What We Think
April 10, 2020
It’s all in the implementation now
On April 2 2020, the European Commission has approved Malta’s aid package under the temporary state aid framework. This was much awaited news following the announcement of the measures earlier last week.
This set of measures has given a proportion of affected people some hope that they are not alone in facing the crisis. The cash injection will alleviate some of the hardships that some employers are facing. The first priority must remain workers and securing their employment. Although ambitious, the package has targeted specific sectors. Though still early days, the ramifications of this economic crisis will go well-beyond these specific sectors. There are many other businesses feeling the brunt of the crisis and they too need reassurances from Government that if and when needed, support will be available to them. Shoring up the confidence of economic operators is critical for the economy.
A modern globalized economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries. Everyone is someone else’s employee, customer, lender, etc. If one of this buyer-seller links is broken by this crisis, the outcome will be a cascading chain of disruptions which if not halted can quickly turn a recession into a protracted depression.
It is therefore critical that these measures are implemented swiftly. Literally nothing should stand in between the support being given out and the intended beneficiaries. Given that the banking system is going to be the main conduit of aid in the economy, processes and procedures need to be streamlined. We cannot have a situation whereby approvals and onboarding take months as is current practice. These are extraordinary times and every day becomes crucial for a firm’s survival. Deployment of digital tools wherever possible is essential for the flow of funds to happen.
Government, through the Malta Development Bank, can contribute significantly to ensure that such financing permeates throughout the economy. A development bank has a key role in such circumstances by leveraging state guarantees and accessing low-interest funds from European institutions. Development banks have made a resurgence in the past few years following the financial crisis especially given their role in providing counter-cyclical financing. One can identify a number of key roles that the development bank can play in this regard. First, to provide direct finance or provide it on better-than-market terms; this should be a main priority at this point in time to ensure that affected firms, including start-ups, have access to much needed funds. Second, to fill gaps in the supply of credit especially in commercial banks will not take on the risks. Third, to promote economic stability, by playing a counter-cyclical role, to ensure that the economy does not seize up in terms of a crisis.
Our economic survival depends very much on flattening the economic recession curve too. For this to happen, in parallel with a robust set of measures we need to ensure that their implementation is swift. Otherwise, it can be too late. Government and the Malta Development Bank need to take a leading role in ensuring that the financial services sector provide the lifeline the economy requires.
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