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OP-ED: Coming out of the Covid-19 recession

  • Published at 11:44 pm December 12th, 2020
covid-19 economy
BIGSTOCK

There is much yet to be done to get the economy back on track

The onset of the Covid-19 pandemic brought a terrible blow to the Bangladesh economy. The government instituted a lockdown hoping to lower the transmission rate.

As a result, economic activity dropped rapidly: Export production declined sharply as orders virtually ceased. Large factories and service establishments closed. Small enterprises found that demand for locally produced goods and services fell from lack of purchasing power. The economy shut itself down with falling incomes and falling demand. This is what took place in Bangladesh and in countries all over the world.

Over the six months following the lockdown, export demand began to recover but remained below the levels of 2019. Government programs to stimulate demand worked quite well but the magnitude was insufficient to lift production very far.

The drivers of the economy all declined over this period: Government expenditures and investment declined in both nominal and real terms. Exports were below the 2019 level. Private investment fell based on all available information.

Hence, increases in GDP were probably negative over the six months from April to September, 2020, compared to the same six months in 2019. Nevertheless. the economy definitely started to improve by September 2020.

Key action areas

The necessary momentum to recover a reasonable growth rate has not yet been achieved. This article outlines an aggressive program to deal with the five key action areas: Increasing government expenditures that have a stronger impact on GDP growth, increasing the flow of money to poor households, increasing export competitiveness, reforming the financial system, and taking actions to increase private investment.

Government expenditures

Government expenditures should be increased as much as feasible. Ideally, this can be done with many small construction projects that can be initiated rapidly and that use largely domestic resources.

Large projects are not so useful as there is always a large imported component to these. Further, mobilization, project selection, and design are all time consuming, so rapid increases in disbursements are almost impossible to achieve.

The best way to achieve rapid increases in disbursements on small projects is through LGE working at the district level. There are many road repairs, bridge improvements, water towers, etc.

The Power Development Board would concentrate on distribution system improvements, cleaning up sub-stations, rewiring hot spots, and fixing badly wired connections. A third area is construction or rehabilitation of government buildings at the local level.

Funds for poor households

Central to assisting the poor households is giving them cash. The government undertook doing this early in the epidemic with modest success. But one should not give up. Rather, based on the first experience, improvements in procedures can be made.

The direct payment of cash to poor households is an essential element to speed coming out of the pandemic-driven recession. How much? I suggest a two year program covering 10 million households with a transfer of Tk20,000 per year. This amounts to Tk200 billion per year, or about 0.70% of the GDP. Well worth the impact.

Begin with the Rajshahi and Khulna divisions, covering 1 million households each. Then move on to the other divisions, preparing the list of recipients. As the government has done in the past, this can be delivered through mobile banking networks. 

Increasing export competitiveness

The government carried out a very successful program to support RMG workers. However, the RMG sector is not really in good shape. This is largely due to the uncertainty in clothing markets in the US and Europe. Bangladesh is reasonably competitive and will not lose market share. There will be continued downward pressure on prices, so survival requires rising worker productivity.

Over the past five years, RMG exports have increased slowly per annum. The ratio of exports of goods and services to GDP has declined. The inflow of remittances has kept the Taka strong and hence reduced competitiveness of all exports. One cannot expect much improvement in the export performance with the current system for managing the exchange rate.

There are eight actions needed to improve the prospects of the RMG sector. These are largely the responsibility of the government but obviously the industry has to participate. The seventh on this list is really best done under the supervision of the two-industry associations.

a)    Manpower Training: Raising the productivity of workers will require regular training. Some of this can be done by the factories, but an independent program with certificates for different skill levels would be more suitable. There is vast potential here for improvement. 

b)    Transportation and logistics management: The problems of delays for road transport and the port will never end and require constant attention from those concerned. Most of these discussions are conducted without agreed quantitative estimates of the actual situation. Establishing appropriate logistic metrics is central to the process of management of the logistics.

c)    Industrial engineering and management directed at the needs of the RMG industry: The business schools and engineering schools need to cooperate with certification programs, internships, case studies, and textbooks linked to the industry as it is now. Joining forces with a foreign university with a good reputation in textiles and clothing should be given serious consideration. There is one such program in Germany that is already working.

d)    Improved financing of exports and imports: The financing position is quite good but the industry takes tremendous risks as is evident in the problem of order cancellations, demands for lower prices, deferred shipments, etc. The cost of reducing these risks is high due to the poor management of international trade documentation by some banks.

That can and should be ended, enabling the industry to reduce the risks of trading. When I first worked on the banking system in the 1990s the mismanagement of the trade documentation was an issue. It improved, but now it has deteriorated again, for which the central bank has no real excuse.

e)    Stable procedures and levels for taxation, better management of export subsidies, setting wages of workers, and defining the role of labour unions and other labour programs: All of these issues need defined procedures that the authorities will stick with; rates should be changed infrequently so everyone has a chance to do calculations of return on investment. If one wants investment then it must be possible to work this out. You can’t do that without knowing tax rates, wages, labour rules, subsidies. If these are changing frequently, it is impossible to do so. 

f)    Encouragement of FDI in the sector with non-discrimination against foreign establishments: Currently there is discrimination against the foreign investor in the RMG and textile sectors. The industry will never grow and prosper from its current level without the competition and sharing of knowledge from foreign companies. 

g)    A different approach to the management of the exchange rate: This will be discussed in a subsequent article.

h)    Developing and maintaining a comprehensive data base on all aspects of the industry: It is shocking how little we know about the industry. One key number is the employment level and how it is changing. No one really knows this. Export prices are not known. Time delays in transportation and passage through the port are not known. There is little information on investment. Careful studies of real profitability are not available.

Without such information, it is not really possible to manage the changes needed to insure profitability and growth. Many of the reports now available are done by labour organizations and these have their own purpose, seeing the world through the eyes of labour leaders. The industry organizations follow the principle that everything is perfect and actually describing the situation is not of interest.

Reforms of the financial sector

The financial sector produces tremendous challenges for the government as the economy recovers from the impact of the pandemic. There are immediate problems arising from the impact of the pandemic that are the most urgent. We will discuss some of those in another article.

Most problems were there before the pandemic. There is a lot of argument about what to do, if anything. But all such issues should be set aside until the banking sector has safely recovered. The key problem arises from the delays in loan recovery; these delays, caused by the lockdown of the economy, result in potential substantial increases in the volume of bad loans.

How can the government handle this? This increase in NPL does not arise from the behaviour of the borrowers but from the unavoidable consequences of closing down production throughout the economy. It is a national, not an individual problem.

Governance of the banking sector, better management of interest rates, tackling the problems of non-performing loans, dealing with the situation of the nonbank financial institutions, and finally revitalizing the capital and bond markets are all considerable undertakings. These need to wait for a year.

Increasing private investment

Recovery of the economy depends critically on increasing private investment. This is an issue that is very difficult for public policy to influence. Why do companies invest? In the expectation that they will be able to sell their products at a good price. This depends on growth of the economy and this cannot be influenced in the short run.

Lower interest rates will provide little benefits, as existing lending rates are negative in real terms (when the tax benefits are included). Lower tax rates on companies should have some impact but in Bangladesh conditions, that is unlikely to be feasible.

In the Bangladesh context, there are two actions that the authorities may take that promise greater private sector investment. First, liquidity of the banking system may be increased by Bangladesh Bank, increasing its share of financing the deficit. Liquidity is one of the main factors that influence the level of private investment. Second, stop using the Asset Deposit Ratio as a monetary policy instrument. This will increase the level of competition among banks and lead to more private investment.

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.

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