Question

There are many situations that may contribute to the inflation of an economy where the volatility and uncertainty can lead to lower levels of investments. With regards to the current situation that is taking place around the world (COVID-19), many stores and businesses in the Kingdom of Bahrain and around the world were faced to close their doors to customers for at least two weeks. Explain in your own words, how these businesses and financial institutions will make up for the losses they are or may face. Will these businesses and financial institutions cause inflation within the economy? Explain.

(300 words)

Answer 1

Covid-19 pandemic will show a significant impact on the economy. in up coming future. investments will reach bottom due to uncertainty about future. No one have any idea about future regarding what will happen next that's why no investor will come forward to invest money. it will be very difficult to make up those losses because demand won't pick with in next 6-9 months so revenue for the companies will be low and earnings will be low. to make up those losses, companies will come with some strategies. companies will try to reduce their variable costs by asking some employees to go on leave, this will reduce the amount of salaries to pay for employees along with that companies will reduce the salaries for the employees who will work but not on leave. and also companies will temporarily close some shops after Lock down until the demand will pick up. Companies will ask banks to sanction some short term loans to meet working capital requirements along with that they will ask for deferments of EMI if there is any. They will try to attract customers by offering some discounts by reducing their margins to increase demand. if financial institutions starts lending aggressively for businesses also there will be no chances for raise in inflation because even after production also they cant sell their inventory as earlier. demand will wont pick until people start forget about Covid-19, it will take some time to happen that. Even after pumping of money inflation wont raise taht easily it will take atleast 9 months to raise inflation. in general aggressive lending will leads to inflation but current scenario is not favourable for that situation . So, forget about inflation there is lot of chances for deflation instead of inflation. Due to this crisis unemployment rate will increase this will become catalyst for deflation and recession. even businesses also wont use their full production capacity until the economy becomes stable. They will lay off some employees and utilize the reserves to meet payments for their debts. So this scenario wont increase any inflation and leads to increase in unemployment and recession. Companies has only one path to overcome is to reduce their expenses by cutting down their variable expenses.