COVID-19 trajectory for Bangladesh RMG

The past global recession that started off in the first quarter of 2008 and tapered down around the middle of 2009, had put the global economy in a shock that saw corporate behemoths collapsing, unemployment rates shooting up, bourses crashing, interest rates going down to zero, and global trade reaching an unprecedented low. This started off due to the collapse of financial markets for the sub-prime mortgage rate meant for real estates in the US and had a cascading effect on other financial products and the global economy.

In 2020, the world economy is facing a similar, even a more severe downturn caused by the COVID-19 pandemic. The signs of distress are already visible in every corner of the world, and the global community is bracing for the worse yet to come.

Back in 2009, the global trade of goods was plunged by 12 per cent, and services trade by 9 per cent, according to the WTO. It is said that 22 million jobs were lost, as per the estimates of the ILO. NASDAQ commodity data showed that crude oil prices came down to a range of US $ 33 to $40 per barrel from the peak of US $147 a barrel within a few months, and cotton bales were sold below 60 US cents from the average range of 80 US cents a bale.

Now in April 2020, the locked-downed world is looking at the alarmingly bleak statistics published by global organisations. The ILO's initial estimate for global job loss stands at 25 million, while the WTO fears that the global trade of goods will drop by 13 to 32 per cent, depending on the severity and duration of the pandemic. As of April 20, 2020, crude oil prices have gone negative in the US market, quite an incomprehensible phenomenon. NASDAQ is showing cotton futures being sold around 50 US cents a bale.

Riding on low prices for oil and cotton, and sizable stimulus by the government, Bangladeshi exports rebounded in an impressive manner. Bangladesh recorded the highest ever annual export growth of about 24 per cent in 2010 compared to 2009, according to trade statistics from the UN Comtrade database. According to many analysts, Bangladesh's quick rebound from the 2009 recession was due to the fact that Bangladesh produces basic apparel products, demand for which remained stable even at times of recession. This strength in the capability for mass production of cheap basic apparels leveraged with low import payments for cotton and other raw materials, the ready-made garments industry of Bangladesh bounced back quickly at that time.

Since the basic parameters remain similar in 2020, as they were in 2009, will the history of bouncing back be repeated in 2020 for Bangladesh RMG?

The likelihood of the history of quickly bouncing back after post-COVID19 is slim.  Why?

The answer lies in the sudden erosion of social capital. The concept of social capital in the industrial context can be defined as the networks of relationships among people and enterprises who live and work in the same industrial value chain, enabling those industries to function effectively.

The social capital in the form of mutual trust between Bangladeshi suppliers and a large number of the Western buyers is depleted by the latter's cancellation of orders and refusal to pay the agreed price for the finished goods. According to the BGMEA, orders worth 3 billion US dollars were cancelled as of early April 2020. In the home front, due to cancelled orders and unfair prices offered, the payment of wages to the RMG workers suffered heavily. The trust between the workers and employers of the RMG industry in Bangladesh got eroded too due to delay and irregularity in paying the wages.

This calls for renegotiating the norms of future contracts between the buyers and manufacturers, and bring necessary reforms in the current standards of the 'Incoterms' - the universally accepted standards defining the responsibilities and obligations of the buyers and sellers in international trade.

To avoid future shocks arising from failure to pay wages on time, employers may think of creating an emergency trust fund to cushion the cash requirements for wages, and such a fund can also be used as collateral for borrowing emergency funds from the banks.

Shaquib Quoreshi is Enterpriser, Business Intelligence Limited.

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