The Financial Express

Win the war and then re-start a stable and inclusive economic recovery

Win the war and then re-start a stable and inclusive economic recovery

The world has not experienced what it is experiencing due to Covid-19 pandemic in any episode of its recorded history. A global pandemic of this intensity and pace that has reached every corner of the world was never possible before, because mankind has never been this interconnected and inter-dependent as it is now. And while we might be better prepared than our ancestors who faced the Spanish Flu a century ago or the Bubonic Plague in the 14th century, which killed approximate 80 to 200 million people - the present pandemic has a much wider geographic spread touching nearly every sovereign state in the world, infecting more than three million people and claiming more than two hundred thousand lives.

As the world changed dramatically in the last three months, Bangladesh being a member of the global community, is also seeing the early signs of a possible exponential outbreak, which had compelled the government to impose a quasi-lock down until May 30. These measures, nonetheless, are associated with profound economic consequences - as it has nearly collapsed the demand for exports and halted most economic activities. Prior to this pandemic-induced economic shock, Bangladesh experienced a robust economic performance under the AL-led government between 2009 and 2019 - with per capita income expected to reach $2000 in FY20, while lifting more than 10.0 million people out of poverty during the aforementioned period.

This article offers specific policy directions to make the economic recovery as stable and as inclusive as possible. But of course, that recovery can only start, when we have contained the health crisis. Let us not forget, Germany and Japan have proven that one can always rebuild and restart the economy even when they had lost a devastating war in 1945. But for that re-construction to begin, you need the war to "end" first. One cannot re-start and rebuild the economy while the pandemic war is in its highest height. With this context in mind, we want policymakers to pay attention to the following issues.

MAJOR ECONOMIC SHOCK: It is a major economic shock affecting the global, Asian, and Bangladesh markets culminating in lower growth, higher unemployment and rise in poverty.  Severe slowdown is being projected in global and Asian economies due to massive slump in production, consumption, and investments. IMF projects global growth to fall to minus 3.0 per cent in 2020 while Asia's growth is likely to be zero, a first-time in last 60 years.  Closer to home, growth in South Asia will have no respite and will dwindle to a range of 1.80 to 2.80 per cent in 2020. Bangladesh, having displayed a robust average growth of more than 7.0 per cent over the last decade, will also fall victim to the severe slowdown with growth rate falling between 2.0 to 3.0 per cent in 2020. Consequences will be devastating with loss of jobs, income, remittances, trade and investment. World Bank estimates that for each $1.0 million in foregone domestic demand in service sector, Bangladesh will lose 125 jobs.

FINANCIAL SECTOR: Financial sector will be key to economic recovery but requires special attention. The design and implementation guidelines of the Bangladesh Covid-19 stimulus packages makes the role of financial institutions critical. It is imperative that the financial sector, particularly the banks, are able to minimise the adverse impact of Covid-19 on their operations and financial health, which in turn, will also require addressing some of the challenges facing the sector in the run up to the pandemic. Among others, the sector is braced for risks such as increase in credit risk, deterioration of credit quality, with potential increase in loan loss provision for private commercial banks, reduced risk appetite and expected lower new lending volume. These would significantly reduce profits for the banking.

SMES: Adverse impact on SMEs will lead to unemployment and increase in poverty. Hardest impact of the 'lockdown' is expected to fall on the SMEs as they are dependent on a short cash cycle which has been affected as a result of supply chain disruption and loss of sales. SMEs' capacity to absorb shock is limited, and any disruptions in production and sales beyond few weeks can wreak havoc to these firms' capacity to survive. A recent survey shows about 50.0 per cent SMEs have halted operations, and 68.0 per cent will have to permanently wind up business in case of prolonged lockdown. Prolonged constraints in demand and supply will lead to many small firms to shut down, intensifying the unemployment problem. Lack of ability of these firms to service payment obligations such rent, debt-servicing, and VAT raises the risk of contracted enterprise base in the economy.

POLICY RESPONSE: Further fine-tuning the policy response will lead to greater impact. The Government of Bangladesh (GoB) also announced a seemingly generous stimulus of more than Tk 1.4o trillion economic stimulus package with several components targeting different parts of the private sector, agriculture, and vulnerable population. The assistance programme was bold in size, and inclusive in objective. That said, there exists a number of fine-tuning opportunities to make the package deliver higher impact.

In light of the aforementioned analyses, we recommend the following set of policy actions:

