UNDP, UNICEF, UN Women COVID-19 Human and Economic … · poverty line. Data from 2003 suggests...

Based on research conducted by Dr. Simon Naitram

BRITISH VIRGIN ISLANDSCOVID-19 HEAT REPORTHUMANAND ECONOMIC ASSESSMENT OF IMPACT

UNDP, UNICEF and UNWomenEASTERN CARIBBEAN

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www.unicef.org/easterncaribbeanCOVID-19 | HEAT SERIES

UNDP, UNICEF and UN WomenCOVID-19 | HEAT Series

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COVID-19 HEAT Series

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Disclaimer:COVID-19 HEAT SeriesJune 2020

The views, designations, and recommendations that are presented in this report do not necessarily reflect the officialposition of UNDP, UNICEF or UN Women.

2020 | UNDP, UNICEF & UN Women

COVID-19 HEAT SERIES

ANGUILLACOVID-19 HEAT Report- Human and Economic Assessment of Impact

ANTIGUAANDBARBUDACOVID-19 HEAT Report- Human and Economic Assessment of Impact

BARBADOSCOVID-19 HEAT Report- Human and Economic Assessment of Impact

BRITISHVIRGIN ISLANDSCOVID-19 HEAT Report- Human and Economic Assessment of Impact

COMMONWEALTHOFDOMINICACOVID-19 HEAT Report- Human and Economic Assessment of Impact

GRENADACOVID-19 HEAT Report- Human and Economic Assessment of Impact

SAINTLUCIACOVID-19 HEAT Report- Human and Economic Assessment of Impact

SAINTVINCENTANDTHEGRENADINESCOVID-19 HEAT Report- Human and Economic Assessment of Impact

COVID-19 HUMAN AND ECONOMICASSESSMENT OF IMPACT

0-17 Population30,030

7,3673,7673,600

MaleFemale

INDICATORS VALUE

Demographic

Macroeconomic

Fiscal

Social

Age Dependency Ratio (Census, 2010) 39.6%

49.16%% of Labour Force Female (Census, 2010)

Population

GDP percapita (UNSD, 2018)

GDP growth rate (Caribbean Development Bank)

Inflation (Caribbean Development Bank)

Debt to GDP ratio (GBV Budget estimates)

Primary Balance to GDP (GBV Budget Estimates)

Interest to Revenue Ratio (GBV Budget Estimates)

Unemployment (LFS, 2015)

Unemployment (female)

Unemployment (male)

Poverty rate (Census, 2010)

Poverty rate (female)

Poverty rate (male)

Poverty rate (children, 2003)

Number of school-going children (2017)

Note: All data is for 2019, unless otherwise stated. Poverty is defined by incomes less than US$700

US$48,511

2.1%

1.7%

16.7%

2.4%

1.5%

2.9%

4.1%

1.5%

9.9%

13.3%

6.5%

29.1%

4,259

3



COVID-19 MACROECONOMIC AND HUMAN IMPACTASSESSMENT FOR BRITISH VIRGIN ISLANDS

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EXECUTIVE SUMMARY

Prior to the COVID-19 outbreak, the BVI economywasset to continue its recovery from the impacts of the2017 hurricane season. The economy was forecast togrow at around 3%, building on the two previousyears of growth after the 2.7% decline in 2017.Economic output in the BVI is driven mainly byfinancial services and tourism. The finance andinsurance activities industry contributes around 24%of real GDP, while the accommodation and foodservices industry contributes around 7%. Morebroadly, tourism as awhole is estimated to contributearound 35% of GDP directly. Accommodation andfood services accounted for 11.6% of employment in2018. The workforce is comprised primarily of non-nationals, most of whom are employed in themanagement and professional services (25%),accommodation and food services (21%) andservices and sales (21%) sectors.

Fiscal rules have helped to ensure modest publicindebtedness, with debt outstanding at the end of2019 equivalent to approximately 16.7% of GDP andinterest costs accounting for just 2% of fiscalexpenditure. Unemployment is among the lowest inthe region at 2.8% in 2017, with data from two yearsprior suggesting rates of joblessness were almostthree times higher for women than men. This genderinequity is mirrored among those who are employedas women’s average monthly wage is roughly 10%lower than that of their male counterparts. Similarly,women are overrepresented in lower income earninggroups.

Since confirming its first cases of COVID-19 in lateMarch, the BVI Government implemented a 24-hournational lockdown that lasted nearly a month. Thisquick response, coupled with one of the highest percapita testing rates and aggressive contact tracing,contained the spread of the virus to just 7 cases.Nonetheless, the external demand shocks and effectsof the domestic lockdown are expected to constraineconomic growth in both the tourism and non-tourism sectors.

Our best estimate is for tourism to reopen in Augustor November 2020, which would result in GDPdeclines of between 11% and 13%, with concomitantfour or five-fold increases in the rate ofunemployment to between 12% and 17% in 2020,with a disproportionate impact expected on femaleworkers and migrants. These outcomes wouldreverse the fiscal surplus and result in a deficitequivalent to nearly 2% of GDP.

Constraints on economic growth will be transmittedto those living in poverty. It will increase both thenumber of individuals living in poverty and thoseliving with vulnerabilities. Figures from the VirginIslands’ Country Poverty Assessment in 2003 foundthat 21% of the population were considered poor,and 29% of children from 0-17 were consideredpoor.5 Children accounted for 42% of the poorpopulation who will bear the brunt of the financialdistress in the households.

The report recommends examining the use of theframework created for the Financial AssistanceProgramme after Hurricanes Irma and Maria toprovide temporary, expanded income support whichwould cost around US$12 million at the lower end;exploring the provision of liquidity for small firms topreserve livelihoods through deficit financing orgovernment guarantees; an extension to the periodfor work permit holders to find new jobs and theimplementation of rapid work permit transfers tomitigate outward migration. Longer term, the reportproposes a rigorous assessment of the current levelof poverty to inform the design and implementationof an expanded, gender-responsive Public AssistanceProgramme and the development of a permanentunemployment benefit fund.


5


The Caribbean Development Bank estimates that realgross domestic product (GDP) in the British VirginIslands grew 2.1%1 in 2019. This reflects a second yearof recovery after GDP growth slowed to 0.7% in 2017due to damage inflicted by Hurricanes Irma andMaria.

The Virgin Islands economy is driven mainly bytourism and financial services. According to NationalAccounts data, accommodation and food servicesaccounts for around 6% of national output andaround 11.6% of employment.2 The World Travel andTourism Council (WTTC) estimates that when boththe direct and indirect contributions of tourism areconsidered, the sector supports around two-thirds ofemployment and contributes nearly 60% of overalloutput.3National accounts data suggests that in 2017finance and insurance activities contributed around25% of economic activity.

MACROECONOMIC

CONTEXT

The majority of the British Virgin Islands’ labour forceis non-national. In 2014, 68% of the workforce wasestimated to be non-national. This non-nationalworkforce was split evenly between men andwomen. The Government’s 2019 Residency andBelonger Status Initiative has likely regularised asignificant number of these non-nationals. In 2014,9,751 work permits were issued while 13,041migrants were estimated to be employed. Thisimplied that around 75% of migrants were on workpermits, or half of the total employed labour force oftheVirgin Islands. Of the 9,571 work permits issued in2014, only 559 were issued for the financial andinsurance services sector. In contrast, 2,037 or 21% ofall work permits were issued for workers in theaccommodation and food services sector. Twenty-five percent of work permits were for managementand professional workers, while 21% were for serviceand sales workers, 18% were for craft and relatedtrades workers, and 13% were for elementaryoccupations.

