ECONOMIC IMPACT OF QUARANTINE ON HOUSEHOLDS,FIRMS AND THE EXCHANGE RATE.

Quarantine as we all may know is a restriction on the movement of people and goods which is intended to prevent the spread of a disease, in this case, the novel coronavirus. In this article we aim to provide a mini detailed explanation on the results of the quarantine on households,firms and the exchange rate all under the Zambian context.

The 3 entities play a huge role in the circular flow of an economy. To substantiate, circular flow is a fundamental economic model in which major exchanges are represented as flows of money, goods and services between economic agents. In this case, our economic agents of interest are households and firms.Initially it is simplified to a two sector model comprising households/consumers and firms/producers. The idea is that firms supply the economy with goods and services, these are exchanged for money from the consumers. On the other hand consumers supply the firms with labour, Capital, entrepreneurship and land in exchange for income.Creating a flow that keeps the economy running.                       

Let’s bring it home and begin with the impact of quarantine on households. Households play a major role in the circular flow by providing services to firms from which they obtain income. However,since the fall of quarantine,companies have either been working from home or shut down altogether. Take for example the hotel industry,hotels have been either closed or reduced their hours of operation leaving most of their staff jobless and hence income less. Income is proportional to consumption so reduction or loss of income lowers consumption at household level. How does this affect poverty and inequality levels? Well,one in every two Zambians lives below the poverty line.It is during times like this that the most affected turn out to be the underprivileged. This calls for restructuring of social protection programs.                                    

We will now expand our two sector model of the circular flow. This expansion introduces the government which is responsible for tax collection.We will also bring in imports and exports that enhance trade. Closure and restriction of operating hours on various businesses such as hotels have drastically reduced both tax and non-tax revenue and is posing a challenge to the employment sector. As a result, revenue collections in the form of VAT and customs duty for March 2020 were expected to be below target by 25% as stated in the presidential National address dated Wednesday 25th March,2020.

In his speech,the president alluded to the suspension of non-essential foreign travel,particularly to countries which have confirmed covid-19 cases. This particular restriction affected the exchange rate of the kwacha because people were no longer buying the kwacha or exchanging it for foreign currency. This led to its depreciation. The international economy has also seen investors diverting their funds from traditional assets such as stocks to safe havens such as the US dollar.This has resulted in the US dollar strengthening against other currencies including the kwacha. Due to closure of borders and lock-down of major economies the reduction in merchandise trade has negatively impacted revenues particularly for commodity exporting countries like Zambia. As we may all know,one of Zambia's largest exports is copper and as of Wednesday 25th March,2020 prices of copper were at US$4,754 per metric tonne.This is a significant fall from the prices of copper at the beginning of the year 2020 which stood at a whooping US$6,165.

The silver lining is that the government has set up an epidemic preparedness fund of k57 million under the Ministry of Health.Cabinet approved k659 million as a contingency and response plan budget. With the management of funds in the past will this silver lining give rise to a dark cloud?

In a nutshell, restricted movements or quarantine has lowered consumer income and made the poor worse off. It has lowered the labor supply in firms and reduced revenue creating a trickle down effect on taxes. An expanded outlook of the external sector reveals a reduction in demand for copper adversely affecting our exchange rates. Are there any plausible solutions to cushion the impact? The articles to come will answer this question.Stay tuned!

Written by-RHODA KAKOMA