In the pandemic’s aftermath, unlike many countries Bangladesh will have to contend with high public and private debt burdens—possibly too large for some to manage.
Tackling this issue will require extra focus on revenue mobilization, public finances, and debt management, with support from multilateral partners and debt relief providing some breathing space.
Private debt might be mounting as a growing number of companies are not generating enough earnings to pay tax and service their debts.
Government support is helping them to keep afloat, but a large wave of business bankruptcies could follow when that support is withdrawn, and in the absence of other interventions.
This vulnerability can be especially acute in other Asian economies as well, if global financial market conditions tighten in the process of recovery, leading to capital outflows and additional burden on the SME and informal private sector.
To address this vulnerability, Bangladesh would need to reinforce private debt resolution frameworks, ensure the availability of adequate financing, and facilitate access to risk capital to speed up the reallocation of resources towards growing sectors.
Recovery actions
Like many economies in distress due to pandemic pressure and paucity of venture capital, Bangladesh too provided significant fiscal and monetary policy support to cushion the blow, and resorted to unconventional monetary policies to ease the pressure on banks and borrowers.
Bangladesh, in line with India, Sri Lanka and Nepal, announced debt service moratoria and targeted lending schemes to provide relief to both big and SMEs.
Financial regulation requirements related to capital and liquidity coverage have been loosened.
Though these more aggressive policies inevitably entail risks, which will increase the longer they are continued.
Policymakers would be wise to focus on minimizing distortions and developing clear exit strategies for the unconventional measures adopted.
It is well argued and prescribed that to prevent longer-term economic “scarring,” Bangladesh needs to expedite economic reforms to boost productivity growth and investment, allow for adequate reallocation of resources across sectors, and support manpower affected by the transition.
The package could include well targeted hiring subsidies and manpower skill development schemes; infrastructure upgrades; simplifying business processes; and reducing the regulatory and tax burden.
Obviously, these actions would be needed to be combined with a broader push for upgrading social safety nets to bring informal workers into formal systems, continue supporting the vulnerable with targeted conditional cash transfers, and regulate the food for work or education items.
However, the Covid-19 shock also provided a foretaste of what a better future could hold for a developing and demographic dividend-enjoying Bangladesh, with the back-and-forth advantage of the temporary reallocation from energy-intensive sectors, providing an opportunity for job creation in more productive and cleaner sectors.
More can be done
A well-designed complementary product and manpower market policies could support capital reallocation and exportable manpower re-skilling.
It could lead to improved health conditions for local populations, better jobs, and more resources to meet developmental needs, to address disaster management.
Reforms in health care, social safety nets, labour markets, mitigating natural calamities and the corporate sector will help to alleviate the pandemic’s effects and to address the pre-existing longer-term issues the Asian region faces, which must remain agile and innovative to exit the crisis in a durable, greener, and more equitable way.
The first and foremost step towards recovery would be efforts to end the health crisis.
It has been an abiding apprehension that the pandemic is not over anywhere until it is over everywhere.
The unprecedented uncertainty brought on by the pandemic means it has become more difficult to plan economic policies, and targets risk quickly becoming obsolete.
While new infections worldwide have recently declined, the global concern remains that multiple rounds of vaccinations may be needed to preserve immunity against new variants.
Additional and adequate financing to secure doses and pay for logistics is critical.
So too, is timely reallocation of excess vaccines from surplus to deficit countries, and a significant scaling up of vaccine production capacity for 2022 and beyond.
The greater access to therapies and testing, including virus sequencing should also be ensured.
Step two
Fighting against the economic crisis should be the second step to recovery.
Bangladesh needs to build on efforts by continuing to provide fiscal support—appropriately calibrated and targeted to the stage of the pandemic, the state of their economies, and their policy space.
The key is to help maintain livelihoods, this requires not just fiscal measures, but also maintaining favorable financial conditions through accommodative monetary and financial policies, which support the flow of capital and credit to households and firms.
However, one risk going forward—especially in the face of diverging recoveries—is the potential for market volatility in response to changing financial conditions.
The monetary policy makers will need to carefully communicate their monetary policy plans to prevent excess volatility in financial markets, both at home and in the rest of the world.
Like many other developing nations, Bangladesh, given its limited resources and policy space, could soon be faced with an excruciating choice between maintaining macroeconomic stability, tackling the health crisis, and meeting peoples’ basic needs.
The increased vulnerability not only affects prospects for recovery from the domestic crisis, but also the speed and scale of the global recovery; and it can be a destabilizing force in a number of already fragile areas.
The first step begins at home. Bangladesh has to raise more domestic revenue by making public spending more efficient and improving the business environment.
At the same time, international efforts would be crucial, if not critical, to further scale up concessional financing and leverage private finance, including through stronger risk-sharing instruments.
Long-term repercussions
History is replete with examples of disease outbreaks casting long shadows of social repercussions: shaping politics, subverting the social order, and some ultimately causing social unrest.
One possible reason is that an epidemic can reveal or aggravate pre-existing fault lines in society, such as inadequate social safety nets, lack of trust in institutions, or a perception of government indifference, incompetence, or corruption.
Historically, outbreaks of contagious diseases have also led to ethnic or religious backlashes or worsened tensions among economic classes.
Concentrating on stabilizing the economy, which should include establishing spending priorities (for example on health and other social spending, as well as liquidity and income support to the most affected firms and households.)
Monetary policy should be as accommodating as possible while being mindful of inflation risks, and financial sector policy should seek to avoid a credit crunch while maintaining sound balance sheets.
However, conventional policies alone may not be enough. In some circumstances, additional measures may be considered.
For instance, the flexibility built into the existing regulatory framework could be used to the fullest, and there may be further room for using unconventional monetary policies.
However, some other measures—such as monetary budget financing—may risk undermining hard-won gains in policymaking and institution building, set damaging precedents, and might be hard to unwind.
A greater focus on the quality and governance of spending measures must be required —rather than specific and measurable conditions
Bangladesh will need to remain agile in reacting to economic shocks and addressing future risks.
With rising debt levels, and when the debt sustainability is unclear, extending the maturity of government liabilities can be helpful in determining the future course of action, until there is further clarity about the need and scope for a possible debt treatment later on.
By freeing up critical resources and reducing pressure on foreign reserves, maturity extensions can also help reduce the need for austerity and monetary tightening that can deepen economic pain.
Seeking insurance against unforeseen shocks might be helpful in some and certain areas of Bangladesh economy.
The author is a former secretary to the government and former chairman of the National Board of Revenue (NBR.) He can be reached at [email protected]
