The coronavirus crisis is unprecedented in its scale and breadth and is the biggest challenge for the global economy since WWII. While developed countries have responded with aggressive monetary and fiscal measures, developing countries have taken more cautious policy measures. The extremely contagious nature of the coronavirus is one of the major challenges policymakers face. The aggressive shutdown measures to impose social distancing and slow the growth of infected cases in many countries despite the massive economic costs it imposes reflect the urgency with which governments recognise the need to contain the pandemic. However, while situation in developed countries presents unprecedented challenges and shocks to their economies, the policy dilemma developing countries face in balancing health risks with economic ones is even more acute. The lack of social safety net combined with the millions of day labourers who rely on their day-to-day wages for their survival present the biggest policy dilemma for developing countries in balancing the importance of controlling virus spread through lockdown versus the economic costs imposed. As Harvard Economist Ricardo Hausmann has noted in a recent article for Project Syndicate : “even if developing countries want to flatten the curve, they will lack the capacity to do so. If people must choose between a 10 per cent chance of dying if they go to work and assured starvation if they stay at home, they are bound to choose work.
All the major components of Bangladesh’s GDP, with the exception of agriculture, are expected to contract. Even the latter is being affected by supply chain disruptions as well as a lack of workers during the lockdown period. In the past week, the news on the RMG sector remains bleak with the BGMEA forecasting order cancellations of $6 billion over a 12 month period coupled with additional pressure for sizeable discounts on current orders that are not being cancelled. The exodus of foreigners from Bangladesh in the past few months will also likely impact mega infrastructure project implementation.
This is in stark contrast to the performance of Bangladesh during the 2008 Global Financial Crisis where it proved to be the most resilient economy in the world with GDP growth only declining from 6.1 per cent in 2007 to 5.8 per cent in 2008. The source of this resilience, the so-called 'Walmart Effect' was the focus on Bangladesh garment exports at lower price segments which were boosted by consumers trying to economize. But this time is very different with the lockdown in the main export markets in the European Union (EU) and USA remaining effectively shit during the lockdown facing twin supply shocks with retail shops closed and demand shocks from collapsed incomes and massive unemployment. The readymade garments (RMG) sector, which accounts for more than 80 per cent of exports, has reported by the end of march around $4 billion of cancelled orders. This is likely to deteriorate further as the lockdowns in developed countries continues and economic contraction and job losses accelerate
BD Economic outlook will depend on effective Virus control and Global Recovery
CPD, a local think tank, downgraded their forecast for GDP growth for FY 19/20 (that ends at the end of June) to 2.5 per cent. Given that the lockdown was imposed from mid-march to end of May, and further targeted lockdowns have been adopted again, such weakness in GDP growth, from 8 per cent last year is to be expected. Moreover, the lockdowns imposed in key markets for exports and remittances in Europe,the US and the Middle East also saw a collapse in external demand. But there are a wide range of expectations for the growth outlook for FY 20/21 with the IMF forecasting a sharp V-shaped rebound to 9.5 per cent, the Bangladesh government above 8 per cent but the World bank with a forecast range of 1.2-2.9 per cent.
We have greater sympathy with more cautious growth forecasts given that the Covid 19 cases and deaths continue to grow and the RMG sector continues to show signs of significant weakness. Bangladesh Garment Manufacturers and Eexporters Association President Rubana Huq has stated that factories are currently operating at 55 per cent capacity given the collapse in export demand both in terms of cancelled prior orders and weak growth in new orders. She also warned that large scale layoffs in the immediate term look unavoidable.
The much better-than-expected US May labour report, further EUR 600 billion European Central Bank Pandemic Emergency Purchase Programme financing to help the Eurozone economy, and the ongoing recovery in oil prices are some tentative positive signs for external demand. But there is a long way to go and the near-term uncertainty on whether Covid 19 cases continue to grow will be the major negative factor for the economy.
Although Bangladesh Bank has already restricting banks from classifying loans the underlying non-performing loans (NPL) position must surely worsen dramatically given the pressures on the RMG sector and remittances which by some measures together account for 80 per cent of the profits of banks. NPLs are also likely to increase sharply in the SME (small and medium enterprises) sector as well as for institutions and individuals with exposure to the capital markets.
Policy Recommendations
Bangladesh needs to adopt aggressive quantitative easing as a means of increasing the resources available to fight the virus by increasing, what economists call fiscal space, in order to avoid a rapid growth in poverty and even starvation undermining the attempts to mitigate virus spread through social distancing via lockdowns.
We would recommend that the finance ministry issues Tk 100,000 crore ($12 billion) of coronavirus bonds. These can be financed directly by Bangladesh Bank who will increase money supply by that amount as new liabilities on their balance sheet and hold the Coronavirus bonds as assets. Economists call this debt monetization and this is normally a risky policy and not consistent with macroeconomic prudence. The reason is that in normal circumstances, such a policy will lead to excess money supply that risks causing both hyperinflation and potential capital flight and exchange rate depreciation. However, these are clearly not normal times.
Firstly, with the exception of certain essential foodstuffs, the collapse in demand and massive rises in unemployment and collapsing consumer and corporate earnings will lead to deflationary risks in the economy , not inflation. The Bangladesh taka has actually appreciated in the past few months as import demand has collapsed faster than export demand. Moreover, Bangladesh’s Public Debt/GDP ratio is a relatively modest 34 per cent and external debt/GDP is relatively low at 18 per cent of GDP. Bangladesh also has forex reserves which are around nine months of import cover. So taking on an extra three per cent of debt to tackle the Coronavirus is not unreasonable. Finally, developed countries need to much more to avoid an economic and humanitarian catastrophe in developing countries. The UN call for a $2.5 trillion Coronavirus crisis package is justified and should be adopted quickly. The UN proposal is composed of $1 trillion of expanded special drawing rights ; $1 trillion of debt forgiveness; a further $500 billion to fund a Marshall plan for health recovery and dispersed as grants.
Developing countries like Bangladesh with a relatively limited social security safety net and more limited tax base faces greater challenges not only to mobilize fiscal stimulus measures, but also to find an effective and efficient means of targeting and distributing resources. An unprecedented crisis requires bold and unconventional policy measures.
(Ifty Islam is Chairman and a founding partner of AT Capital establishing the firm in 2007. Since then Ifty has focused on corporate advisory, macro strategy and sector research with a wide range of clients including leading international fund managers as well as large local corporates).