Holding Onto Our Cash Will Only Hurt the Economy — We've Got to Spend It
Just as nations across the globe and their respective central banks do everything there is to stop the current global economic mayhem, and to keep their respective economies on life support — through stimulus payments, pandemic economic recovery funds, and unemployment benefits — I have taken a close look at our own Rwanda’s economic recovery efforts. So far, the government has made great strategic efforts to sustain our macroeconomics during the pandemic, and enacted more dovish monetary and fiscal policies to steer us through it, but I am afraid that our own individual microeconomic behaviours and households consumer sentiments are poised to hinder those efforts and hurt us in the long run.
Individuals and households have got to spend more
From just sieving through local media commentaries, and talking to a few of well-informed individuals in Kigali, regarding current business activities and economic sentiments since the lockdown has been gradually eased, my take is that people are saving as much as there is to save. They have changed their typical outing, consumption, and shopping routines because, “Yeah, you never know,” they say. They drastically cut back. One person even went to the extreme to tell me that they are barely driving their car, nowadays, in order to save on gas. Everyone is saving every spare dime. Everyone is holding onto their stash. Rather than help, this is going to hurt us really bad.
This time, it is important for us, consumers, to go out often and spend as much as our needs call for it, on all sorts of consumer goods whether it is consumer staples or discretionary. We need to keep the money flowing and moving through the economic machine. Aggregate economic activities is the machine, aggregate spending is the oil that keeps it running. Yes, increased savings enhance banks reserves and liquidity which, in return, facilitate business lending. However, there won’t be a need for businesses to go out for more financing, unless there is a relatively active market for their goods and services. Plus, our collective spending ultimately comes back to us in form of increased wages for existing workers, new hires, increased sales in our own businesses, government tax revenues to name a few.
From consumer staples (i.e. essential products such as foods and beverages, pharmaceuticals, transports, households goods) and hygiene products (such as papers and cleaning supplies) to consumer discretionary items (such as fashion high-end apparels, furnitures, appliances, luxury goods, automobiles) and travel or entertainments, our consumption behaviours must attempt to mirror the same patterns as those we had before the pandemic, or at least to the best of our current abilities, unless we want our economic machine to stop running. The machine needs all pieces working together.
To the contrary, businesses sales will slow down, owners and managers will shy away from adding new hires and/or increasing wages at best, or they shall slash wages, lay off employees and shut down at the worst. Take this effect, multiply by hundreds, if not thousands folds across the country, your guess of what will happen cumulatively is as good as mine.
Whether or not access to finance at our local banks has never been easier and cheaper, thanks to the central bank’s recent easing and monetary policies, more businesses are not going to apply for new eased financing unless there is a decent market force calling for it. No savvy investor or business owner wants to borrow more money to finance ventures on downward spirals, even when money is more accessible at low cost. Maybe they will take in some financing to keep lights on, but only sales turnovers are going to keep doors open. So by cutting back and stashing some extra cash, we are actually hurting ourselves, either now or in the foreseeable future. The best thing we can do for Rwanda’s economic recovery is to keep our consumer spending habits going.
Government pandemic relief efforts
It is not wise to ask for the central bank and the government to create new money and send checks to every individual households in the country. The central bank could allocate what already exists. There’s got to be another systematic way to stimulate the economy by putting some money directly into the hands of consumers, either as pandemic relief benefits or wages protection grants. The government needs to make sure that those who had existing wages do not lose them completely or have them slashed, and those whose nature of work been extremely hurt be given means to keep shopping — for at least the foreseeable future.
The central bank has taken great steps to offer interest rates easing and liquidity stimulation through the banking system, not to mention the adopted quantitative easing through their direct bond buying programs, but this won’t fully do it either. Definitely not at the fast enough pace, to say the least. Yes, banks have recently reported that they have seen increased new applications for loans at the new favourable terms, mostly as a way for business owners to refinance their existing debt obligations or financial restructuring, but these loans are most likely meant to keep them afloat and save them from going under. But they do not make up for lost sales and wages. Past lost sales can only be recuperated through increased current and futures sales. Even though favourable financial restructuring loans might artificially keep businesses afloat, they wouldn’t sustain them when the actual markets aren’t organically doing it.
So, as the government make strategic efforts to overhaul the economy for the rest of Twenty-twenty and Twenty-one, most of our small businesses might not exist within a year unless they can maintain sales above shutdown multiples. And, as we know, businesses shutdown means workers layoff, increased unemployment, lost tax revenues, lost long-term social security savings and retirement benefits, lost tenants revenues to the landlords; not mention possible bank loan default if the businesses owe money to the banks. This could also be followed by home mortgages defaults for involved parties, and the multiplier effect goes on and on, leading to a nationwide economic crisis.
Ideally, one would suggest, authorities must find a way to identify households that have significantly been hurt by the pandemic, either through job losses by the primary breadwinners or just businesses shutdowns due to the nature of their respective businesses, to the point of drastic cut back on their consumption behaviours. The screening variables shouldn’t be based on their income levels or Ubudehe categories, rather their behavioral economic changes during this time. It is an interesting exercise that can be surveyed on a local administrative levels. Those of us who really cut back, simply due to behavioural psychology, not because we cannot afford level consumptions, it is recommended we resume normal spending routines for the sake of our economic sustainability. And, you know, live a little. For those of us who really lost significant means, then, let the government assist us with direct monetary reliefs. Free money. Yeah, make deposits on our bank accounts and encourage us to go shopping tomorrow.
Some will spend it all on essential households goods and services as well as discretionary luxury consumptions, which is great for businesses. Others will save a portion of it in their bank accounts which would again enhance bank reserves and liquidity as the central bank had intended to. I don’t see what not to like here. As long as all that is happening within our economic system (i.e. no one is remitting the relief funds outside the country) we are overall better off. Maybe the only intermediate concern could be a spike in inflation, but the central bank is able to manage inflations through monetary tightening and rates normalisation.
As Rwanda strives to maintain its forward-looking economic outlooks and to keep healthy consumer behaviours, it is also equally urgent for the government strategists, policy makers, and businesses to adopt even more innovative and conducive spending climates. Just like we have recently seen intentional efforts to mobilise the tourism stakeholders to adopt more attractive offerings in order to attract local tourists, similar efforts can be called for and made in other sectors, products, and service offerings. Wanting to go out is one thing, but having places to go and diverse things to do come in very handy. It cannot all just be bars and restaurants.
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