The four key areas for accelerating out of the Covid-19 impacted economy
The impact of the pandemic on the economy has been severe. There is a little data now available for the first three months from March-May 2020, but this is limited. It will be a long time before there will be sufficient data to describe what happened in detail.
When Covid-19 struck Bangladesh, the immediate response was to shut down the economy to protect people by achieving some kind of isolation. Most countries had reacted in much the same way, so the world economy partially shut down.
Three immediate impacts on Bangladesh
Export industries, particularly the garments and textile sectors, shut down reducing production; at the same time, there was widespread cancellation of orders from buyers who did not know when their stores would open and who cancelled purchases to try to preserve cash.
The oil price collapsed and the economies in the Gulf States partially shut down. In Bangladesh, this led to fear of a drop in the value of remittances. In fact, exports in April and May 2020 were only 29% of the same two months in 2019. Remittances for the same period were 82% of the value in 2019.
Our estimate is that exports for the remainder of 2020 will reach 55-60% of the 2019 level for the seven months of June-December. This is based on the low order books, the uncertainties in the recovery of the European and North American economies, and the lack of clear guidance from the buyers.
Projecting remittances is more difficult; our estimate is 70-80% for the seven months of 2020 compared to the same period for 2019. Further difficulties arise from the uncertainty in the changes in the flow of remittances through the hundi system. The third impact of the rest of the world is the inflow of capital from abroad.
These flows are quite irregular. For the first 10 months of 2020, the Financial Account of the Balance of Payments shows an inflow of $4.7billion or 92% of the same period in 2019.
A decline in capital inflow
We expect a decline in capital inflows for 2020-21: FDI will slow and the ability to implement infrastructure projects of the government will decline. Private sector borrowing from abroad will decline. The government’s analysis as presented in the budget documents indicates the economy is expected to fully recover in 2020-21 returning to a high growth rate.
This belief is also manifest in the actions of the central bank in establishing rules for its credit lines. BB seems to believe the banks will draw heavily on the working capital lines, responding to the growth in demand. There is no agreement of this forecast with those of the IMF or the World Bank.
The ADB projection comes close to 7.5%. The ADB’s only stated reason for this is the strong growth of manufacturing; this can only mean the RMG and textile sectors. At present, the best industry judgment is that the recovery of this sector is going to take another 12-18 months and is not going to jump back. I know of no major Bangladesh economists, outside the government, who agree with the budget’s highly optimistic GDP forecast.
Growth of the economy can be analyzed in two ways
First, one can examine the four driving forces -- exports, private investment, government investment, and government non-development expenditures. Exports are unlikely to recover before the end of 2021; bad news from the clothing sector in the West keeps rolling in.
Private investment will not recover strongly during the coming year; demand for domestic sales will be slow to signal favourable returns for new investment; investment in an increase of export capacity is premature; and with present interest rate caps, banks are not interested in making SME or consumer loans.
Finally, there is little evidence of any interest in major investments by leading private sector groups. Capital goods and construction materials imports were declining during 2019-20 before the full force of the pandemic hit; so private investment fell sharply in 2019-20. It will not recover in 2020-21.
Government non-development expenditures will increase next year, but government investment should stagnate as getting all the components in place will be difficult while the pandemic is still strong. The total of these driving forces is not going to increase over 2019-20, so it is hard to see how there is going to be a strong growth of GDP over 2019-20.
The economy is certainly going to recover in an increasingly robust manner. But a much more aggressive policy regime is needed to achieve this in a short time-frame. The second way to think about economic growth in Bangladesh is the employment opportunities available to the public.
Despite much talk by the think tanks, the level of unemployment before Covid-19 struck was very low. That is, most people had a job and earned money. Of course, they want a better job and to earn more, but that desire does not mean that they are unemployed. The labour market works very efficiently. As is well-known, most people work in the informal sector usually in very small enterprises.
Table 1 reports the data as of 2013. A look at this table indicates very clearly the extent to which the labour force works in small enterprises. This table deals with non-agricultural workers. There are 13 million workers in 4.45 million enterprises employing 19 workers or less; while there are 5.86 million workers in 49 thousand enterprises with 20 or more workers.
When Covid-19 hit Bangladesh most of the workers in the small establishments lost their jobs or found that the enterprise in which they worked had difficulty functioning.
Critical to the recovery of the economy is how many of these businesses survived. Note that these businesses are for the most part too small to come under the SME programs; they rarely have relationships with banks. Credit they receive will be very short-term trade credit from the supplier.
All of these companies get back into the business when there is enough demand for their services. This is the key problem! How is demand built up for this multitude of small enterprises? Our argument is that this happens, slowly driven by two factors: Larger enterprises starting up and demanding the goods or services of these small companies; or consumer demand arising from wage earners who purchase from these small enterprises.
It will take more than one year for these demands to grow and create the demand to bring these workers back to work. This is the second reason why the recovery of the economy is going to take some time.
There are four key aspects to accelerate economic performance: 1. Transfers of cash to the population 2. The emergence of the financial sector from the pandemic 3. Management of government debt levels 4. Export promotion
Getting cash into the hands of the population is one way to build up demand impacting these very small enterprises. The government’s brilliant programs to distribute cash through the payment of export workers’ salaries (The Tk5,000 crore program) and the distribution of Tk2,500 to 5 million poor persons both directly contributed. Much more of this is needed.
The export worker program can be continued for another six months but limited to employees who are not working due to a lack of demand. Gradually, as the export sector returns to 2019 production levels, this program goes away. For the 5 million poor, this program can continue with another Tk2,500 four times in the next six months.
This would make a cash transfer of Tk15,000 crore injecting a lot of purchasing power into the hands of the poor. They will need it, as the economy is unlikely to come out of the recession that it is now experiencing.
Bringing the financial sector out of the crisis to support the expansion of the economy is a complex subject. I take this up separately, but the key issues are clear: Stronger governance by BB ceasing the excessive forbearance now allowed; adjusting the interest rate regulations to increase flexibility; removing much of the bad debt from the banks and freeing them to concentrate on the future.
Finally, the capital market must be regulated to enhance investor confidence in the integrity of the market. There is hope that the disaster of the past five years can be over.
In the near term, the government has shown that it is not going to be constrained by the amount of debt that it is taking on. That is certainly the correct approach. Eventually, this will have to be faced.
The main problem is revenue collection. It is noteworthy that most of the macroeconomic targets of the Seventh Five Year Plan have been achieved. But there is one spectacular failure. The goal was to raise the revenue/GDP ratio to 16%. It remains at 10%. The political will to raise this must be found.
If Bangladesh is to achieve rapid economic growth, it must increase exports faster than GDP. This is not being achieved; before the pandemic, exports were growing more slowly than GDP. There is no major interest manifest in the budget for accelerating or diversifying exports.
The fundamental reason for this failure over the past five years is allowing the taka to appreciate against competitor currencies and against the currencies of most of the countries purchasing Bangladesh’s exports. It is very unlikely that rapid sustainable growth can be achieved without dealing with the exchange rate issue.
The Bangladesh economy is well- positioned to resume rapid economic growth. But to do so will take some time and there is little agreement nor does the data indicate that this can be achieved in one year. The four key areas for accelerating out of the Covid-19 impacted economy have been sketched above. The government will certainly adjust during the year to deal with these issues. These are necessary to come out of the recession.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics. A version of this article has originally appeared in the May-June issue of the AmCham Journal, published by the American Chamber of Commerce in Bangladesh.