as they already have started doing.
They know their clients - unfortunately, they have had a legacy problem of bureaucracy; taking too much time to evaluate the case of the customer. This time will be no different, given the track-record, and already there have been issues cropping up as the system starts to realize the size of the problem it is confronted with.
It is likely that the size of the stimulus package offered by the UAE Central Bank will only get bigger in the weeks ahead. To get ahead of this, one of the ways is that banks (backed by the government) give an interest-free bridge loan to all SME businesses, provided that they retain at least 95 per cent of their workforce.
Track records, integrity, and other knowledge-based variables that bankers historically used to make judgement calls in the past now need to come to the fore
This will immediately bolster confidence, as losing jobs and business has been the single biggest worry for individuals and businesses alike, as both confidence and business conditions spiral lower. While the cost of this measure would be extremely high, it would be nothing compared to the devastation that would ensue as the economy picks up the pieces of the damage if nothing is done.
Push the envelope
Another obvious measure would be to slash (or even temporarily suspend) VAT collections. This has been discussed in many international circles; the problem with this measure is that it does little to stem the tide of unemployment and closure of businesses that is already underway throughout the globe. It would serve as an incremental measure, when measures required are nothing sort of revolutionary.
The idea is to get the economy back to where it was before the onset of the pandemic panic. In order to do that, time is of the essence and buy in is required from multiple stakeholders. The interest-free bridge loan concept keeps the vital sectors of the economy moving; from real estate to SMEs, and allows for employment checks to be paid out, thereby averting the costs and consequences of mass bankruptcy.
Make that extra effort
Undoubtedly, this idea has its downsides too. There will be unscrupulous players in the system that will “game” the stimulus. This, however, is part of every crisis response, and is not an argument that needs to be taken seriously.
There will also be issues of collateral that SME players and individuals will not be able to fulfil, thereby leading to more red-tape and ultimately providing banks with an excuse to not extend the facility to those in need. However, it is the banks that know their clients; in an era where “compliance departments” have taken over lending based banking decisions (often to the detriment of the client), there is a wealth of knowledge that these departments and individuals possess.
Track records, integrity, and other knowledge-based variables that bankers historically used to make judgement calls in the past now need to come to the fore. Their eyes and ears are now needed as the government navigates this economic crisis.
Ideally, contractors, restaurants, hotels, and other sectors should receive a loan based on their income generated in the last 12 months. In any event, the criteria should be simple to adhere, and provide immediate relief, rather than letting the compliance departments have their way. In the months ahead, as the world grapples with this, it is likely that banks will get exemptions from regulators on capitalization and loan loss provision requirements in any event.
It is prudent to get ahead of the curve and respond with the full force of monetary stimulus that goes into the sector that needs it most - SME businesses and therefore individuals.
Time is in short supply. Measures need to be implemented immediately. Incremental steps such as suspension of license fees, and other visa services, along with reduction in VAT may reduce costs, but will do little to stimulate demand, especially in an economy that relies on world investment flows.
What we know of this crisis, is that this is not a systemic one unlike 2008-09. Measures taken now can ensure that this may end up being not a chronic one either.
The leadership of the UAE has always demonstrated its ability to lead from the front; it has demonstrated this already in its approach to the health crisis. It is time that this is done on the economic front as well.
- Sameer Lakhani is Managing Director of Global Capital Partners.