Write an essay on ‘What should be the appropriate policies to overcome from the economic

crisis caused by Covid-19’.

Important note: i) Please use your own ideas and thoughts; ii) Not more than 1500 words; iii)
if you use any reference, then please write the sources; iv) your discussion should not be
focused on Bangladesh, rather in global perspective

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APPROPRIATE POLICIES TO OVERCOME FROM THE ECONOMIC
CRISIS CAUSED BY COVID-19: A GLOBAL PERSPECTIVE

Introduction

1. A good positioning strategy clearly differentiates a brand from all competing brands.
A good positioning strategy statement is clear, concise, uncomplicated, addresses target needs
and communicates a key benefit. The importance of positioning strategy are market analysis,
target market analysis, competitor analysis, product strategy, price strategy, IMC strategy and
distribution on strategy.

Aim

2. The aim of this essay is to formulating appropriate policies to overcome from the
economic crisis caused by covid-19 from a global perspective.

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Understanding COVID19’s Impacts in the Circular Flow diagram
1. “A modern 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 ruptured by the disease or
containment policies, the outcome will be a cascading chain of disruptions 1. This point is
illustrated in Figure 1.

Figure 1:COVID19’s multiple strikes in the circular flow diagram2

2. To understand COVID19’s impacts let’s consider the basic macroeconomic model of
circular flow diagram. In simplified form, households own capital and labour, which they
sell to businesses, who use it to make things that households then buy with the money
businesses gave them, thereby completing the circuit and keeping the economy growing. In
short, a flow disruption anywhere causes a slowdown everywhere.
3. The red crosses show where different types of shocks are disrupting the economy.
Starting from the far left and moving clockwise, we see households who don’t get paid
experience financial distress and thus slow their spending. Second, the domestic demand
shocks hit the nation’s imports and thus the flow of money to foreigners. While this doesn’t
reduce domestic demand directly, it does reduce foreign incomes and thus their spending on
the nation’s exports (the cross in the top-right corner). The reduction in demand and/or direct
supply shocks can lead to a disruption in international and domestic supply chains (the two
crosses on the right). Both lead to a further reduction in output – especially in the
1
Flattening the pandemic and recession curves, Pierre-Olivier Gourinchas
2
Mitigating the COVID Economic Crisis, Richard Baldwin and Beatrice Weder di Mauro

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manufacturing sectors. The hit to manufacturing can be exaggerated by the wait-and-see
behaviour of people and firms. Business bankruptcies are another point of disruption.
When creditors and workers don’t get paid, they invest and spend less.

Key Economic Policy Responses by Countries

4. Having understood the different issues of economic impact of COVID 19, before
considering appropriate policies to overcome from the economic crisis caused by covid-19
from a global perspective, let’s consider key economic policy responses encompassing fiscal
and monetary/ macro-financial by countries in view of the ongoing situation. In the following
table,

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A coordinated and comprehensive policy is necessary to deal with health emergency needs, to
support economic activity and to prepare the ground for the recovery. This policy should
combine short, medium and long-term strategy initiatives, taking account of the spill overs
and inter linkages between the economies.

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 Table 1: Summary of Key Economic Policy Responses by Countries as of May 21, 2020

At the risk of oversimplifying, policy needs to distinguish two phases:

Phase 1: During the Epidemic. The epidemic is in full swing. To save people’s lives,
mitigation measures are severely curtailing economic activity. This may be expected to last at
least one or two quarters.

Phase 2: the post-epidemic recovery. The epidemic will be under control with vaccines/drugs,
and continued but less disruptive containment measures. As restrictions are lifted, the
economy returns to normal functioning.

The success of the pace of recovery will depend crucially on policies undertaken during the
crisis. If policies ensure that workers do not lose their jobs, renters and homeowners are not
evicted, companies avoid bankruptcy, and business and trade networks are preserved, the
recovery will occur sooner and more smoothly.