1 Caribbean Development Bank, https://www.caribank.org/publications-and-resources/resource-library/economic-reviews/country-economic-review-2019-virgin-islands2 & 3 TheWTTC suggests that the direct and indirect effects of the tourism industry contribute around 57% of GDP and 66% of employment.

4 https://bvi.gov.vg/media-centre/economic-response-plan-be-implemented-phased-approach

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FISCAL

In 2018, the Government of the Virgin Islandscollected US$372 million in revenue, equivalent to36.2% of GDP. Taxes on goods and services accountfor 68% of total revenue, with 90% of that beingincome from the registration and renewal ofinternational businesses. Payroll taxes account for14% of tax revenue, and import duties accounts for11%.

The Government of the Virgin Islands expects torecord a balanced budget for 2019, and total publicsector debt is estimated to have reachedUS$216 million, approximately 16.7% of GDP at theend of 2019. The Government is reported to be innegotiations with the UK Government for a LoanGuarantee for Recovery to Development projectsassociatedwith rebuilding theTerritory following thedestruction fromHurricanes Irma andMaria. This wasinitially reported to be up to £300 million and wouldopen significant financing opportunities for theVirgin Islands.5

The Virgin Islands imposes a relatively low taxburden. Under normal circumstances, theGovernment’s fiscal decisions are constrained underSection 20 of the Protocols for Effective FinancialManagement. Section 20 of the Protocols forEffective Financial Management calls for anaffordable level of debt, consistent with Annex B,which in turn requires:

• Net debt remains within 80% of recurrentrevenue,

• Debt service remains within 10% of recurrentrevenue,

• Liquid assets remain above 25% of recurrentexpenditure.

In 2018 the Government of the Virgin Islands’ totalexpenditure was US$345 million. The largestcomponent of spending was employeecompensation, which accounted for 34% of totalrecurrent spending. Interest payments accounted foronly 2%of recurrent expenditure, reflecting low debtlevels. Capital expenditure made up 6% of totalexpenditure, well below the originally budgetedshare of 18%, reflecting delays to infrastructureprojects.

5 https://bvinews.com/premier-optimistic-bvi-will-still-receive-uk-loan-guarantee/

7


SOCIAL SECTOR

5Real GDP has grown 14% in that time. If some of these benefits accrue to the low income groups, then the rate of poverty might be somewhat lower in 2020. However, it isimportant to note that the damage of Hurricanes Irma and Maria likely exacerbated the vulnerability of these groups.6This implies an annual income of US$8,400 in 2010. In 2003, the poverty line was assessed as US$6,300 per year.7These might be considered vulnerable individuals.8https://bvinews.com/nearly-12-of-bvi-benefits-from-financial-assistance-programme/9 https://cash-hub.org/resources/cash-in-emergencies?q=bvi&Category=&DateFrom=

Social sector development challenges are broad, butthe main challenges are unemployment, incomeinequality, poverty as well as universal access toquality education and healthcare services.The unemployment rate was estimated to be 2.8% in2017. The 2015 Labour Force Survey found a higherunemployment rate for women of 4.1% compared to1.5% for men. Lacking an unemployment scheme,the Labour Force Survey found that half of theunemployed were financially supported by friendsand relatives while 30.6% depended on their spousesand partners. Further, there was a higherunemployment rate among Virgin Island nationals(4.5%) than the overall unemployment rate of 2.9%.The average monthly income was US$2,513 fornationals, and US$2,078 for non-nationals.

A quarter of working women are service workers andshop and market sales workers, and a fifth of themare skilled professionals. Because many women workin sectors that pay lower wages, 50% more womenthan men earn a salary between US$700 andUS$1,400, and 100% more women than men earnless than US$700. Women’s average monthly wage isroughly 10% lower than men’s: US$2,332.77 vsUS$2,573.05.

The Virgin Islands’ most recently completed CountryPoverty Assessment in 2003 found that 21% of thepopulation were considered poor, and 29% ofchildren from 0-17 were considered poor.6 Childrenaccounted for 42% of the poor population. Childpoverty was 49% in households with 4+ childrencompared to 18% in households with 1 or 2 children.The 2010 Census found that 9.9% of the working-agepopulation had incomes below US$700.7 Of these67% were women, making up 13.3% of the workingfemale population. A further 19.2% of the populationhad incomes between US$700 and US$1400,considered low-incomeby the Government. Of these,60% were women.

Social Protection programmes which include socialassistance is a tool to respond to the needs of thoseliving in poverty and those living with vulnerabilities,in addition to addressing income inequalities. TheVirgin Islands’ flagship social assistance programme,the Public Assistance Programme, provides cashgrants up to a maximum of US$350 to support themost indigent and low-income groups. Financialassistance is offered on either a short-term (up to 3months), medium-term (3 to 6 months) or long-term(6 to 12 months) basis. This is means tested, followedby a committee assessment of the degree ofhardship. The number of beneficiaries stood at only93 in 2019. At present, the target groups include“vulnerable” children, persons aged 65 years andover, unemployed and disabled people.

In the aftermath of Hurricane Irma, a three-monthunconditional household grant was paid tovulnerable households. This Financial AssistanceProgramme was part of the first ever joint cashplatform - Humanitarian Cash Transfer Programme inBVI to providemulti-purpose cash to the affected andvulnerable households. The humanitarian responseinitiative was the first in BVI, led by Government ofthe BVI in close partnership with the the BVI RedCross, the British Red Cross, Caritas Antilles andfunded by DFID - UK Department for InternationalDevelopment. It was originally anticipated that 24households would benefit from the programme.8 Inthe end, the programme reached 1076 households,accounting for 3274 individuals, including 280 infants— almost 12% of the population of the BVI.9

8


SOCIAL SECTOR CONT’D

10 https://bvi.gov.vg/media-centre/new-peebles-hospital-officially-opens-december-1711 https://bvi.gov.vg/pub/2020%20Budget%20Estimates%20Final.pdf

The criteria used for prioritising families were: thosewith low or no income who also fit into one or moreof the following categories:• larger households• households with people with disabilities or

severe health issues,• single-parent families,• families with children under 5,• families with members over the age of 65.

Grants were given in the range of US$800 toUS$1,200 per month for three months. The totalprogramme cost US$3.2 million. The applicationperiod was time-limited. A follow-up survey of 7% ofthe recipients found 97.5% to be satisfied with theprogramme, while 78.5% indicated that the amountallocated was sufficient in meeting their basic needssuch as food, water, rent, transportation,communication and household items.

Approximately 78% of individuals living in the VirginIslands were estimated to have access to the internet.The lowest monthly fee for fixed broadband is US$99per month for 50Mbps.

Physical school closures have put a toll on studentsquality learning experience. In Virgin Islands’education is compulsory and free for children fromages 5-17 years old in the Virgin Islands but not forearly childhood of 0-4 years old. The total number ofchildren age 0-4 years in BVI is 2,134, where provisionof universal access to early childhood education is awork in progress. The Virgin Islands has 32 non-compulsory early childhood education centres, 27primary schools, and 7 secondary schools.

