The world has never experienced a crisis like this.
Not even during wars was economic activity interrupted without discriminating economic sectors or regions. Some countries -China, South Korea- were shut down and only now are gradually resuming activity. Other countries are approaching the peak of contagion -the US- and some others, like Mexico, are beginning to feel the impact of paralysis.
Large companies and small businesses have lost their revenues. However, they face obligations -office rents, equipment leases, payroll payments- without having cash flow to cover them. Today, they have a liquidity problem. It is not yet a solvency problem, since their income will gradually return, as the crisis subsides. It is urgent to inject liquidity in the system in order to prevent companies from going bankrupt and the permanent closure of businesses. There should be coordinated action between commercial banks, development banks and, above all, the State through government. The current interruption of economic activity is not the fault of companies. It is just that they are on the receiving end of the stay at home orders. Therefore government support is fair and critical.
By offering relief, government is not “rescuing” companies. It is safeguarding jobs. It allows people to have a job when the situation stabilizes. But, moreover, the big loser for not doing so would be the government itself, as it would kill its own tax revenues -through income tax, payroll tax, VAT- when the storm wanes.
It is outrageous that the López Obrador administration in Mexico continues to generate conflict with private companies, when it should be closing ranks with them to face the brutal crisis together. They are Mexico’s only chance to recover after hitting bottom. Without them, who will generate jobs, wealth and economic activity? The Mexican state-owned oil company (Pemex)? Mexico’s oil export basket is trading at US $10 dollars per barrel in international markets, one-fifth of the budgeted price of oil for this year. Every barrel sold by Pemex is subsidized with tax money paid by the Mexican people. Pemex loss last year would be enough to hand out MXN 16,000 pesos (US $670) to the 54 million poor in Mexico. Pemex will lose much more this year.
In the US, the Treasury postponed the filing of annual tax returns for three months. It is also recommending filing right away only if a refund is expected. Consideration is being given to allow small businesses to defer paying taxes, without penalties, when their income stabilizes, perhaps next year or later, and forgivable loans might be offered to businesses that maintain current employment levels.
Giving tax credits is an effective way to inject liquidity. Tax credits are not public debt, since they are considered a receivable. The Finance Ministry should make use of them, instead it is forcing taxpayers to pay soon and even pressing with “fiscal terrorism” against companies already suffering enormous financial stress. All payroll taxes and contributions –to the social security, housing, retiring accounts– should be postponed.
In the US, banking regulations are being relaxed so that commercial banks increase the availability of credit without worrying about stringent capitalization rules. Credit cards rates should be reduced significantly, with the support of Mexico’s central bank. Development banks should also do their part. Lastly, this is a great opportunity to help those working in the informal economy, but only in exchange for them obtaining an “ITIN” from the Mexican revenue service. It is hopefully evident by now that it is extremely hard to provide relief in an economy fueled by cash and where informality is so prevalent. If we want to grow again someday, let’s promote formality: access to credit, benefits, savings, training, and everything that only within it is possible.
Why is it that a “leftist” Mexican government refuses to hand out money when it is urgent to do so? Let’s cancel the construction of the absurd Dos Bocas oil refinery and the Mayan Train in order to channel those resources as aid. It is now when the country should make use of its many lines of credit. Insisting on austerity only ensures a terrible economic contraction this year, that will make it impossible to grow during the rest of President Andrés Manuel López Obrador’s six-year term. Worrying about fiscal discipline right now is like being concerned that firefighters -who are putting out the fire in our house- will ruin the carpet.
The López Obrador government is putting Mexico’s social stability and governance at risk. Is Finance Minister Arturo Herrera asleep?
* Jorge Suárez-Vélez is an economic and political analyst He is the author of The Coming Downturn of the World Economy (Random House 2011). A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @jorgesuarezv