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-19 PANDEMIC.
1.0. Introduction
The robust outbreak of COVID-19 pandemic hasexposed the globe to an economic upheaval.Declared a pandemic by the World HealthOrganization (WHO) on 11 March 2020, COVID-19 has become a global emergency, given itsimpact on the entire world population and theeconomy. It has no doubt resulted in countrieshaving to close their borders, ordered businessto close down and instructed their population toself - quarantine.
According to scenario simulations of theInternational Monetary Fund (IMF), globalgrowth could fall by 0.5 for the year 2020.Several other sources are also predicting a fall inglobal growth due to the direct effects of theCOVID-19 outbreak. The global economy mayenter a recession at least in the first half of theyear 2020, when adding the direct and indirecteffects of the crisis (e.g. supply and demandshocks, commodity slump, fall in tourismarrivals, etc.).
It is worthy of note that the pandemic has so faraffected companies particularly on the supplyand demand sides. On the supply side,companies experience a reduction in the supplyof labour, as workers are unwell or need to lookafter children or other dependents while schools are closed and movements of peopleare restricted. Africa is overwhelmingly acontinent of small businesses, petty traders andmicro-firms, with an estimated 95% ofenterprises falling into this category.This particular category is vulnerable to theeffects of the COVID-19 pandemic. Few have thesavings to cover things like rent and pay wagesas lockdowns across the continent seebusinesses close, custom dry up and employees
let go.
African countries such as South Africa, Tanzania,Angola, etc are facing economic challenges asthe COVID-19 pandemic coincides with risingdebt levels and other structural issues,continuing deterioration in fiscal strength, sharpdecline in oil prices that has massively affectedthe country’s oil-dependent economy.
On the demand side, a dramatic and suddenloss of demand and revenue for companiesseverely affects their ability to function, and/orcauses severe liquidity shortages. Furthermore,consumers experience loss of income, fear ofcontagion and heightened uncertainty, which inturn reduces spending and consumption. Theseeffects are compounded because workers arelaid off and firms are not able to pay salaries.
As the world continues to cope with the impactsof the COVID-19 crisis, government officialsthroughout the world have taken importantsteps to curb the spread of the virus. At thesame time, many businesses, financialinstitutions and government entities arestepping up to provide some relief to those whoare worried about their financial security. One ofthe countries taking the lead in Africa is SouthAfrica providing finance to Taxi vehicle withinterim repayment assistance to taxi operatorsto help them honour their financialcommitments during the 21-day
lockdown aimed at stemming the spread of thecoronavirus outbreak.
Therefore, in order to achieve prudent financialhealth during the seemingly endless plague,Covid-19, it is imperative business organizations,corporates, small business holders be givendebt relief or cancellation.
2.0. Concept of Debt Relief/ Debt Forgiveness
Debt relief/ forgiveness is as old as the age ofman as it existed in a number of ancient books.Debt relief and granting debtors more time torepay is established in Islam, Christianity andthe Ancient Athens. United States of Americastands out as pioneer country in granting debtrelief. When consumers begin to fall behind onpayments, they have several options todischarge the debt, either in full or in part. Thisis automatic as long as a debtor is able todeclare bankruptcy, which has the immediateeffect of stopping any payments made tocreditors.Debt reliefcan be defined as the partial or totalforgiveness of debt, or the slowing or stoppingof debt growth, owed by individuals,corporations, or nations. It is the reorganizationof debt in any shape or form so as to provide theindebted party with a measure of respite, eitherfully or partially.Debt relief could also meanclearing the debt out altogether in bankruptcy;getting changes in interest rate or paymentschedule to ease payments; or assuringcreditors to agree to accept less than the fullamount owed.
One of its advantages includes assistingcompanies to pay debts faster or in a slow-and-steady manner, helps in reducing the amountowed by the debtor, it amplifies the Debt
Payment Process etc.
However, debts relief is not free of demerits.Some of the challenges are that it couldencourage imprudent and reckless behavior byhistorically fiscally irresponsible parties. Somewho are relieved of their debt may embark onborrowing sprees in the expectation that theircreditors will eventually bail them out. Otherdrawbacks include prolonging the payoff of debtdue to consolidation, whereby the interest rate islowered but the term is lengthened.
3.0. Forms of Debt Relief.
1. Debt settlement.2. Debt consolidation3. Debt Management Plan
3.1. Debt settlement
Debt settlement is a debt repayment strategywhere a debtor negotiates with his creditors toaccept a partial payment as full satisfaction forthe debt. If the creditor agrees, the debtor paysjust a percentage of the outstanding balanceand the rest of the debt is canceled for good.This option is typically used on unsecured debt,like credit card debt, and only when the debtor isseverely behind on his payments. Debtsettlement aims to reduce a consumer'sobligations rather than the number of creditors.
Advantages of Debt settlement.
1. It prevents the debtor company fromgoing bankrupt.
2. It helps a company to pay its debts in ashort time.
Disadvantages of Debt settlement.
1. Debt settlement can result in negative taximplication. A company may owe tax onthe amount of debt cancelled by itscreditor. This may likely expose thecompany to a greater financial implicationthan the debt which was offset by thecreditor.