Connectivity is a fundamental necessity for ensuringquality online education.

Healthcare for legal residents of the Virgin Islands ismainly provided through the National HealthInsurance System (NHIS). This is funded by acontribution of 3.75% of an employee’s income,matched by a 3.75% contribution by the employer.The benefits of National Health Insurance areaccessible by the unemployed, self-employed, andindigent. The Government provides subsidisedhealthcare for the indigent, elderly and youth. Thereis a single public hospital with a capacity of 120beds.11 There is also a private hospital withsignificant additional bed capacity, which themajority can afford due to the NHIS.

Two of the early childhood education centres arepublicly-owned, as are 16 of the primary schools and4 of the secondary schools. In 2018 there were 1,782students enrolled in public primary schools and afurther 705 enrolled in private primary schools.There were 1,447 students enrolled in publicsecondary schools, 325 enrolled in privatesecondary schools, and a further 70 enrolled inalternative secondary education.10

9


The Virgin Islands’main tourism source market is theUnited States. The IMF expects US GDP to decline byalmost 6% in 2020, rebounding by only 4.7 in 2021.This suggests there will be some permanent loss. Thislikely implies lower tourism activity in the post-pandemic period than immediately pre-pandemic.

The direct impact of COVID-19 on tourism couldpotentially be long-lasting. The Government intendsto reopen its borders on June 2, 2020. At this time, itappears that only BVI citizens and residents will beallowed to enter. It is seeking to use hotels ascontracted quarantine facilities during this time.While the tourism industry remains closed, a largenumber of residents will become unemployed. This isparticularly damaging to the Virgin Islands due to itslarge migrant workforce—many of whom remain ontemporary work permits subject to continuingemployment.

The COVID-19 virus has acted as a synchronisedeconomic shock to an already-vulnerable globaleconomy. The financial services sector is quitesensitive to changes in global economic activity.During the global financial crisis of 2007,incorporations of business companies in the VirginIslands—the key measure of financial servicesactivity—fell by 38% from 2007 to 2009.12 In thistime, global GDP shrank only 0.7% in 2009, havingactually grown 2.8% in 2008 according to the IMF. Instark contrast, the IMF is predicting a decline inworld GDP of 3% in its most recent World EconomicOutlook.13

Agriculture output represents less than 1% of totalGDP. Soils are shallow and are not conducive to highyields. Additionally, potable water originates fromdesalination and even though reports suggest thatthe water complies with WHO standards, its effectson crops vary greatly. There appears to be littledomestic buffer against shocks to the global supplychain.

12 There were 77,000 new registrations in 2007, 61,716 in 2008, and 47,477 in 2009. https://www.bvifsc.vg/sites/default/files/2007_annual_report_final_r_0.pdf13 https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

CHANNEL OF TRANSFORMATIONEXTERNAL

Table1:TourismArrivalsbySourceMarketandContributiontoGDP

United States 60% -5.9

ShareGDPGrowth

in 2020GDPGrowth

in 2021

4.7

22% -2.8 4Caribbean

Europe 11% -7.5 4.7

Source: Government of the British Virgin Islands. GDP growthpredictions are from the IMF’sWorld Economic Outlook April 2020

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The Virgin Islands imposed a 14-day 24-hourlockdown from 4 April 2020. During this time, onlyessential workers were allowed to leave home. Thisclosure included supermarkets and shops. As of April29, a range of non-essential businesses are allowedto reopen between the hours of 6:00 a.m. and 1:00p.m. In the short-run, it appears that the VirginIslands’ domestic economy will resume significantactivity.

The majority of businesses in the Virgin Islands aresmall andmedium-sized. Access to credit for many ofthese businesses is limited. The commercial bankingsector is risk averse. There is a significant chance thata portion of tourism and tourism-related servicesmight suffer insolvency due to the likely prolongednature of the tourism shutdown.

DOMESTIC


11


MACROECONOMIC

Prior to the onset of the COVID-19 disease, the VirginIslands expected real GDP growth in the range of 1%to 3%. The IMF’s baseline scenario assumes that theCOVID-19 pandemic fades globally during thesecond half of 2020, and allows the global economyto unwind the restrictions on economic activity. Theprediction is for a 3% contraction in global economicactivity and a 5.8% recovery in 2021.

To augment this baseline forecast, we consider arange of scenarios using a simple SIR-Macro model.Unlike past economic crises, the root of this currentcrisis is not due to weak fundamentals within theglobal economy, but to spinoffs from the effects ofCOVID-19 on travel and hospitality sectors and thesecond order impacts on other sectors. The impacton the financial services sector in the currentscenario will therefore be determined by how theother sectors, both domestic and global, areimpacted. As such, the analysis here focuses mainlyon the tourism impact, with knock-on effects on theother sectors as endogenous to the model. Themodel has four phases, defined in weeks, whichidentify the various stages of the pandemic and theeconomic closures that are intended to limit thespread of COVID-19.

IMPACT

These phases are:

1. The pre-COVID-19 period where the economyoperates without effect. This period lasts from 1January 2020 to 3 March 2020.

2. COVID-19 first reaches the country and theinfection spreads. This period ends on 28 March,2020.

3. The country shuts the tourism sector, and thedomestic economy works remotely—all exceptessential workers. We assume that some workersare high-flexibility workers who are 80%productive at home, while there are low-flexibilityworkers who are 50% productive at home.Tourism workers become unemployed. The effectof this shutdown slows the spread of COVID-19.

4. The post-COVID-19 period, which comprises twosub-phases: first the domestic economy reopens;second, the tourism sector reopens, likely at alater date.

Since we already know the lengths of the first twoperiods, our scenarios consider different dates for thereopening of the domestic economy. The data andparameters used for this simulation are included inthe Technical Appendix.

6-Week Lockdown 6-Week Lockdown 6-Week Lockdown 6-Week Lockdown 24-Week Lockdown

Indicator 2020 2021

Tourism restartsimmediately

Tourism restartsin August

Tourism restartsNovember

Tourismdoes notrestart until 2022

Tourismdoes notrestarts until 2022

-8%

Consumption

GDP Growth

Unemployment

-4%

5%

+7%

+5%

4%

Source: Author’s calculations. GDP and consumption are measured in real terms. The baseline unemployment rate is 2.8% and ismeasured as an average unemployment rate for the full year.

2020 2021

-11%

-13%

12%

+9%

+14%

6%

2020 2021

-13%

-21%

17%

10%

+24%

7%

2020 2021

-17%

-14%

22%

1%

0%

27%

2020 2021

-23%

-23%

22%

8%

+10%

27%

Table 2: Macroeconomic Projections for Different Reopening Scenarios


12


The two central impacts of the COVID-19 pandemicon the macroeconomy stem from the lockdown ofthe domestic economy and the lockdown of thetourism sector. In the short-run the effects areobvious: tourism workers become unemployed anddo not produce output; the domestic economyoperates at a severely restricted rate.

