Countries around the world have experienced economic growth of either negative or lower than projected rates during the Covid-19 pandemic. A for Bangladesh, the country has experienced a loss of Gross Domestic Product (GDP) growth by 2.91 percentage points in FY20 from the previous fiscal year. The economy in the previous fiscal year recorded all time high GDP growth of 8.15 per cent. Accordingly, the government of Bangladesh has set a target of GDP growth of 8.2 per cent in FY21. Like government expectation, the Asian Development Bank (ADB) has very recently projected a strong economic recovery for the country in the next fiscal year. Although the projection is based on the recent surge in exports and remittances, economic recovery, despite the government's macro-economic management through several stimulus packages and social protection coverage, will depend on sustainability of the key economic parameters.
During the months of July-August, exports and remittances-- the two major engines of growth, rebounded strongly in contrast to the slump during earlier periods of the pandemic. Increase of foreign exchange reserves, improvements in some key determinants of growth momentarily hint that Bangladesh has embarked on the route to economic recovery. Yet, given the interdependencies among countries and uncertainties of second waves of the codid-19, it is a risky thing to settle on this conclusion. Since exports and remittances are vulnerable to economic worsening in source countries as well as their recovery mechanisms, current circumstances require deeper analyses about the sustainability of the observed positive trends. A shift of attention to sustainability rather than immediate judgment of potential recovery would serve to be an effective means of rethinking policies to keep the economy afloat during periods of crisis.
The above mentioned trends have been plotted in Figure 1. Nevertheless, such determinants of growth are subject to exogenous fluctuations. The uncertainty amid the pandemic thus calls for a shift in focus as to whether these recent favourable inflows to the domestic economy could be considered as sustainable in the medium to long term. Trade and remittances, in particular, would be significantly dependent on the unravelling of the pandemic in source countries, their public expenditure priorities, alterations in disposable income and consumer tastes as well as the revamping of the international economies as a whole.
Exports of Bangladesh are widely known to be dominated by ready-made garments (RMG) of which the major purchasers are the United States of America (USA) and European countries. In other words, amid the pandemic, probability of a fall in export values due to adverse demand shocks is now higher than any time before. For instance, the UK, a popular destination for ready-made garments is expected to experience negative GDP growth of 10 per cent in 2020 according to the latest forecasts of the National Institute of Economic and Social Research (NIESR). The economic blow due to stringent lockdown and social distancing measures unfolded itself in the form of reduced production capacities, bankruptcies and job losses. Barclaycard informed of a 36.90 per cent drop in sales of non-essential items in May that resulted from a combined decline of 44.5 per cent and 42.4 per cent respectively in the sales of department store and clothing. As forecasts predict, the British GDP is not expected to return to its 2019 level until 2023 or 2024 and other European nations are also battling with recessions. These hold significant implications for sustained recovery of our exports. New orders received by the garments industry or those exporting luxury items like leather will depend on extension and successes of stimulus packages in the international economies to boost business investment and consumer confidence.
Remittances too are volatile to similar secondary economic impacts in the Gulf countries. Lower-than-average oil prices and contraction of non-oil sectors such as tourism, hospitality and construction have led businesses to narrow down payrolls. Hence, absorptive capacities for new or repatriated migrants in host economies would be influenced by the introduction or generosity of their employee retention or income support programmes. Stability of exchange rates, promotion of legal channels or digitalised means of remitting as well as the possibility of a second outbreak of virus prolonging the Middle Eastern recession would further determine values of inflows in upcoming months.
Therefore, in a globalised economy thwarted by a pandemic, it is too early to be optimistic about an economic rebound based on the last two month's economic performance. Indeed, the economic rebound will depend on the sustainability of the recent increase in exports earnings and remittances. However, the export earnings will depend on how the pandemic unfolds in the Western countries and remittances inflows will depend on the conditions in the Middle Eastern countries over the next few months. A rational approach would be to keep an eye on the sustainability of the improved inflows that would serve the best interest of our economy. This would then motivate systemic restructuring or trade and migration policies along with priorities of fiscal and monetary stimuli amid the Covid-19 crisis.
Md. Tuhin Ahmed and Fabiha Bushra Khan are research associates at South Asian Network on Economic Modeling (SANEM).