Having spent almost a year with the novel Coronavirus, the new year brings forth a beacon of hope with the advent of vaccines, setting aside the associated implementation challenges. It also means that a stock-taking of the overall macroeconomic scenario of the pandemic-ravaged past year is now due-- how it has unfolded, the anticipated and unanticipated consequences, and the extent of those effects. While most studies on Bangladesh, so far, has focused on microeconomic or sectoral and sub-sectoral aspects, we approach the matter with available secondary statistics, namely government publications, in an attempt to bring forth the story they tell for the lockdown and post-lockdown periods.
The recent BIGD study by us titled "COVID-19's Impact on the Bangladesh Economy" examines the impact of Covid-19 on the major economic and financial indicators of the economy of Bangladesh, including production, wages, price levels, advances, bills, investments, remittances and foreign trade using the secondary data published by the Bangladesh Bureau of Statistics (BBS), Bangladesh Bank (BB), and the Ministry of Finance (MoF). With the first case of Covid-19 being identified in Bangladesh in March 2020, the immediate response of the government to prevent the spread was to shut down the economy. The simultaneous responses of the governments across the world resulted in a partial shutdown of the global economy, which brought this unprecedented global recession. Recent global economic trends indicate a fragile and uneven recovery from the impact of the pandemic.
Pre-Covid-19 Bangladesh had a vibrant economy that had graduated to the category of lower-middle-income countries (LMIC) in 2015 and was aiming to achieve the status of an upper-middle-income country (UMIC) by 2031. Besides exports concentration in RMG and lower than desirable tax-GDP ratio, several additional challenges were already on the horizon, like the Fourth Industrial Revolution (4IR). The pandemic is not only adding to the existing challenges-it is also threatening the progress that had been made so far and the future course that the country was supposed to take. In addition to the recent impact of the global economic meltdown, Bangladesh also experienced severe demand contraction in the local economy which exacerbated the overall economic crisis of the country. Although the extent and nature of the macroeconomic impacts cannot be predicted with certainty, which among other things depend on how the pandemic evolves and by when it can be contained, a discussion of the pre-pandemic status quo and observed effects so far is likely to prove insightful both from academic and policymaking perspectives.
Covid-19 is an ongoing pandemic that is evolving rapidly. As such, its trajectories are unknown. Bearing that in mind, we begin by taking a bird's eye view on its impact on the GDP and then identify possible transmission channels to various key macroeconomic aspects. As the pre-Covid-19 scenario has already been outlined in the preceding paragraph, we turn towards the observed impacts of the pandemic so far and discuss projected impacts. We begin by looking at the domestic sector and then move to the external sector.
Growth in the preceding fiscal year showed better performances than predicted by many. However, the issue of sustainability of growth remains susceptible as the global economy is continuously suffering from the pandemic. Despite such facts, the Government of Bangladesh is optimistic to achieve the growth of 8.20 per cent in the current fiscal year. Both domestic and international demands declined due to the outbreak and subsequent lockdown, and, thus, producers responded by lowering output to minimise the loss, especially in the manufacturing sectors. An analysis of the General Index of the Quantum Index of Industrial Production (QIIP) showed that the index fell from 418.19 in January to 276.63 in April, and then rose to 308.52 in May, which was still lower than the pre-pandemic level. As this is a weighted index of three sub-indices, the fall was driven by the component which receives the largest weight, namely manufacturing (87.54), which fell from 445.58 in January to 282.60 in April and stood at 315.67 in May. Findings also reveal that the nominal Wage Rate Index (WRI) in the industry and service sectors fell in recent times, which now appears to be recovering. The national inflation rate has not been affected much based on point-to-point changes. Food inflation fell in May 2020 and stood at 5.09 per cent, but it appears to have risen recently. Non-food inflation rates have been falling over the last six months from April-September 2020.
Another analysis of data on advances (including loans & advance, money at call, balances and reverse repo with NBFI's & accrued Interest) and investments (including treasury bills, treasury bonds, share and securities with accrued interest) reveals that advances remained unaffected during the three months of the lockdown, though the effect is evident in the bills and investments. Point-to-point estimates show that the pandemic adversely affected advances in March 2020 and started to recover marginally in April 2020 onward. Lower import demand and transport restriction contributed to the drastic reduction in bill payments and it was found negative until May 2020. However, there appears to be a surge in investments, compared to the same time last year. This is due to the nature of investments considered in our study. Although the monthly remittance inflow had plunged to US$ 1,092.96 million in April 2020 from $1,691.68 million in December 2019, it had an upward trend since then and hit a record monthly amount of $2,599.56 million in July 2020. In October 2020, the amount stood at $2,112.44 million.
The export of goods sharply declined in FY2019-20. Exports have recovered in July 2020, but low demands from major buyer countries are likely to persist in the near future and thus the sector is suffering from uncertainty. Point-to-point estimates for the exports of RMG show that it has severely been contracted in the last quarter of the outgoing fiscal year in the key export destinations such as the USA and the EU. This demonstrates the urgent need for greater export diversification.
The pandemic has hit Bangladesh at a pivotal time when the country was making commendable progress on various economic and social indicators. Although the domestic economy has fared better than expectations, concerns regarding the sustainability of this optimistic performance remain. The two growth engines for the country-RMG and foreign remittance-are closely intertwined with the external economy, which are not under the control of the government. Prudent measures should include constant monitoring and adapting to the latest developments in major trading partners and host countries to mitigate the economic losses caused. Stable fiscal deficit, debt-GDP ratio, and foreign exchange reserves provide the macroeconomic soundness needed to utilise fiscal tools for economic management during and after the pandemic. Bank credit would play a key role in the ongoing and upcoming recovery process, as the government has opted for a credit-led stimulus package. However, as the virus is yet to be contained and an effective vaccine is yet to be made available everywhere and to everyone, its economic repercussions are likely to continue in the foreseeable future.
Dr Muhammad Shahadat Hossain Siddiquee, Professor, Department of Economics, University of Dhaka and Senior Research Fellow, BRAC Institute of Governance and Development (BIGD), BRAC University. [email protected]
Avinno Faruk, Research Associate, BRAC Institute of Governance and Development (BIGD), BRAC University. [email protected]