The first main mechanism through which theseshutdowns damage the economy in the mediumterm is the closure of businesses. We assume thataround 20% of firms are liquidity constrained. Thelonger the shutdown lasts, the more likely thesefirms will become insolvent—both in the tourismand non-tourism sectors. This means that there isscarring from the recession, since not all tourismfirms reopen after COVID-19 has passed, leaving thefinal level of output lower. The second mainmechanism through which the shutdowns damagethe domestic economy is the effect of tourismclosure on demand for non-tourism goods andservices. Based on the September 2001 terroristattacks which represented an external shock, weestimate that a 1% decline in tourism activity over atwo-year period is associated with a 0.44% decline innon-tourism activity. The closure of the tourismsector has repercussions for domestic firms becauseof the deep decline in domestic demand. Some ofthe domestic firms will become insolvent because ofthe “second-hand” effect from the shutdown of thetourism sector.

The worst-case scenario we consider is that theshutdown of the domestic economy lasts for 24weeks and tourism activity does not restart withinthe forecast period (until the end of 2021). This wouldlead to a 23% decline in economic activity in 2020,with an 8% recovery in 2021. In this scenario,unemployment levels would be expected to reach upto 27% in 2022.

The best-case scenario we consider is that theshutdown of the domestic economy lasts 6 weeks, atwhich time the tourism sector is able to reopen. Thisis an unlikely scenario, but presents uswith an idea ofthe damage that has already been done to the VirginIslands economy. In this case, real GDP is predicted todecline by 8% in 2020 and recover by 7% in 2021.Because this model includes an epidemiologicalcomponent, reopening the tourism sectorimmediately leaves the Virgin Islands at risk of areturn of the virus. In this scenario, we observe anadditional mechanism affecting the economy—there would be significant infection, reducing thesize of the labour force and limiting output until atleast October 2020. Unemployment rates wouldincrease up to around 5%on average, and fall slightlyto 4% in 2021.

The more likely scenarios are that tourism activityreopens in August or November 2020. These involvesignificant closures in the tourism sector. If tourismreopens in August we predict that around 5% oftourism jobs are permanently destroyed, while aNovember reopening predicts that around 8% oftourism jobs are permanently destroyed. The Augustscenario is predicted to lead to an 11% decline inGDP, while our November scenario would lead to a13% decline in GDP. Under the August reopening, weexpect average unemployment rates to increase toaround 12% in 2020, while a November reopeningwould push that further up to 17%.

We consider a final scenario: one where the VirginIslands economy reopens in May but operateswithout tourism until the end of the forecast period.This is quasi-autarky. The impact of closing thetourism sector is large, even while the domesticeconomy remains open. The model predicts thatGDP would decline by 17% in 2020, and recover by1% in 2021. Without a significant rearrangement ofthe domestic economy, unemployment rates wouldremain high. This scenario stems from the possibilitythat the international community does not get theCOVID-19 virus under control, as might occur ifimmunity from COVID-19 lasts for a short period.

MACROECONOMIC CONT’D


13


The greater the portion of the population employedin essential services and high-flexibility jobs, thesmaller the divergence between these two scenariosand the lower the expected fallout from marginalincreases in the domestic lockdown period.

We do not expect the COVID-19 crisis to have assevere an impact on the international financialservices sector as the global financial recession did.The decline in global GDP is not being caused by afundamental upheaval of the financial sector, andappears to be a temporary problem for manymultinational firms and for international financialmarkets.


The GDP forecasts for the last two scenarios inTable 2 where there is no tourism in 2020 diverge byaround 5 percentage points. This divergence is theeffect of the additional domestic lockdown of around18 weeks. Intuitively onemight think this should leadto a larger decline. However, we assume that asignificant portion of the population continues towork, especially essential services and high-flexibilityworkers. We assume high-flexibility workers operateat reduced productivity levels for three reasons: high-flexibility jobs are not all perfectly flexible; home careduties significantly reduce some workers’productivity; we account for likely mental healthissues stemming from social distancing.

FISCAL

The fiscal effects of COVID-19 are based on twoscenarios, a 6-week lockdownwith tourism restartingin August 2020 and a 6-week lockdown with tourismrestarting in November 2020. We estimate thatrevenue is likely to fall by between US$22 million(-6.3%) and US$38 million (-10.9%) in 2020. Taxes ongoods and services are likely to fall by betweenUS$7.5 million and US$18.2 million, representing thebulk of the decline. This category comprises mainlythe taxes paid by the international business sectorand even though some revenue is expected to be lostdue to the reduction of new registrants, existingcompanies are likely to still pay fees especially for2020.

If global growth continues towane it is expected thatthis category could be adversely affected over themedium term.

Taxes on international trade, property taxes andother revenue are also expected to decline, fallingcumulatively between US$12 million andUS$15 million. The declines in these categories aredriven mainly by dampened demand and lowereconomic activity.

MACROECONOMIC CONT’D

Table 3: Fiscal Projections for Different Reopening Scenarios

6-Week Lockdown 6-Week LockdownTourisminAugust

2020Actual2018

Estimate2019

TourisminNovember2021

Total Revenue

Total Expenditure

Recurrent Expenditure

Capital Expenditure

Income/PayrollTaxes

372.3 350.3 328.1 312.2

50.3 51.8 46.7 42.8

251.3 229.0 221.5 210.8

3.0 2.9 2.2 2.0

39.7 44.7 35.0 33.3

343.7 319.1 343.5 343.5

323.3 293.4 325.5 325.5

95.4 99.2 106.0 106.0

14.1 14.8 16.6 16.6

16.3 17.3 19.7 19.7

4.3 3.1 2.9 2.9

1.3 2.9 4.2 4.2

0.4 0.2 0.4 0.4

109.7 82.5 85.8 85.8

0.8 0.7 2.0 2.0

1.9 1.2 1.6 1.6

7.4 8.0 11.5 11.5

8.0 1.2 7.3 7.3

20.4 25.7 18.1 18.1

28.6 31.2 -15.4 -31.3

34.3 37.1 -8.4 -24.3

2.8% 3.0% -1.4% -2.9%

3.3% 3.6% 0.7% -2.3%

TaxesonGoodsandServices

Property Tax

Taxeson InternationalTrade

Personal Emoluments

Employer Social Benefits

Social Contributions

Domestic Interest

Foreign Interest

Subsidies

Grants

Social Assistance Benefits

Property Expenses

Assistance Grants

MiscellaneousOther Expense

FiscalBalance

PrimaryBalance%GDP

FiscalBalance%GDP

Primary Balance%GDP

14


FISCAL CONT’D


Government expenditure will likely increase due toCOVID-19. The Government of the Virgin Islands hasoutlined some measures necessary to combat thepandemic and these include; the suspension ofwater rates, transfers to farmers and fisherfolk toensure business continuity, social assistance, andexpenditure related to building quarantine facilitiesand purchasing necessary supplies. These initiativesare estimated to cost around US$16 million.With thetemporary closure of operations, it is likely that theGovernment will be able to shift some of thediscretionary expenditure towards covering someCOVID-19 related expenditure.

Not accounting for any reduction in non-discretionary spending, total expenditure isexpected to increase by US$24.4 million whencompared to 2019 estimates.

Taking into consideration the estimates for the fall inrevenue and the likely increase in expenditure, thiswill likely result in a fiscal deficit betweenUS$15 million and US$31 million, and a primarydeficit between US$8 million and US$24 million.

