COVID-19 is a humanitarian problem, and containing the pandemic as soon as possible is an urgent obligation to save human lives. Yet we have to deal with the economic fallout from the pandemic just as urgently because the costs are substantial.

The pandemic is affecting most economies through both a decline in supply and a decline in demand. The decline in supply stems from two reasons: People who get infected drop out of the labor force and cannot contribute to production, while most nonessential sectors have been forced to shut down, further reducing production.

On the demand side, the pandemic has caused substantial changes in consumption patterns as well. First, people are avoiding shopping centers and not participating in public events for fear of contracting or transmitting the virus. Second, there is a tremendous amount of uncertainty regarding the course of the pandemic, contributing to precautionary savings among the population, as consumption and investment typically decline during times of elevated uncertainty. Third, the loss of income due to the decline in production leads to a reduction in overall demand.

On top of the standard supply and demand channels, emerging-market economies such as Turkey also suffer from capital outflows. During times of crisis, the appetite for risk declines and investors switch to safer assets, such as cash or U.S. government bonds, leading to an outflow from emerging markets. For an economy like Turkey, where the external debt is about 56 percent of the GDP, this is particularly alarming because foreign exchange flees at a time when foreign exchange revenue is declining. Thus the need for foreign exchange funding increases, causing a depreciation in the Turkish lira.

Minimizing the economic costs

Our research has estimated the economic costs of COVID-19 for Turkey under various scenarios, and our findings show that they can be minimized with effective lockdown policies. Contrary to the popular belief that less restrictive approaches would be more economical, we found that demand patterns will not return to normal so long as the number of infections remains elevated. Partial lockdown policies that keep businesses open but impose restrictions on daily life are not very effective; they extend the lockdown period for almost a year, which increases the economic costs to about 10 percent of the GDP.

A full lockdown, by contrast, shuts down most sectors, with only essential businesses and jobs that can be performed remotely continuing to operate. This policy can contain the pandemic in approximately 40 days. It saves the maximum number of lives and minimizes economic costs; the economic costs in this scenario come to about 4.5 percent of the GDP. In terms of the implications on the growth rate, the full lockdown policy causes a 12 percent decline in the GDP in the quarter that it is implemented. Delays in implementation of lockdown policies or ending restrictions prematurely increase the economic costs.

Turkey started the pandemic with an immediate partial lockdown and gradually increased its restrictions. Some 40 percent of the population is currently under full lockdown, which includes the elderly and youth population, while a full lockdown for the entire population is applied on weekends and holidays.

The low number of infections at the end of approximately two months of lockdown suggests that Turkey implemented something between a full and a partial lockdown — more of a mix of the two. As mentioned earlier, according to our calculations, in the case of a full lockdown, it takes approximately 40 days to contain the virus, while it might take up to a year in a partial one.

Economic relief package

In addition to implementing an effective lockdown policy, the economic slowdown can also be minimized by a generous and well targeted stimulus program. Nevertheless, the size of Turkey’s economic relief package, at approximately 4.5 percent of the GDP, is less than half of the G20 average of 10 percent.

Turkey is financing its economic stimulus package with a quantitative easing (QE) program, whereby the central bank purchases bonds and injects domestic currency into the system to stimulate the economy; the Central Bank of the Republic of Turkey (CBRT) has more than doubled its bond holdings since April 2020. Extraordinary times call for extraordinary measures and one can understand why the CBRT needed to enact such an aggressive expansion of its portfolio. However, in an emerging market like Turkey, where central bank independence is not well established, the CBRT needs to be very transparent about the terms of its QE and the conditions under which the money will be drained from the system. Furthermore, the increase in the domestic money supply should be balanced with the inflow of foreign exchange to prevent further dollarization.

So far, we have not seen adequate transparency regarding the QE program. Meanwhile, there are attempts to establish swap lines with G20 countries to secure foreign exchange inflows. If the pandemic ends soon and a second wave does not occur, then swap lines might provide the much-needed relief for a temporary period of time. If the pandemic continues for longer, however, a longer-term arrangement with an international institution might be needed.

 

Selva Demiralp is a Professor of Economics at Koç University and Director of the Koç University-TUSIAD Economic Research Forum. The views expressed in this piece are her own.

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