2. There is no guarantee that the creditor willaccept the settlement terms.
3.2. Debt Consolidation.
The term debt consolidation refers to the act oftaking out a new loan to pay off other liabilitiesand consumer debts, generally unsecured ones.Multiple debts are combined into a single, largerpiece of debt, usually with more favorable payoffterms. Favorable payoff terms include a lowerinterest rate, lower monthly payment, or both.Therefore, when a consumer is saddled withdifferent kinds of debt, they can apply for a loanto consolidate those debts into a single liabilityand pay them off. Payments are then made tothe new debt until it is paid off in full. Animportant point to note is that debtconsolidation loans do not erase the originaldebt. Instead, they simply transfer a consumer'sloans to a different lender or other types ofloans.
Advantages of Debt consolidation.1. It allows a company to get lower month
payment, thereby alleviating its financialstress.
2. It helps companies to free up their cashflow so as to enable them pay suppliersand have enough funds to grow thebusiness.
Disadvantages of Debt consolation.1. Consolidated debt cannot fix bad
business, it can only fix financial mistakes,if a business model is flawed, debtconsolidation will be of no benefit rather itwill simply push problems faced by thecompany to the future.
2. In debt consolidation, the company doesnot enjoy any relief, it only cut short thenumber of creditors. The company stillhas an obligation to pay its creditors theexact money owed by it.
3.3. Debt Management Plan (DMP).
In a Debt Management Plan (DMP), the debtorappoints a credit counseling company tonegotiate with his creditors to reduce hisinterest rates and fees, or lower monthlypayments for him. The debtor still pays off theprincipal amount. Credit counselors will alsohelp the debtor to improve his moneymanagement skills and come up with aworkable budget. The parties agree on anaffordable payment schedule that allows 3-5years to pay off debt owed. A debt managementplan is part of the package of debt consolidationplans that are designed to help businessesregain control of their finances while reducingunsecured debts. It is one of the several wayscompanies can take
control of their debt by reducing the number ofpayments they make each month which couldtranslate to savings in interest and fees.
PROSPECT OF DEBT RELIEF TOWARDSACHIEVING FINANCIAL HEALTH. Most countries have taken up the challenge toease financial stress that could emanate fromthe Covid-19 disease. Many countries areworking tirelessly to keep their economies going.For example, to support the economy, protectthe well-being of its people, and dissuadecitizens from leaving their homes, Nigeria hasbegun handing out four months’ worth ofwelfare payments up front in certain areas.
Common challenges such as Capital access,Workforce Capacity, Inventory and Supplyshortfalls, facility remediation, InsuranceCoverage Issues, Changing Market Demand andMarketing usually confronted by small businessholders can be solved through debt relief or debtforgiveness.
Debt relief offers immense benefits toconsumers without hope of repaying unsecureddebt (credit cards, medical bills, personal loans)within stipulated five years, even with observingextreme measures to cut spending; and to theone whose total of unpaid unsecured debtequals half or more of his gross income.
CONCLUSION.
It is the writer’s opinion that debt relief willprovide succor especially in this era of Covid-19pandemic- a decease which apart from causingthe loss of thousands of lives, has alsonegatively impacted on business sustainability.It may eventually guarantee and offer hope to
business organizations and small businessholders to remain in business by the applicationof any of the procedures for debt managementand debt restructuring.
REFERENCES
1. https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020
2. https://markets.businessinsider.com/news/stocks/covid-19-survey-impacts-on-global-supply-chains-1028985875accessed 6th April, 2020.
3. https://blogs.imf.org/2020/03/09/limiting-the-economic-fallout-of-the-coronavirus-with-large-targeted-policies/?utm_medium=email&utm_source=govdelivery accessed 6th April, 2020
4. https://www.dw.com/en/covid-19-relief-promises-for-africas-small-businesses/a-52995876lasted accessed 6th April, 2020.
5. https://www.brookings.edu/blog/africa-in-focus/2020/04/04/africa-in-the-news-impacts-of-covid-19-on-african-economies-and-elections-updates/amp/accessed 6th April, 2020.
6. https://www.experian.com/blogs/ask-experian/covid-19-resource/last accessed6th April, 2020.
7. ibid8. "Choosing a Credit Counselor" . Consumer
Information. 2012-11-01. Retrieved 2017-11-28 .
9. https://en.wikipedia.org/wiki/Debt_relief#cite_note-12lasted accessed 5th April,2020.
10.Julian Kogan ( January, 24, 2020), “Debtrelief”https://www.investopedia.com/terms/d/debt-relief.asp, last accessed 7th April,
202011.Leslie Parrish and Ellen Harnick- state of
Lending: Debt settlementhttps://www.responsiblelending.org/stat
e-of-lending/reports/12-Debt-Settlement.pdf accessed 5th April, 2020.
12.Julian Kogan ( January, 24, 2020), “Debtrelief”https://www.investopedia.com/terms/d/debt-relief.asp, last accessed 7th April,2020
13.https://www.solvable.com/credit-card-debt/debt-counseling/the-pros-and-cons-of-debt-relief-programs/
14.Ibid15.Ibid16.https://www.debt.org/management-
plans/ accessed 6th April, 2020.17.Ibid18. https://www.brookings.edu/blog/africa-in-focus/2020/04/04/africa-in-the-news-impacts-of-covid-19-on-african-economies-and-elections-updates/amp/last accessed,5th April, 2020.
19.https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resourcesaccessed on 6th April, 2020
20.ibid
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