15


Our model includes predictions for differentcategories of workers. We simulate the effects on thefour categories of workers outlined: tourism, non-essential high-flexibility workers, non-essential low-flexibility workers, and essential workers. Tourismworkers are likely to be the most affected by theCOVID-19 pandemic. The longer that the tourismindustry remains closed, the greater the burden theseworkers bear.

SOCIAL

However, those who remain in the Virgin Islands onwork permitsmay be forced to leave theVirgin Islandsunder the conditions of their work permits. Unlike theaftermath of Hurricane Irma, there is not significantreconstruction activity to which this labour can berepurposed in the short term.

In 2014, the tourism industry benefited from thelargest share of work permits issued—around 21%.An extended closure of the Virgin Islands tourismindustry could see a significant exodus of many ofthese workers—up to 10% of the previouslyemployed labour force. Further spillovers into thedomestic economy could lead to additional outflowsof workers. A survey conducted by the Government ofthe Virgin Islands in the wake of the COVID-19pandemic found that by April 24, 329 workers hadbeen laid off with 179 of those being identified asbeing work permit holders and a further 79 notspecifying their status. This means that anywherebetween 55% and 78% of those who have alreadybecome unemployed are likely to be migrant workerson work permits. Given that migrants earn 17% lessthan nationals, they are also at serious risk of fallinginto poverty.


Table 4 : Percentage Change in Incomes by Industry

6-WeekLockdown

Sector 2020

-13%

Non-EssentialHigh-Flexibility

Non-EssentialLow-Flexibility

Tourism

-4%

-8%

-1%

Source: Author’s calculations.

Essential

6-WeekLockdown

2020

-37%

-10%

-21%

-1%

6-WeekLockdown

2020

-60%

-16%

-35%

0%

6-WeekLockdown

2020

-77%

-11%

-15%

-1%

24-WeekLockdown

2020

-77%

-18%

-31%

0%

Under the most likely scenarios of a reopening oftourism activity in August or November, incomes inthe tourism sector are expected to decline between37% and 60% in 2020. Workers in non-essential low-flexibility sectors are expected to bear a significantshare of the burden as well, with their incomesdeclining by 21% or 35% in 2020. These suffer in partbecause of the domestic lockdown, but also in partdue to the falling demand for domestic goods andservices due to loss of tourism incomes. Thesecalculations do not factor in any policy response bythe Government in the shape of cash transfers tonewly unemployed workers. The Virgin Islandseconomy faces an important complexity—much ofits labour force is a migrant labour force. Those whohave become permanent residents are expected notto have significant migration responses to the crisis.

16


Data suggests that around 56% of workers in theaccommodation and food services sector are women.We know that in the Virgin Islands around 63% ofthose who are poor or vulnerable are women. Andwomen already have higher unemployment ratesthan men (4.1% versus 1.5% in 2015). Women aremost likely to be at risk from the deep decline intourism activity.

The 2010 Census suggests that females constitute themajority of single parent households.14 Around 33%of women are single parents. Given that the averagemonthly wage of a single person is roughly 70% thatof amarried person (US$23,790.16 andUS$32,281.39),this strongly suggests single mothers are a vulnerablecategory in BVI society.

The secondary impact of COVID-19 will furtherexacerbate the conditions of those living in povertyand increase the proportion of who fall below thepoverty line. Data from 2003 suggests that the childpoverty rate in the Virgin Islands was around 29%,translating to a total of 1773 children living inpoverty. The impact of COVID-19 may contribute toincreasing this rate and number. This place higherburden on single-parent households caring forchildren. Child poverty rates vary by nationality.15 Inparticular, non-national (non-belonger) migrantsfrom other Caribbean countries had child povertyrates that were around a third higher than VirginIslands nationals (belongers).

Given that migrants constitute around 63% of thetourism labour force, children in migrant householdswill bear a significant portion of the burden of theCOVID-19 pandemic. One qualitative concern is thatnon-national households may have access tosignificantly diminished family-based safety netscompared to nationals. In 2010, half of unemployedpersons said that they were supported financially byfriends and relatives. Coupled with lower migrantincomes relative to nationals, children in migrantfamilies appear particularly vulnerable to theeconomic shock.

As a result of the school closures, online classroomshave been introduced where some students facedisruption to quality learning due to connectivity andsupplies setbacks. The longer the students remaindisengaged from the learning process, the higher theprobability they will drop out permanently—especially those from low income backgrounds. Asurvey covering 2,765 households with school-agechildren conducted by the Ministry of Education inthe wake of the COVID-19 pandemic found that atleast 340 households lack internet access and afurther 446 had limited packages. Of those withoutinternet access, 162 reported that they would beunable to purchase even a discounted internet plan.16

Households surveyed covered 3,312 students acrossprimary and secondary schools, and reported that 157students did not have any device at their disposal,while a further 577 had only a tablet or a smart phoneavailable for online learning.

SOCIAL CONT’D

14 http://www.bvi.gov.vg/content/virgin-islands-2010-population-and-housing-census-report15 https://www.unicef.org/Child_Poverty_in_the_ECA_WEB_VERSION.pdf16 https://www.bvibeacon.com/online-classes-start/

Table 5: Labour Statistics by Gender and Employment TypeMale

1184

Low-flex

High-flex

Essential

4868

3160

992

Source: Government of the Virgin Islands Central Statistics Office

Tourism

Female

1288

2648

3935

1242

%Female

52%

35%

55%

56%

Total

2472

7516

7095

2234

17


A more fundamental problem is the quality of thebroadband, which the Government hasrecognized.17 To begin to offset these concerns,education websites have been zero-rated and 25%discounted internet packages have been madeavailable to students. Further, there have beendonations of around 1,000 devices to be loaned tostudents to aid with online learning that began onMay 4, 2020.18

Women are the majority of clerks, service workersand shop and market sales workers, andprofessionals. Most women are indeed serviceworkers and shop and market sales workers,followed by professionals. While skilled professionalscan work from homewhere feasible, the rest of thesewomen are severely impacted by the COVID-19 crisis:the women working in tourism and in non-essentialservices are not earning a wage, with womenworking in tourism out of a job for an unknownamount of time. On the other hand, women whowork in essential services continue working andstruggle to cope with any childcare duties theymight have. As a third of women are single mothers,we see two strains of problems arising: feeding theirchildren for the unemployed women, looking afterand homeschooling them for essential workers.

SOCIAL CONT’D

19 http://www.virginislandsnewsonline.com/en/news/domestic-violence-stats-startling-top-cop-20 https://bvi.gov.vg/content/gis-preview-premier-fahie-appeals-abusers-stop21 http://www.bvi.gov.vg/media-centre/office-gender-affairs-calls-peace-homes-during-6-day-lockdown

The year 2011 saw two important legal steps forwomen: the First National Gender Policy for Equityand Equality for the Virgin Islands and the DomesticViolence Act. However, gender discrimination is stillwidespread and so is Gender-BasedViolence (GBV).19

The Royal Virgin Islands Police Force domesticviolence reports showed an increase in GBV from2009 to 2012. Appealing to abusers to stop20 andcalling for peace in homes during the lockdown21 isnot enough to combat GBV. The Office of GenderAffairs must recognise that in an environment wherewomen depend on men and are locked in the housewith their abusers, encouraging women to reportinstances of domestic violence is not an effectivepolicy. The Government, through the SocialDevelopment Department offers shelter andsupport for victims of GBV.

