Economic Stimulus Packages – Understanding The Latest Buzzphrase

Very soon after the Covid-19 became a part of our regular vocabulary and conversations, another phrase came to the fore – economic stimulus packages announced by governments across the world. Among the torrential negativity that surrounds Covid-19, these packages are presumed to be a sort of Noah’s Ark. However, like most such announcements, the negativity around them and the criticisms and shortfalls began to pour even before most people properly understood what they meant. But, a lot of time has passed, a lot of governments have learned, tweaked, explained, or modified the same packages. However, I get a sense that there is still a lack of clarity about what these really mean for the regular person. Who really gains, what do they gain, what losses are averted, and what are these packages all about really?

Broadly speaking, stimulus packages across the globe have tried to solve four potential problem areas.

The first, is to reduce obligations payable at an individual or organizational level. Within Bahrain this has taken the form of the government paying the salaries of citizens in both the private and public sectors for 3 months. This means that for any company, their monthly payroll is reduced by the extent they pay their citizen employees. This can, hopefully, provide a sort of insurance for the non-citizen employees or could incentivise companies to hire citizens more proactively knowing that they will be supported by the government.

Second, is helping individuals have more available money from within their existing framework to meet their obligations – financial or operational. Some countries have chosen to make direct cash transfers into citizens bank accounts, some have reduced their burden on payments through relief from rent, relief from utility bills like electricity and water (like in Bahrain). This can even take the form of reduced taxes and indirect payment obligations. This is a very direct way of providing relief as it has an immediate impact on the cash outflow of individuals.

Third, is increasing the money available to individuals and companies. This is the aim of making changes to banking policies such as changes in interest rates, lending policies etc. The aim is to allow easier and more access to money to encourage spending activity.

Fourth, is an indirect support through monetary support i.e. the government providing guarantees to shoulder the new banking norms, greater defaults, and higher risks that the banking system is likely to have to endure. In the absence of this, in practice, the banking system will not be able to alter its customer interaction.

Putting it all together, with the governments providing a backbone of guarantees to the banking system, the banking system can support retail and corporate loans. These loans allow companies and individuals to have greater spending power. This in turn churns economic growth.

On the other end, direct benefits such as cash transfers or tax incentives or salary relief provides greater cash flow and reduces the immediate payment obligations. So, if I have an income, I am saving a little more to spend later; or, if I have lost my income, my savings will help me for a little longer.

Nothing about what we are dealing with is ideal. And every single package has issues. But even governments are learning on the job this time. Through all the negative noise, if there is any lesson to be learned it is this: in a crisis, as in life, there are no perfectly right or perfectly wrong answers. The only perfection one can achieve is in looking for the silver linings and the small wins – because each small step that prevents a mishap, is really a saving grace. The fact that you are healthy, safe and well enough to read this article, is one such grace accorded by the safety provided by the government currently looking after you wherever you are.

Originally written for and published in Bahrain This Month's July 2020 issue.