  1. ALLOCATING AT LEAST 2.O PER CENT OF GDP TO HEALTH SECTOR: The government must make heath sector - a priority sector -- to contain the crisis as much as possible. Given that the health crisis is intimately intertwined with the economic crisis, keeping the pandemic under control will be fundamental to reopening the economy. In this context, the government must use the upcoming national budget for FY21 to mobilise higher resources for the health sector.
  2. CONTAINING BUDGET DEFICIT TO 7.0-8.0 PER CENT FOR FY21 (AND EVEN FY22): The forthcoming national budget will be prepared against the backdrop of two central uncertainties: (i) whether Europe and the US will experience a "V-shaped" economic recovery or not; (ii) how the virus will itself unfold in Bangladesh over the next six months. Consequently, it is prudent to expect weak revenue mobilisation performance in FY21 (and even FY22), which necessitates that the GoB relies on bold monetary policy initiatives to support critical fiscal expenditures, such as supporting SMEs, providing income transfer to the poor, and stabilizing the financial sector.
  3. FINANCING STIMULUS PACKAGE THROUGH CONCESSIONARY MULTILATERAL BORROWING AND RE-ALLOCATION OF RESOURCES IN GDP: The Government should seek at least $5.0 billion of financing from the World Bank, IMF, ADB, EU and the JICA to ensure that its stimulus does not create a high domestic debt burden, which is usually more expensive than foreign loans. Bangladesh faces a low public debt to GDP ratio, which gives it some cushion to devise a stronger stimulus. Government must also reallocate resources from development budget by withholding and/or cancelling non-urgent development projects.
  4. SUBSIDISED INTEREST RATE WAIVER IN THE BANKING SECTOR: The government can consider turning cumulative interest payments from the previous loans - for the period between March to August - into long-term liabilities with manageable interest rates - perhaps at 6.50 per cent. This also might require subsidisation for the banking sector - as they are increasingly under the pressure to service short term deposits with long-term loans. The exact amount of the subsidisation might vary between Tk 150.0 billion to Tk 200.0 billion - as loan defaults will make it difficult to service existing depositors for the months between April and September.  
  5. DIRECT ASSISTANCE TO POOR THROUGH DIGITAL FINANCIAL SERVICE: The government must consider direct income transfer to 10 million poor through digital financial service for two months - perhaps Tk 5000 to each family per month for the month of July and August - when economic activities are expected to remain lukewarm due to the after-effects of the lockdown. This will only cost the government Taka 100.00 billion in FY21. Furthermore, to enhance better targeting, GoB should consider one-to-one mapping of NIDs and mobile telephone numbers - and use transactional history from DFS operators and mobile operators to screen economically vulnerable individuals. The creation of an accurate "data bank" of the poor is absolutely fundamental - and the process must allow citizens to offer feedback to regularly correct the beneficiary list.
  6. ADJUSTING STIMULUS PACKAGE FOR GREATER IMPACT: Success of the stimulus package will require pragmatic design, effective implementation, and robust monitoring and feedback mechanisms. Credit support to enterprises through banks requires more than re-financing through central bank, and will benefit from at least 50.0 per cent of the fund being contributed by the government as interest subsidies, wage protection support, partial credit guarantee investment etc. The package needs to offer incentives for employers to sustain employment. One of the devastating effects of the Covid-19 lockdown/slowdown is loss of enormous number of jobs, the most critical driver of development and poverty reduction in Bangladesh. It will be prudent for GoB to consider inclusion of cash and non-cash incentives to motivate employers retain employments. The policy makers should consider developing appropriate monitoring and feedback mechanisms to constantly assess, and if necessary, adjust the design and implementation mechanics of the stimulus. This is critical as an effective consultative process allows the "response framework" and stimulus to harness more adaptive efficiency.
  7. GREATER BUT TARGETED AND TIME-BOUND FORBEARANCE OF REGULATORY COMPLIANCE IN THE SHORT RUN: Countries around the world have offered temporary time-bound relief to companies about regulatory compliance such as tax filing, tax and utility payments, and loan servicing. While Bangladesh has announced few such supports, there is room for and need to expand such relief measures e.g., extending time period for VAT filing, property tax by businesses, utilities payment, longer time horizon to furnish corporate taxes etc. There are also opportunities to look into further relaxation of interest and loan obligations, and also waiver/reduction of different government fees with regard to issuance and renewal of various permits/licences/registrations with clear sun-set clauses.
  8. TAILORED POLICY AND FINANCING SUPPORT TO SMEs: Support to SMEs are going to be critical to bring back broad-based dynamism in the private sector and rural economy. Some of the key measures required include : (i) concessional financing: through soft loans/working loans of up to 5.0 million for firms, and 2.50 million for women entrepreneurs ; (ii) tax reductions and grants: the government may consider reducing the tax rate and offering grants to businesses in hard-hit sectors; (iii) digital transformation: within the scope of the government's financial assistance, the SMEs should try to digitise their business operations to the best of their abilities. Since the lockdown is forcing people to stay home, it is imperative that businesses switch to online channels.
  9. ENHANCED PRIVATE INVESTMENT (INCLUDING FDI) TO REVIVE DYNAMISM IN EMPLOYMENT AND EXPORTS: Bangladesh must capitalise on the emerging advantage of many investors contemplating relocation from China; but to do so, it requires to put in place a targeted investment promotion strategy and its operationalisation at the soonest. Countries such as Vietnam, Indonesia, India, and the Philippines are all expected to put in a strong effort. This makes it imperative for the GoB to prepare and position Bangladesh as a strong candidate for hosting the investors. This calls for preparing and implementing a targeted, time-bound, and focused investment promotion plan by putting in place an effective investor facilitation and after care process.
  10. AREA-SPECIFIC LOCKDOWN PLANS AND DRAWING LESSONS FROM SUCCESS STORIES: The government should develop a medical and economic response framework for the medium term to address the possibility that this pandemic might keep reoccurring and a vaccine not developed in the next few years. In such circumstances, the government must internalise the lessons from South Korea, Vietnam and Taiwan to understand their experiences and approaches.
  11. DEVELOPING AND EXECUTING "THREE" SEPARATE HEALTH PROTOCOLS FOR (A) "HIGH DENSITY" WORK PLACES, SUCH AS RMG; (B) "MEDIUM DENSITY" WORK PLACES; AND (C) "LOW DENSITY" WORK PLACES: The government must only open up when the timing is right and it must embrace a scientific approach to easing the lockdown, which necessitates the implementation of three separately tailored health and safety protocols for work places harnessing different degree of employee-service recipient densities. There is also a need to develop professionalised task force - which can monitor the implementation of the health protocols across the major economic sectors.

 Dr. Ashikur Rahman is a Senior Economist at the Policy Research Institute of Bangladesh (PRI). [email protected]

Dr M. Masrur Reaz is a former Senior Economist at the World Bank Group, and currently Chairman of Policy Exchange, Bangladesh. [email protected]

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