17 http://www.virginislandsnewsonline.com/en/news/internet-providers-should-have-no-excuse-for-poor-service-premier-fahie18 https://bvi.gov.vg/media-centre/students-receive-aid-remote-learning?fbclid=IwAR2PW7b47o7VI9Cc17R_bkITo7rUDDW5nue0BppRs74TdtEGtJEN0BuF9LY

https://bvi.gov.vg/media-centre/students-receive-aid-remote-learning?fbclid=IwAR2PW7b47o7VI9Cc17R_bkITo7rUDDW5nue0BppRs74TdtEGtJEN0BuF9LY

18


RESPONSE AND RELIEF

Given the possibility that tourism activity might notreturn until late 2020 or even later, it isrecommended that the length of the programme bedependent on the status of the domestic economy(under curfew or not), and the status of the tourismsector—where there are significant vulnerablecategories. The previous programme was reportedto have reached 12% of the population. A COVID-19programme would then likely exceed the cost of theprevious programme, but would be responsive tothe context of the COVID-19 pandemic. Withunemployment expected to peak around 18% to19% in our central scenarios, this would requireoutlays of around US$3 million per month at thepeak, and falling as the domestic economy reopens.Assuming that this is provided for the extent of thelockdown, and tourism reopens in August, thiswould cost approximately US$12 million in total. Ifpayments are made dependent on income statusbeyond a three month period, then this wouldsignificantly increase the total programme cost.


RECOMMENDATIONS

Government launched a stimulus package designedto support vulnerable individuals manage theimpacts of the pandemic. There was a suspension oncharges for water for all Water and SewerageDepartment customers for a 30-day period, endingmid-April as well as a US$2 million allocation tofarmers and fisher folk to purchase critical suppliesfor business continuity.

These interventions are, in addition to thediscretionary unemployment assistance, availableunder the Public Assistance Act No 14 of 2013, byapplication through the Social DevelopmentDepartments of the Government of theVirgin Islands.As this income support is discretionary, support isreviewed on a case by case basis.

The response and relief phase is the period duringwhich immediate interventions are necessary tomitigate as much as possible the impact on people,communities and businesses. These actions areundertaken in the short-term and are designed toensure continued access to basic human rights andfreedoms.

Use the framework created for the FinancialAssistance Programme after Hurricanes Irma andMaria to provide temporary cash

The Government of the Virgin Islands socialprotection programmes are not readily able torapidly scale up for the distribution of cash transfersin the wake of the COVID-19 crisis. However, after thepassing of Hurricanes Irma and Maria, the FinancialAssistance Programme was rolled out with the helpof the BVI Red Cross, the British Red Cross, DFID - UKDepartment for International Development, andCaritas Antilles. This programme can be a templatefor providing multi-purpose cash to mitigate thesecondary impact of COVID-19, building on existingtargeting mechanisms, information management,coordination mechanisms, and creating linkages toother existing social services. Grants were given inthe range of US$800 to US$1,200 permonth for threemonths, representing enough to lift families out ofthe lowest income category. That total programmecost US$3.2 million. It is likely that the scope for thisprogramme will need to be broadened to capture amuchwider range of households given the increasednumber of persons with financial and socialvulnerabilities—including formal and informalworkers from the tourism sector.

Provide liquidity for small firms

Given the risk aversion of Caribbean banks, it ispossible that there will be a number of micro, small,andmedium enterprises (MSMEs) which do not haveaccess to liquidity. We predict that between 5% and8% of tourism firms are likely to fail. The longer thelockdown lasts, the more pressing the need toprovide tourism-related firms with liquidity. This canbe done in two ways: either directly through theGovernment of the Virgin Islands in the form of agrant, or indirectly through the commercial bankingsector using Government guarantees to encouragelending.

19


RESPONSE AND RELIEF CONT’D


Extend the period for work permit holders to findnew jobs and implement rapid work permittransfers.

Given the potential for an extended closure of thetourism sector, the Virgin Islands’migrant labour forcemight suffer substantially. In order to retain workers sothat there is not significant detachment, theGovernment of the Virgin Islands could extend theperiod where unemployed work permit holders areallowed to search for new jobs from three monthsuntil the reopening of the tourism industry. Further,allowing rapid work permit transfers during theperiod of the lockdown allows labour to bereallocated quickly from sectors with excess supply oflabour to sectors with excess demand. The faster workpermits are transferable, themore poverty is limited inthe short run. In addition, migrant families returningto their home countries in the short run puts childrenin particular at risk of being uprooted. Given thehigher incidence of Caribbean migrant child poverty,this is an important short-term economic response toprotect vulnerable children.

A voluntary“Home Return”programmeThe high proportion of migrants in the workforce,particularly within the tourism sector which is likely tobe hardest hit, will create additional unemploymentamong the non-national population. Depending onhow long the demand for tourism remains depressed,this unemployment could be protracted. With limitedscope for broad coverage of income supportprogrammes, a temporary migrant repatriationprogramme could be implemented that wouldprovide support to those unemployed migrants andtheir families to return home.

This programme would be completely voluntary andcould provide a simple process for migrants with workvisas to apply for support to cover the basic returntravel costs for them and/or their family members totheir countries of origin. Migrants who participate inthe programme could be given preference if theyre-apply to return to the BVI after a specified period.This programme would have the benefit of allowingmigrants to explore employment opportunities intheir countries of origin. While the scale of theprogramme would be determined by the availableresources and the number of individuals applying, it isclear that such a programme would result in a lowernet per person cost than providing sustained incomesupport over the short/medium-term. The proposedprogramme should be informed and guided by ahuman rights-based approach, ensuring that migrantsrights and freedoms are fully protected and that theprocess does not reinforce existing inequalities.

Fiscal space

The Government of the Virgin Islands is constrainedmainly by its fiscal rules. While it had, at the end of2019, US$87.80 million in its Reserve and ContingencyFunds, it is constrained to keep these above 25% ofrecurrent expenditure. At the end of 2019, this wasapproximately 29.3% of recurrent expenditure for2019. These funds are available to use, but theGovernment will likely need to breach its establisheddebt limits to use these funds to provide a significanteconomic response to the crisis.

In the short run, the Government of the Virgin Islandshas a very low debt to GDP ratio, making it anattractive borrower. The Government is limited to a netdebt level equivalent to 80% of recurrent revenues.Using 2019 estimates this would imply a net debt limitof US$250 million. With net debt estimated to beUS$27.3 million, this gives the Government significantfiscal space. The Government is, however, constrainedin its borrowing by the lack of an international creditrating.

The Government of the Virgin Islands therefore hasaccess to the finances to provide a significantresponse—it is constrained mainly by its fiscal ruleswhich will need to be breached given the severity ofthe situation.

Provide liquidity for small firms cont’d

The former places a greater burden on theGovernment, and might likely require outlays ofaround US$11 million assuming that 5% of tourismfirms and 1% of other firms are likely to fail in theAugust reopening scenario. The Governmentguarantee approach requires much lower outlays inthe immediate term, but relies on commercial bankshaving the liquidity to finance this lending.

