The novel coronavirus (Covid-19) hit Bangladesh at a point when its economy was already under stress. Except for remittance income, all major economic indicators were underperforming during the first few months of the 2020 fiscal year (FY2020).
Remittance flows grew by 20.1% in the first eight months of FY2020 but both exports and imports registered negative growth.
Private sector credit growth declined to 9.2% in January and remained lower than the 14.8% target for FY2020 set by the central bank. This corresponds with low private investment, which has stagnated at 23% of GDP for the last few years.
Foreign direct investment (FDI) has not shown significant growth either. During the first seven months of FY2020, FDI increased by only 4% compared to fiscal year 2019 (FY2019).
This situation is coupled with weak macroeconomic management. Between July and February of FY2020, actual spending under the Annual Development Program (ADP) was only 38.5% of the planned allocation.
And in FY2019, Bangladesh’s revenue-GDP ratio was only 9.9% -- much lower than the target of 15.1% set out in the country’s Seventh Five Year Plan.
Revenue collection was so low during the first six months of FY2020 that it will need to grow by 87.5% in the second half of the year to meet the annual target -- a task that seems impossible given current circumstances.
Covid-19 will further slow economic growth. Bangladesh is unlikely to achieve its targeted growth of 8.2% in FY2020. The World Bank has projected growth of 2-3%, while the International Monetary Fund has projected a rate of 2%.
The economy is being affected due to both domestic disruptions and as a result of Bangladesh’s interconnectedness with the global economy. At the domestic level, uncertainty will cause private investment to decline further, impacting employment.
The Asian Development Bank has estimated that if the outbreak lasts for at least six months, Bangladesh will lose nearly 900,000 jobs due to a global economic downturn.
Then there are the disruptions in production and supply chains. Prices have gone up because of supply shocks. With less employment and lower incomes, the economy is also experiencing depressed demand.
Bangladesh’s export income will shrink as overall global demand decreases. But its imports are also being hampered -- Bangladesh imports many raw materials such as textiles, pharmaceuticals, and leather from China for domestic production.
Foreign investment will also remain subdued. Remittance earnings will decline as economic slowdown causes job cuts in destination countries.
The flow of official development assistance is now uncertain, which will hamper the implementation of Bangladesh’s ADP.
The Bangladesh government has announced a stimulus package for various sectors equivalent to Tk964 billion, or 3.3% of Bangladesh’s GDP.
This support is mainly for export-oriented industries, small, medium, and large industries, the agriculture sector, pandemic preparations, health workers, and social safety net programs.
The government has also announced it will expand existing transfer programs that benefit vulnerable households and committed to subsidizing the cost of food.
Other monetary policies include delaying repayments for non-performing loans by six months, extending the time for paying the bill of entry on import-related letters of credit and lowering policy rates.
The central bank has lowered the repo rate by 0.5% and the Cash Reserve Requirement by 1.5% to create additional liquidity.
While these measures are noteworthy, more than 80% of this package is liquidity support which will be disbursed through banks.
Affected businesses will be provided with working capital to continue their operations. The government then provides an interest subsidy to those loans.
But the banking sector is already suffering from various challenges, including high non-performing loans, low profitability, weak management, and influence by politically-connected people.
There are concerns that new loan opportunities will create additional burdens on the banking sector.
The other worry is about people’s livelihoods, particularly those in the informal sector. While the country has been in lockdown since March 26, informal sector workers -- who comprise around 85% of the total workforce -- are in dire need of income and food.
Preliminary research shows that the daily income of poor people dropped by 76% in the first week of April 2020.
The country is also preparing its national budget for the next fiscal year, to be announced in June. This year, the budget deficit may be higher than the usual 5% of GDP because more fiscal space needs to be created to tackle the impact of Covid-19.
Budgetary measures should aim to both stimulate domestic demand and strengthen supply chains through expansionary fiscal and monetary policies.
The efficacy of these policies will depend on how well they are managed and coordinated by various government departments and how efficiently resources are distributed among affected people.
Given resource constraints and the pressure on the economy, the prioritization of government spending will be much more critical this year. Some activities may wait for a few months, while others cannot.
For example, immediate healthcare and health management-related expenditures must be made to save lives. There should also be cash in the hands of the poor and support for producers to strengthen supply chains.
While the government has to take these short-term measures promptly, it must also begin designing medium and long-term measures -- for example, investing in the long-neglected health sector.
One thing that is clear to all countries is that while confronting the immediate fallout from Covid-19 seems daunting, the aftermath will be even more challenging.
Fahmida Khatun is Executive Director at the Centre for Policy Dialogue, Dhaka.
This article originally appeared on the East Asia Forum at www.eastasiaforum.org/2020/05/07/covid-19-batters-bangladeshs-already-struggling-economy/. It is part of an EAF special feature series on the novel coronavirus crisis and its impact and has been republished under special arrangement.
