Not in our interests to support loss-making businesses – Central Bank governor

It is not in anybody's interests to support loss-making enterprises, with some companies unlikely to survive Covid-19, the governor of the Central Bank has warned in a pre-budget submission.

In his letter to the Minister for Finance Paschal Donohoe, Mr Makhlouf noted that Covid-19 may mean some sectors may never be able to return to previous financial health, even in the medium term, because of the requirement for social distancing.

“In such a scenario, more difficult decisions may need to be made about the balance between company closures and further fiscal outlay to support their survival,” he said.

“It is not in the community’s interest that it supports loss-making enterprises,” Mr Makhlouf, wrote.

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Any measures the Government does introduce in response to the Covid-19 crisis should support the “productive capacity” of the economy and reduce the risk that otherwise viable companies become insolvent.

“Given the sharp increase in the numbers out of work, labour market activation and training programmes can have a positive impact, as can bringing forward planned investment programmes where possible,” he wrote.

Mr Makhlouf noted that data for the economy showed a trough in activity in April, with current activity above this low point. And despite a strong rebound in some elements of spending, weakness remains in other areas. Precautionary behaviour by consumers, he added, has intensified, evidenced by the sharp rise in household savings. “How these savings are used will be important in shaping the recovery from the current downturn,” he said.

“The overall level of activity still remains well below pre-Covid-19 levels and the challenge ahead will be to move from tentative re-opening to sustainable recovery,” Mr Makhlouf said.

Sustainable debt

The pre-budget submission also saw Mr Makhlouf advising that Government provides a clear and credible plan to return to a “much lower and sustainable” debt position for the economy.

He added that a decline in the public debt ratio “from the very high levels it has now reached” is “necessary”. As it stands, the economy is “more vulnerable to future shocks” with less room for manoeuvre if circumstances change.

The governor’s letter stressed the need to build economic resilience, particularly given the deep uncertainty facing the economy in light of a possible no-deal Brexit. Such an outcome would knock between one and two percentage points off the growth rate of the Republic’s economy in 2021.

“In addition to boosting demand in an economy with spare capacity, measures that address structural challenges should also increase the economy’s productive capacity and benefit the Government’s future fiscal position, notwithstanding the short-term costs.”