20


The recovery and resilience phase is the next stage inthe process, and represents the transition from thecritical response and relief phase to medium andlong-term interventions that help people rebuildtheir lives.

Implement a permanent unemployment benefitfund.

The increasing frequency of large economic shocksrequires that a small country like the British VirginIslands may benefit from some form ofunemployment insurance. Low income householdsare especially vulnerable to large economic shocks.They can easily be plunged into temporary poverty ifthey do not have access to unemployment insuranceduring an economic shock. This limits the cost to theGovernment of the Virgin Islands during largenegative shocks, and would allow a much fasterautomatic response to a crisis. This is particularlyimportant given the fiscal rules faced by theGovernment. Assuming a requirement to cover eachindividual up to at least 60% of the average monthlyincome22 at the baseline rate of unemployment, thecost of the fundwould be approximately US$ 758,000per month. While the initial capitalisation will requirean injection by the government, ongoingreplenishment would be funded by a small increasein social security contributions.

The main complexity faced in the implementation ofsuch a fund would be the existence of a largemigrantworkforce. Given that there is a short period duringwhich migrants on work permits are allowed tosearch for a new job, it seems reasonable to allowworkers who have contributed to the scheme toaccess unemployment benefits while they search fora new job. At the individual level, this preventsmigrant workers from falling into poverty in a countrywhere they may have no informal safety net. This isparticularly important given the relatively highincidence of child poverty for Caribbean migrants inthe Virgin Islands. At the aggregate level, this retainsboth labour supply and domestic demand evenduring downturns.

RECOVERY AND RESILIENCE

Expand the coverage and targeting of the PublicAssistance Programme.

The Public Assistance Programme offers cashpayments that are not enough to lift households outof poverty. While it is not clear where the poverty linecurrently exists, the payments made areapproximately US$350 per month, which compareunfavourably to the US$800 to US$1,200 that waspaid in the wake of Hurricane Irma. The amountcould be expanded in linewith a rigorous assessmentof the poverty line. The Public Assistance Programmealso offers only temporary support, lasting only up toa year. This puts vulnerable households at risk. Whileit is appropriate to review the eligibility of recipients,benefits should not be explicitly short-term. TheProgramme could broaden its target groups toinclude all who fall into poverty, but targetingespecially those who are vulnerable such as women,households with children, single parents withchildren, and the elderly.

This programme could be made responsive to alltypes of shocks, given the vulnerability of the VirginIslands to significant economic shocks. To do so,objective criteria could be outlined so that theprogramme can be scaled up quickly and efficiently ifa substantial portion of the population are pushedinto poverty. This will require considering “relaxing”the criteria in times of shocks to ensure timelydistribution of multi-purpose cash to householdsand recipients. The benefit amount could account forthe size of the family, and in particular the number ofchildren in a household. Broadening the schemewithout further increases in benefit amounts will costa small fraction of the Government’s budget. Themost recent figures suggest there are fewer than 100beneficiaries, costing approximately US$420,000 peryear in total. Assuming a rate of between US$700(double the current rate) and US$1,000 (the mid-range of the previous post-hurricane incomesupport), the vertical expansion of the programmewould cost between US$840,000 and US$1.2 million.However, given the significant projected impact onunemployment, horizontal expansion to includeadditional beneficiaries would also be necessary tomitigate significant increases in poverty andvulnerability to poverty.

22 The most recent Labour Force survey notes than the overall average monthly income for workers who stated their incomes was $2,215.30

21


Annex


COVID-19

The Model

June 3, 2020

Drawing from Eichenbaum et al. (2020) and Kaplan et al. (2020): combina-tion of SIR and macro model to evaluate policy options in small open economieshighly reliant on tourism.

SIR Model

SIR model for the epidemiological side. For sectors i = (T,H,L,E) define

Susceptible: Si

t+1 = Si

t� T

i

t(1)

Infected: Ii

t+1 = Ii

t+ T

i

t� (� + µ) · Ii

t(2)

Recovered: Ri

t+1 = Ri

t+ � · Ii

t(3)

Deceased: Di

t+1 = Di

t+ µ · Ii

t(4)

New infected: Ti

t= � · (1 + �)m · (1 + ↵

i · �) · Si

t·X

i

Ii

t(5)

Population: Popt+1 = Pop0 �X

i

Di

t(6)

with � recovery rate, µ death rate, � infection rate, � extra exposure frommarket work (instead of remote work or the sector being shut), m number ofsectors working market, and ↵

i sector-specific weight.The infection rate � is a function of public and health policy, for example

strictness of quarantine rules, how well informed the public is about preventivemeasures, etc. The infection rate � is augmented by a factor � for every sectorthat is open and operating normally (i.e. market), with � 2 [0, 1] infection riskfrom in-person interaction at work and m number of sectors operating as normal(market). The e↵ect is multiplicative: if more sectors are operating normallythen the risk of infection increases exponentially. The sector-specific weight ↵i

captures the increased (decreased) chances of being infected if working market

1

(remote).

↵i =

8>>><

>>>:

0 if m = 0 or m = 4

+1

mif 0 < m < 4 and market

� 1

4�mif 0 < m < 4 and remote/shut

(7)

Working market implies more in-person interactions and therefore a higher riskof infection. Working remote, by greatly limiting in-person interactions, de-creases the risk of infection. For simplicity we assume that the extent of expo-sure and risk of infection is the same for all those working market, regardless oftheir job or sector.

Macro Model

In real terms (i.e. no prices). Three types of agents: households, firms, gov-ernment. Households consume all disposable income and supply labour inelasti-cally. Firms can belong to four sectors: tourism (i = T ), high flexibility (i = H),low flexibility (i = L), or essential (i = E). High flex is for example software en-gineering, low flex is restaurants, essential is pharmacies. Generally sectors caneither work market (i.e. regular work), work remotely (i.e. telecommuting), orbe shut. If they work remotely they will be �

i 2 [0, 1] as productive as workingmarket. If they are shut they will not produce. Unless shut, firms produce finalgoods Y i using labour and technology (we do not consider capital). Finally, thegovernment pays unemployment benefits and transfers to households, subsidiesto firms, collects income tax from the first and corporate tax from the second.

Phases

The model has four phases, which we define in periods of weeks.

1. First phase: pre-COVID-19 period where the economy operates withoute↵ect.

2. Second phase: COVID-19 first reaches the country and the infectionspreads uncontrolled.

3. Third phase: the country shuts the tourism sector and the domes-tic economy, apart from essential workers, works remote. High flexibil-ity workers are able to work at home albeit with reduced productivity.Low flexibility workers work with a substantially reduced productivity.Tourism workers become unemployed. Shutting tourism and switchinghigh and low flex sectors to remote working slows down the infection andflattens the curve.

4. Fourth phase: post-COVID-19 period. It comprises of two sub-phases:

2

(a) the domestic economy returns to normal: high and low flex sectorswork market. Tourism remains shut,

(b) Tourism re-opens.