Wartime policy measures

Policy has three objectives:

a. Prevent excessive economic disruption. Policies need to safeguard the 

relations among workers and employers, producers and consumers, lenders and borrowers, so
that business can resume in earnest when the medical emergency abates. Governments need
to provide support to private firms, including wage subsidies. Large programs of loans,
guarantees and direct capital injections have already been put in place.

b. Guarantee the functioning of essential sectors. Resources for COVID-19 testing and
treatment must be boosted. Regular health care, food production and distribution, essential
infrastructure, and utilities must be maintained. It may even involve intrusive actions by the
government to provide key supplies.

c. Provide enough resources for people hit by the crisis. Households who lose their
income directly or indirectly because of containment measures will need government support.

d. Policies in support of households, businesses, and the financial sector will involve a
mix of liquidity measures (provision of credit, postponement of financial obligations) and
solvency measures.

e. Bankruptcy would ensure that equity holders share some of the costs, but would also
cause significant economic dislocation. An intermediate option is for the government to take
an equity stake in the firm. When liquidity is the problem, credit by the central bank (through
asset purchase programs) or other government controlled financial intermediaries (through
loans and guarantees) has proven effective in previous crises.

f. Domestic policies need to be supported by maintaining international trade and

cooperation, which are essential to defeating the pandemic and maximizing the chances of a
quick recovery.

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g. Promoting the recovery will have its own challenges, including higher levels of public
debt and possibly new swaths of the economy under government control. But relative success
in Phase 1 will ensure that economic policy can go back to its normal operation. Fiscal
measures to boost demand will become increasingly effective as more people are allowed to
leave their homes and go back to work.

h. Interest rates and inflation were projected to be low-for-long prior to the pandemic in
most advanced economies. Preventing major disruptions in supply chains should avoid
inflation during the emergency and recovery phases. Under those circumstances, fiscal
stimulus will be appropriate and highly effective in most advanced economies. And this will
facilitate exit from the exceptional measures introduced during the crisis.

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 Table 1: Summary of Key Economic Policy Responses by Countries as of May 21, 2020
FISCAL
Bangladesh  Revised budget for FY20
 Additional funds to COVID-19 Preparedness and Response Plan
 Increased allocation to the Open Market Sale (OMS) program
 Tk. 50 billion (about USD 588 million) stimulus package for exporting
industries.
 Subsidize interest payments on up to Tk. 500 billion in working capital
loans.
 Approaching international financial institutions and bilateral development
partners seeking budget support.
India  Stimulus package valued at approximately 0.8 percent of GDP.
 Measures targeting businesses (about 2.7 percent of GDP), expanding
support for poor households, targeted support for the agricultural sector (about 0.7
percent of GDP).
 Financial sector measures for micro, small, and medium-sized enterprises
and non-bank financial companies; liquidity injection for electricity distribution
companies; and a reduction in up-front tax deductions for workers.
China An estimated RMB 2.6 trillion (or 2.5 percent of GDP) of fiscal measures. Key
measures include: (i) increased spending on epidemic prevention and control, (ii)
production of medical equipment, (iii) accelerated disbursement of unemployment
insurance and extension to migrant workers, (iv) tax relief and waived social
security contributions.
MONETARY AND MACRO-FINANCIAL
Bangladesh  Bangladesh Bank (BB) is ensuring that there is adequate liquidity in
the financial system and it has announced that it will buy treasury bonds and
bills from banks.
 The repo rate was lowered from 6 percent to 5.75 percent and was
further reduced to 5.25 percent effective April 12.
 The CRR has been reduced to 3.5 percent (daily-basis) and 4
percent (bi-weekly basis).
 BB has also raised the advance-deposit ratio (ADR) and
investment-deposit ratio (IDR) by 2 percent to facilitate credit to the private
sector and improve liquidity in the banking system.
 The Export Development Fund was raised to $5 billion, with the
interest rate now fixed at 2 percent and the refinancing limit increased.
India  On March 27, the Reserve Bank of India (RBI) reduced the repo and
reverse repo rates and announced liquidity measures of 3.7 trillion Rupees (1.8
percent of GDP).
 The RBI’s policy measures 8 represent liquidity injection of around 4

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 percent of GDP.
 RBI also announced a special liquidity facility for mutual funds.
China To support and safeguard People's Bank of China (PBC) financial market stability
key measures include: (i) liquidity injection of RMB 3.33 trillion into the banking
system via open market operations (reverse repos and medium-term lending
facilities).

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