Inside the ESO’s economic assessment and stimulus plan

The Economics and Statistics Office has this week released its COVID-19 Economic Impact Assessment and Stimulus Plan that is informing government policy on tackling the economic fallout from the pandemic.

Finance Minister Roy McTaggart outlined the key findings of the report at the end of May, stating that the economy might contract by 12.2%, with nearly 10,000 jobs lost, including almost 3,000 Caymanian employees.

The report estimates the economic impact of containment measures and attempts to determine which industries, businesses and workers are going to be most affected. It also recommends what government can do to support the economy.

Here is a summary of the key findings:

What was the economy like before COVID-19?

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Last year Cayman’s GDP grew by about 3.1%, the ESO estimates, based on the performance of the first nine months of 2019. The construction industry was particularly robust, growing at 6.1%.

Tourism benefited from the record number of stayover arrivals of more than half a million visitors, and expanded by 5.3%. Tourists spent about $770 million in Cayman in 2019, the vast majority of the money going to hotels and restaurants. In the first two months of 2020, visitors continued to arrive in record numbers, rising by 8.5% compared to the same period the year before.

Prices increased considerably in 2019, with inflation hitting 5.7%, mainly due to the higher cost of rental accommodation. The total labour force grew by 6.3% to 49,089.

Cayman’s key employment sectors

What are the post-COVID projections?

According to the Economics and Statistics Office, the disruption caused by the global pandemic and related lockdown measures is leading to an expected economic contraction of between 11.4% and 12.2%, depending on whether some tourists return to the islands in the final quarter of the year.

The hotel-and-restaurant sector alone is expected to take a 75% to 82.5% economic hit this year. The sector is made up of approximately 468 firms, mainly comprising hotels, guest houses, apartments, restaurants, fast-food outlets, caterers and cafés. The contraction in the hotels and restaurants industry could lead to more than 4,400 job losses, including more than 1,000 Caymanian jobs.

Transport has been equally affected. About 80% of workers in the sector are Caymanians and almost 800 jobs are on the line. The wholesale-and-retail sector is expected to contract by 15.9% and could displace about 850 employees, including almost 350 Caymanians.

While financial services are expected to ride out the initial storm, the heightened uncertainty is still expected to lead to a 6.5% decline of the sector this year. Business services have been mostly unaffected by the domestic COVID-19 restrictions, the ESO noted. But the general drop in local and international demand in the latter half of the year could leave its mark.

The only expanding sector of the economy, aside from healthcare, is government, whose share of economic activity is anticipated to rise by 9.5%, boosted in part by salary increases that took effect in January 2020.

Low earners are the hardest hit

The ESO noted that financially vulnerable workers – those with a monthly income of less than $2,000 – will be among the hardest hit. This will make it necessary to reinforce the social safety net, the statistics office concluded.

Late last year financially vulnerable workers made up almost one third (30.6%) of all employees. Almost 3,900 of the 14,480 are Caymanians with an average household size of 2.3 persons.

Workers with a monthly income of less than $2,000 are found in all sectors of the economy but especially among domestic helpers, gardeners, the wholesale and retail trades, and construction, as well as administrative and support services.

Employees at micro and small businesses, which have reduced access to financing, are at a higher risk of being laid off. Micro businesses, with fewer than five staff, employ about 6,450 people, and small businesses with up to 10 staff employ more than 11,400 workers. Taken together this accounts for 37.7% of the employed population. Even in the hotel-and-restaurant industry 28.1% of all employees (about 1,650 people) are working for small and micro businesses.

How is the pandemic going to affect government finances?

The statistics office expects government revenue to decline by between $211.4 and $227.7 million. At the same time, expenditures will increase by $141.3 million.

Lower demand for imports is expected to reduce duty revenue, and restrictions on tourism mean significantly less revenue from cruise departure taxes and tourist accommodation charges. Taxes on goods and services are also forecast to contract, following a drop in domestic taxes and financial services licences.

On the expenditure side, government spending is projected to rise because of higher capital expenditure, higher expenses and more money spent to fight the spread of COVID-19 and strengthen the social safety net.

Despite the significant reduction in government debt and the accumulation of reserves on the back of economic boom years, the ESO concluded that “the savings are insufficient to accommodate the magnitude of expenditure that will be required to maintain economic and social stability during and after COVID-19 successfully”.

The road to economic recovery would therefore require substantial participation from the private sector to assist the government.

The plan recommended a line of credit of $500 million to support government expenditure for the next 18 months to 24 months. This week, government issued a tender for a loan of this size. The money could also be used to help small businesses in the five key economic sectors – hotels and restaurants, wholesale and retail, transport, and arts, entertainment and recreation – with low-cost or grant financing.

How to move on from here?

The statistics office noted an international consensus around the best approach to restrict both the spread of the pandemic and its long-term impact on the economy.

This consists first of healthcare investments and lockdown measures to control infection rates.

It then requires more spending on the vulnerable, assessing the effect of containment measures on businesses and providing financial assistance to the unemployed and companies in need of working capital.

In a final phase, government strategically removes the containment measures and supports key sectors of the economy with higher spending to minimise the potential for a stagnant recovery.

Government has so far followed these steps. It allocated $3 million from the disaster fund to finance COVID-19 measures and increased some funding for vulnerable families with one-off payments or grants for certain categories of workers.

The pension withdrawal and pension-payment holiday, adopted in April, are expected to inject money into the economy.

Government also launched micro- and small-business relief measures. These consist of a $9 million grant programme and a $5 million low-interest loan programme for micro and small businesses. The programmes are facilitated by the Centre for Business Development, complemented by technical assistance and training initiatives for which $700,000 have been made available.

What else can government do to stimulate the economy?

To boost demand and encourage business investment, the ESO suggests the expansion of the low-cost financing programme for small businesses in five areas of tourism to $50 million.

Small tourism-related businesses, deemed vulnerable, could be granted $3,000 monthly for six months.

Government could partner with commercial banks and the credit unions to provide soft loans of between $15,000 and $75,000 to qualifying small tourism-related businesses. The repayment of the loans can be deferred for six months with a repayment period of up to 15 years.

Government should also expedite the public-sector capital-investment programme by focussing on construction projects, such as the John Gray High School campus, and new and enhanced road infrastructure.

In addition, the National Community Enhancement (NiCE) project could be expanded to support unemployed Caymanians.

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