The model

In the real world when a sector is shut firms have no revenues but still have topay fixed costs. These fixed costs pile up, and at some point the firm will nothave enough liquidity to cover them. The longer the shutdown lasts and themore liquidity constraint a sector is, the higher the share of firms that fail. Inour model the share of firms failing in sector i is ⇢i

t2 [0, 1], and it follows

⇢i

t=

8>>><

>>>:

0 if i = E

t� ni

nmax· ⇢ if shut

⌘ · t� ni

nmax· ⇢ if not shut

(8)

where ni is the period when sector i shut down, nmax the maximum number

of periods the sector can be shut for (i.e. length of periods 3 and 4), and ⇢

long-term failure probability.We introduce this as a labour friction. If a share ⇢

i

tof firms fail, since firms

and workers are homogeneous and atomistic, it means that the same share ⇢i

t

of workers is unemployed.Labour

if market/remote: Ni

t= (1� ⇢

i

t) ·

�Si

t+R

i

t

�(9)

if shut: Ni

t= 0 (10)

Healthy people can work. Unless the firms has failed or the sector is shut o↵,they do.

Production, with production function Y = f(Nt) = A ·Nt.

if market: Yi

t= A

i ·N i

t(11)

if remote: Yi

t= (�i ·Ai) ·N i

t(12)

if shut: Yi

t= 0 (13)

High-flex and low-flex sectors can switch to remote work, though this reducestheir productivity by a factor �

i, with �H

> �L. Shut sectors do not produce

any output.Profits

if market/remote: ⇧i

t= (1� ⌧F ) ·

�Y

i

t� w

i ·N i

t� �F · wi · (1� ⇢

i

t) · Ii

t

�

if shut: ⇧i

t= 0

If the sector is market or remote then firms who still operate have to pay wagesand sick pay, as well as corporate tax ⌧F . If the sector is shut then the firms

3

make no profits. Note that the failure rate is implicit in the workforce, and thatonly workers who are employed by firms that have not failed receive sick pay.

Income

if market/remote: �i

t= (1� ⌧I) · wi ·N i

t+ (�F + �G) · wi · (1� ⇢

i

t) · Ii

t

+ ✓ · wi · (1� ⇢i

t) · (Si

t+ I

i

t+R

i

t) +⇧i

t(14)

if shut: �i

t= ✓ · wi · (Si

t+ I

i

t+R

i

t) +⇧i

t(15)

with ⌧I income tax (same for all sectors), (�G+�F ) sick pay rate with �G sharepaid by the government and �F share paid by the firm, ✓ 2 [0, 1] unemploymentbenefits rate paid by the government. �i

tincome, N i

tlabour in hours worked1.

Consumption

Ct = (1� ⌧C) ·MPC ·X

i

�i

t(16)

where MPC is the marginal propensity to consume and ⌧C consumption tax.Government

Bt =X

i

⌧I · wi ·N i

t+ ⌧F ·

⇥Y

i

t� w

i ·N i

t� �F · wi · (1� ⇢

i

t) · Ii

t

⇤+ ⌧C ·MPC · �i

t

� �G · wi · (1� ⇢i

t) · Ii

t� ✓ · wi · (1� ⇢

i

t) ·

�Si

t+ I

i

t+R

i

t

� �(17)

The governments revenues come from the income tax on the healthy people whowork in firms that have not failed and from corporate tax on those firms. Thegovernment pays welfare transfers to households, subsidies to firms that havenot failed, sick pay to the unhealthy individuals employed in firms that havenot failed, and unemployment benefits to all those who were working in firmsthat failed or those working in shut sectors.

Trade: net of tourism YH

tthat is not consumed by locals, net imports are

(IM �X) = Ct ��Y

H

t+ Y

L

t+ Y

E

t

�(18)

Initial conditions

During phase 1 (of length n1) the population does not change:

Popt =X

i

Si

t= 1 8t = 0, ..., n1 (19)

1We assume that everyone works full time, so N it is the share of healthy employed popu-

lation working in the sector.

4

At time n1 + 1, when the infection starts2:

Ii

n1+1 = " · Si

n1+1 (20)

Si

n1+1 = 1� Ii

n1+1 (21)

Ri

n1+1 = 0 (22)

Di

n1+1 = 0 (23)

Popn1+1 = Popn1+1 (24)

and from time t = n1+2 onwards the infections spreads as described in the SIRModel section.

Calibration

Table 1: Health parameters

Parameter Description Value

� Recovery rate 0.99 · 7

14

µ Mortality rate 0.01 · 7

14

� Infection rate (health policy) 0.40

� Extra infection risk (work) 0.30

" Initial impact 0.001

The model is weekly. Since the illness lasts roughly 14 days, we adjust the

health parameters of table 1 to a period being7

14of the illness. 1% of people

who contract covid-19 pass away, giving us a mortality rate of 0.01 · 7

14. The

remaining 99% recover, hence the recovery rate of 0.99 · 7

14. We calibrate �

and � to be in line with the R0 parameters inferred by, among others, Liu et al.(2020) or Hellewell et al. (2020). We get � and � from assuming R0 = 2.5 whenall economic activity continues as normal and R0 = 1.1 when only the essentialsector operates normally and everyone else either is shut or operates remotely.It must be noted that these R0 are on the conservative side: R0 was estimatedto be almost 5.0 for Lombardy, for example. We choose lower R0 because of the

2Note that we assume the infection starts in all sectors simultaneously and with uniformprobability

5

lower population density of the countries considered, as well as on the hypothesisthat the virus spreads slower in hotter climates (Cookson, 2020). Then

8><

>:

� · (1 + �)4 = 2.5 · 7

14� · (1 + �) = 1.1 · 7

14

and we approximate the results to � = 0.4 and � = 0.3. Last, the initial impactis " = 0.001 as in Eichenbaum et al. (2020).

The model initial conditions are calibrated using data from the nationalstatistical services. The economic parameters are the current tax rates, sick payrates, and unemployment benefits rate. Productivity rates an educated guess, asthere are no studies that measure the productivity of remote work. Changes inthe productivity rates would rescale production during lockdown, but would nothave long-term e↵ects in this simple model. Last, we calibrate the probabilityof firms failing when shut down so that if the sector is shut until the end of thesimulation (end of 2021) then 20% of the firms in the sector fail.

Note that we redistribute the elasticity of non-tourism activity to changesin tourism activity to high flex and low flex sectors only, leaving essential firmsuntouched, by calculating

⌘ = ⌘0 · A

H

t·NH

t+A

L

t·NL

t+A

E

t·NE

t

AHt·NH

t+A

Lt·NL

t

. (25)

References

Cookson, C. (2020, mar). Scientists hopeful warmer weather can slow spread ofcoronavirus.

Eichenbaum, M., S. Rebelo, and M. Trabandt (2020). The Macroeconomics ofEpidemics. NBER Working Paper Series 26882.

Hellewell, J., S. Abbott, A. Gimma, N. I. Bosse, C. I. Jarvis, T. W. Russell,J. D. Munday, and A. J. Kucharski (2020). Articles Feasibility of controllingCOVID-19 outbreaks by isolation of cases and contacts. Lancet Glob Health 8,488–496.

Kaplan, G., B. Moll, and G. Violante (2020). Pandemics According to HANK.

Liu, Y., A. A. Gayle, A. Wilder-smith, and J. Rocklov (2020). The reproductivenumber of COVID-19 is higher compared to SARS coronavirus. Journal of

Travel Medicine, 1–4.

6

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