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Could monetary and fiscal policy measures aid to check FDIs implications of COVID-19 on investment projects?

ESCALATING fears on investments in general and importantly flow of foreign direct investment will in my look start to reveal themselves during 2nd Q 2020 of businesses performance reports.

As of now, four months after the outbreak of this deadly virus many of us are yet to grapple with or have actual full extent of the coronavirus impact and how it will affect foreign direct investments in this year and year ahead.

Whereas this is in my judgement a global health crisis with very significant human and economic impacts, it is important for investors in our region to consider the issue and its implications in a wellorganised and calm manner not triggered by politicking.

Much as companies are grappling with related effects of this as a result of the virus, I anticipate more effects on FDI that might leave many previously seen as viable ventures at cross roads.

By this time, debate amongst economist shows that the coronavirus epidemic will generate international foreign direct investment to shrink significantly as quoted in the media to a tune of up 15 percent from earlier forecasts that in my judgment will lead to solely marginal headway in 2020-21, with automotive, airways, infrastructure and power industries to be hit hardest.

In January 2020, the U.N. convention on trade appraised that international FDI flows in 2019 was $1.39 trillion and based on its assessments this was expected to rise by roughly 5 percent in in the beginning of 2020.

With COVID-19 to what extent will this hit FDI, remains mysterious, even though, in the midst of economist discussion are COVID-19 widespread could bring international foreign direct investment flows to their lowest levels since the 2008- 2009 financial crisis.

Report issued by UCTAD on 8thMarch 2020 suggests that FDI shrink could be between 5 percent-15 percent.

Those of us who have been following up what is likely to be long term implication of COVID-19 on the economy will agree with me that, the economy was very healthy entering 2020, with low inflation and steady economic growth.

This fact, and the reality that the virus became a major global issue late in the first quarter, makes it likely that the first quarter for businesses and financial sector despite slow trend will still see solid real GDP growth.

Even the effects of the virus on the economy in March could be diverse, with very strong sales of grocery and outlets supplies as people stocked up, offsetting growing weakness in the travel and entertainment industries.

My thinking amidst a call from Dr Mpango, the Minister, endeavouring MoFP and Central Bank to start working together on what is likely to be a reaction to comprehend the impact brought by the virus outbreak; We should expect second quarter of undesirable growth that could come from knock-on effects.

Given our region isn’t an island, in the second quarter, the negative impacts of social distancing should begin to hit the economy hard, with very sharp effects felt likely in airline industry, hotels and tourist businesses, sporting events, and restaurants among other industries.

These sectors take on or offer significant number of employment opportunities. Out of FDI slowdown, the economies most severely to be affected by the epidemic will be the hardest hit, shockwaves that will affect consumer demand and the economic impact of supply chain disruptions, all that will shake investment prospects in other countries including those in our region.

History suggests as quoted in the employment debates vs. economy growth that when the economy enters stagnation, the redundancy rate rises at a pace of 2 percent per year.

Though, the suddenness and severity of this go-slow could make idleness rise at a faster pace this COVID-19 time around, with only slow growth in the working-age people warning its rise.

The ripple effect in my opinion might cause a major obstacle to efforts of government around the world and in our region to entice the private investment desired to achieve sustainable development objectives.

No doubt, COVID-19 will lower profits and as a result, lower returns will transform into lower reinvested earnings, a major component of FDI.

To overcome COVID-19, and further loses financiers have a duty to seek best options that could minimise the effect of coronavirus epidemic.

Studies globally have shown that countries that improve its local business environment are more likely to attract more FDI, it is therefore expected that the concerted drivers by His excellence John Pombe Magufuli towards improving local business environment coupled with the recent measures taken to combat the pandemic would work positively towards mitigating the impact of the pandemic on the flow of FDIs into Tanzania.

Private sector are also called upon to rally behind Government’s efforts in mitigating the impact of the pandemic by own initiatives of all magnitude for example, trading responsibly by preventing price hikes, cartels, racketeering and crisis profiteering; Deploying hand sanitiser and face masks at work and businesses premises, enhance work technology such that staff may work remotely from homes thus avoiding crowding at these risky times.

Like any measures taken in other countries notably G7 countries EU, China on interest cut and Egypt for longing banks re-payment period or Kenya by removing all service charges for 90 days on mobile money transactions on all network aimed at reducing the use of cash etc.

They have come up with strategies to governs effects caused by the virus, the control of the virus on our economy and markets in my view could also be softened by monetary and fiscal policy.

Although short-term lowering interest rates will not be predominantly effective, in helping the industries or individuals most hard-hit by social distancing to recover immediately, to the extent that lower short-term interest rates feed through to lower longterm rates, will in my opinion increase the relative attractiveness of stocks over bonds for investors.

Correspondingly, on the fiscal side, while in my opinion there could be some political disagreeing, a sizable package in my opinion is likely, designed at helping small businesses and individuals ride out the storm to come and, most probably, relieving a healthcare structure that is in my opinion likely to see huge pressures in the months ahead should we fail to control the virus spread.

THE month of September 2020 is on its ...

Author: Dr Hilderbrand Shayo

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