ONE ECONOMIC THEORY postulates that GDP (Gross Domestic Product) is determined by Money supply multiplied by Velocity. Velocity, on the other hand, is the number of times a money currency is transacted (used) in the economy in the purchase of goods or services.
As laypersons, we must understand why certain government policies affect our well being as individuals.
For example, the higher the GDP, theoretically -the better one’s well being is -since a person’s GDP per capita income (or your share in the economy) is arrived at by dividing GDP (peso amount) by the number of population.
During the lockdown due to the Covid-19 virus, generally, people cannot buy because either they lost income, cannot buy goods ( no transport), or supply is not available because the supplier cannot manufacture his goods because of the disruption of the supply chain of his raw materials or his capital has been eroded by losses due to “no business” in the recent past.
In this scenario- the movement of money is limited. Velocity is at a standstill -affecting the GDP remember?
The famous example would be that of a farmer who has P 1,000 and a Hardware owner who has P 1,000 or a total of P2,000 available currency. Let us assume they are in normal economic times with no lockdowns (that cause fear and lack of confidence.)
The farmer buys P1,000 worth of farm supplies and spare parts from the hardware and the hardware owner purchases P1,000 of farm produce from the farmer. That’s P2,000 in currency used and two transactions. (In a lockdown situation, both would not be spending any of their available money due to fear, lack of business confidence or the absence of supply or demand as the case may be.)
With his sales proceeds, the farmer buys P1,000 new raw materials for his farm and fresh medicine while the hardware owner purchases P1,000 worth of new food from the supermarket. The total currency used is now P 4,000 and 4 instead of just 2 original transactions. The cycle will grow exponentially. Let us see how.
Since the supermarket now has additional money, he purchases new goods for sale and farm raw material supplies and the botica now has more money to buy their medical supplies for further sale. And so on.
In an effort to rev up the economy, the Philippine government had reduced interest rates to encourage lending and borrowing and repurchased government securities to bring back more money into the economy, thus, increasing the money supply. This is their Money Supply route to spur economic growth.
But if that increase in money supply is less than the impact of the loss of velocity- GDP will remain depressed, nonetheless, as is happening now.
From a plus 6% GDP growth in 2019, GDP contracted (-.o2% ) in the First Quarter and reportedly a frightening (unofficial) (- 6.7%) contraction in the Second Quarter on the way to a full projected (-4% )contraction (instead of growth ) for the whole of 2020. We are in for economic hardship- big-time.
The Philippines is now infamously known for having the longest lockdown in the world but among the biggest Covid 19 cases in southeast Asia alongside Indonesia and Singapore. Can one, therefore, imagine the impact on the Velocity of money when you are inflicted with the longest lockdown in the world?
Do not, therefore, be shocked to see our GDP go down the pits this 2020. And 2021, as well- if we do not reform our ways.
(Even those of you readers who are well off enough to have savings these days can help by just giving money to foundations and the poor. Your donated money will be used by them to buy more ( food, essentials, facemasks and alcohol) and start the velocity cycle, remember?
In the meantime, the Capital Economics Ltd, a think tank based in London, had predicted the contraction in the Philippine economy will be longer than most in Asia because of its longer lockdown (in various forms and names ending all in CQ). It will be worse if we let the “fear economics” mindset to continue to rule our policy-making from hereon.
To our observation, the Philippines always had the means to respond fast to the pandemic because of its solid economic fundamentals and an all-time international dollar reserves of $93-Billion. But it did not.
Initial estimates is that the economy suffered (hold your breath) P1.9 Trillion in lost business income and wage earnings due to the virus.
The initial answer of government support was P1.3-Trillion which newly-minted NEDA OIC Kendrick Chua believed is unfundable (given the numerous constraints).
So far, RP has gotten $5.3 B from World Bank, ADB and the Asian Infrastructure Investment Bank, floated $2.5B in sovereign bonds (borrowings) and a loose change of $127-M from various sources or a total of about $9-B or only P450M.
From our raw calculations (“too small and too slow”), the government response to the heavy economic loss totals only about P741m. Aside from the P41-B for Bayanihan I, Congress and DOF (Finance) are working on P140-B for Bayanihan II, Stimulus Fund of P280B and a P280-B increase in the 2021 budget compared to the 2020 GAA.
Together with the multilaterals’ P450B, the P741-B seems within the financial support target- but is dependent on two things: how fast government can (a) translate these funds into actual disbursement to targeted needy principals and (b) absence of corruption due to the tempting amounts involved and the COA years away from being efficient due to bureaucratic and administrative barriers obtaining in this abnormal times.
Talk of overpricing of supplies, pocketing of proceeds and purchase of unnecessary items is sprouting all over the archipelago. (Let’s start with the DOH and some LGUs.)
The private sector, on the other hand, is asking the government for help to get tax shelters involving corporate income tax, carryover losses as tax shield for 5 years, wage subsidies and deferment of rent and loan amortization.
These represent already a struggle for focused government action aside from pressure to contain the rising 62,000 Covid cases with more able testing and contact tracing capabilities and increasing the quarantine rooms and beds in both hospitals and LGU quarantine centers. (Enrollment, by the way, has also dropped by 40%, additionally).
In the meantime, let us not forget our original thesis- continuous, needless lockdowns (in any name) will lessen money velocity and make the economy suffer even more.
Let the government be reminded that whatever the negative results will be because of this- will fall inevitably on their laps in the future in terms of additional required stimulus, rehabilitation and other forms of bail-outs.
It will just increase the magnitude of the problem and prolong the already agonizing procession of the financial Calvary of the Filipino people.
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