The Unlikely Case of Some Government-Funded Coronavirus Loans Being Repaid

  • May 23, 2020 BST
  • Team Kalkine
 The Unlikely Case of Some Government-Funded Coronavirus Loans Being Repaid

In a report that may not seem like a surprise to many, the Business Banking Resolution Services in the United Kingdom, has stated that nearly forty-three per cent of the business in the country who have availed of loans under the various stimulus schemes may not be repaying it. The schemes which were announced in the month of March were done in anticipation of a likely situation that would last a couple of months. Now at the end of May when two months have already passed there does not seem to be an end date when the threat of the pandemic would finally be over. The businesses are also in a fix on how to respond to the situation, as the new social distancing measures will ensure that their business will be too slow to pick up if at all it is viable to do so. The situation as it is evolving on the coronavirus front seems it will be a very long and arduous time before life comes back to where it was prior to the outbreak, and till that time everything will have to function at less than their optimum levels. The coronavirus pandemic till now has infected at least 250,000 people in the UK out of which about 36,000 people have already lost their lives.

When the scope of the lethality of the virus first became clear, the country was quick to realise what the healthcare and the economic impact of the pandemic were going to be. The necessity of the lockdown though not clear in the beginning, became apparent as the first few weeks passed and the infection started to spread like wildfire.

If we talk about the government measures, there were three main components of the stimulus package that the government announced since the beginning. The first one was the furloughing scheme, under which the exchequer promised to pay small and medium-sized businesses eighty per cent of the staffs’ salary if they were retained for the lockdown period. The scheme which was designed to restrict mass unemployment in the country was later extended to large corporate entities as well, who were unable to benefit from the other stimulus schemes. The second scheme announced by the government was the loan guarantee scheme, where the Bank of England would guarantee loans being extended by banks to corporates fighting the lockdown induced business disruptions, to pay salaries to their staff and meet other essential expenditure. The third scheme that was announced by the government was the business "Bounce back Scheme" under which small and medium-sized businesses would be able to apply online for loans up to £50,000 under lucid terms with no interest charge, or repayment obligation for the first year and in subsequent years they will have to pay a modest interest of 2.5 per cent.

Another major factor to be kept in mind regarding the situation of different industries is that the pandemic has impacted the different industries differently. While some industries have been doing brisk business during the thick of the pandemic, others have had their revenues bottoming months before the pandemic hit the country. Even when the government announced a three-phased plan to open up the lockdown it was made clear that some industries will see a longer lockdown period as the threat of a resurgence of the pandemic from those industries is higher than the others. Under such circumstances, the business bounce back of certain industries undoubtedly be slower than others, and they would need more support from the government compared to others. The government this month after a discussion within the treasury decided to extend the furloughing scheme till the end of October and also promised not to withdraw this scheme abruptly, which could result in disastrous consequences for the economy. It is thus natural that the financial position of businesses in different industries will be different and would have to deal with accordingly by the government while the country navigates through these treacherous times.

It is currently very difficult to say how the pandemic situation will pan out in the near to medium-term future when it is being predicted that the situation would not become normal until an effective vaccine is found against the virus, and all the citizens of the country are not vaccinated with it. Till the threat, of the infection, is not reduced substantially, it will not be easy to expect a return to normal life. The government, in its three-phase plan to open up the economy has kept the spike in new infections as the focal point. It has categorically stated that from one stage of relaxation to the next stage will only be possible if there is no significant rise in the number of new infection or else a more stringent lockdown would have to be imposed. The earliest vaccine candidate to deal with the coronavirus pandemic is not expected to complete its trial process till the end of September, and manufacturing of millions of doses and vaccinating the whole country will take another six to eight months at least. If all goes according to plan and no hindrances are met, the country could see itself to normalcy at least not until the end of the first quarter of next year.

The reason some people believe that so much of the government stimulus loans will not be refunded could be because of the attitude of the government, which has been demonstrated towards the business in the country in the past few months. The government in its effort to protect the country from a major crisis has spent money generously, regardless of which a number of businesses are in very bad shape and will continue to struggle for a while before getting back to normal. Should the government be forceful in recovering back its loans then a situation of mass bankruptcy may arise. The most likely course of action the government will undertake is to follow a strict austerity measure and raise taxes to slowly retire off the debt burden it is accumulating on its books now.

 

 


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