A Post-Pandemic Bangladesh and The Road to Recovery

With the recent lifting of lockdown in Bangladesh, the question that hangs in the air is a difficult one. Is the social benefit of resuming business activity at full throttle on par with, or greater than the social cost that may arise if the rate of infection cannot be curbed?

Though guidelines for mandatory social distancing and the donning of masks has been set out by the government (with hefty punishments to ensure compliance), the degree of enforceability and effectiveness of these guidelines in halting the spread of the virus, has evolved into a matter for nationwide debate.

An important aspect of the lifting of the lockdown is how it will affect Bangladesh in moving forward and its long term readiness.

Financial Readiness for COVID-19 Aftermath

A May, 2020 edition of The Economist included a calculated ranking, which featured the Bangladesh economy as being the 9th strongest among 66 listed countries, in terms of its financial readiness for the aftermath of COVID-19.^[1]

The Rankings were based upon key criteria as follows:

• Public Debt as percentage of GDP
  
• Foreign Debt (both Public and Private)
  
• Cost of Borrowing and Reserve Cover
  

On the Matter of Public and Foreign Debt for Bangladesh, the latest data from 2018 from the World Bank and the International Monetary Fund, show the following summarised figures:

Public and Publicly Guaranteed (PPG) Debt consists of Debt from both Domestic and External sources.

Public Debt is an obligation of a public debtor such as the government, while a Publicly Guaranteed Debt is the liability of a private debtor guaranteed by a public entity.

Domestic sources of PPG, as percentages of total domestic debt, include National Savings Schemes(54%), Bonds(31%), Treasury Bills (6%), and Specialized Bonds(2%). The remaining 7% comes from other sources.^[2]

External Debt Sources are mainly:

• Bilateral(23% of total), which comes from other countries such as China, Japan etc.
• Multilateral (62% of total), which comes from developmental organizations such as The World Bank, Asian Development Bank etc. ^[2]

Relative to other large economies like the U.S and China, Bangladesh is not heavily in debt. Privately taken external debt is seemingly on a growing trend, but may fall in the coming years as a result of the financial strain of the pandemic.

The encouraging sign for Bangladesh is the fact that the figures have not significantly grown despite Bangladesh’s high rate of GDP growth. There is a fairly constant ratio which indicates lower dependence on debt for growth.

However, as can be inferred from above, this does not take away from the fact that the country still has a significant amount of debt as a percentage of GDP, which may become further inflated as a result of its deficit financing plans.

Early Impressions on Deficit Financing and Prioritization of Key Sectors

The early look at the government budget for FY 2020-21, seems set at an amount of BDT 566,000 crore.
The budget deficit is estimated to be BDT 180,000 crore, which is 5.7 percent of the GDP.^[3] 

However, the corresponding revenue collection target of BDT 3,30,000 crore ^[4]  for the National Board of Revenue (NBR) seems to be very unlikely to be met if put forward.

Bangladesh already holds a low tax to GDP Ratio of 9.3%^[5], especially in comparison with other developing countries of South Asia. To add to this, there is a high rate of tax avoidance and tax evasion in the system that needs to be rectified first to promote greater tax compliance.

There also needs to be a large-scale formalization of the shadow economy in order to meet these lofty targets.

Given the impact of the virus, firms and households in the next one or two years will likely be given tax breaks to promote quicker recovery and thus will lower government revenue. 

With commercial banks facing low liquidity, the government must borrow to fund its spending. This will likely have to come from external borrowing and printing of money.

Printing of money adds another dimension of whether quantitative easing will be able to boost output enough to prevent inflation from spiking up. 

Healthcare Sector and Safety Nets/Packages are expected to take priority as the country looks to bring itself back from the impact caused by the virus. The FY2019-20 budget had the highest allocation of 18.5 percent proposed for public administration. Health sector received 4.9 percent while social safety and welfare received 5.6 percent. ^[6]

RMG and Export Industries Face an Uphill Battle

Perhaps the biggest concern in terms of future growth prospects is how the Textiles and RMG industries of Bangladesh will be impacted in the longer term. With 400 factories already shut down according to Bangladesh Garment Manufacturers and Exporters Association (BGMEA), and the inability of many factories to pay workers’ salaries, a huge number of job cuts may be imminent.  An estimated USD 5 billion loss is to be expected, according to the president of BGMEA. Recent negotiations have managed to recapture only 26 percent of USD 3.15 Billion worth of pending work orders. ^[7]

This brings to the table, the issue of possible blacklisting of non-compliant foreign brands such as the Britain-based brands, Peacock, Jaeger, Austin Reed etc ^[8] who are refusing to pay for orders placed earlier. While ethically this may be the correct response, it may provoke a long term shift of orders from the parent country away from Bangladesh and towards other countries such as Korea and Vietnam.

Foreign aid to help the sector has been steadily coming in, with the European Union recently giving assurance to approve a 93-million Euro grant for one million Bangladeshi apparel workers who were either laid off or would permanently lose their jobs because of the Covid-19 pandemic. Also, German Minister for Economic Cooperation and Development, Dr Gerd Müller assured a 20million Euro grant for the apparel workers. ^[7]

The Threat of Re-Opening Too Early

While spending on priority sectors and deficit financing may help to re-stimulate the economy back to pre-pandemic levels, another important issue that requires addressing is the possible future impact of reopening the economy too soon.

The most important concern when reopening the economy is that of public health. Bangladesh, at the time of writing, seems to be on a rising incline in terms of numbers of infections. Being unable to contain the spread and isolate cases well enough may lead to another potentially exponential growth in infections. Such fears of a possible second wave may stunt business confidence, consumption, investment, and recovery plans. 

With the prospect of Bangladesh graduating from LDC status in a few years, there is the looming threat of revocation of the Generalized System of Preferences(GSP) for exports. It will be important to maintain relations with trade partners to sustain future growth from trade in the case of such a scenario.

If the current lifting of lockdown results in a snowball effect in terms of infections, Bangladesh may very well continue to lose orders and opportunities to secure Bilateral Trade Agreements from other countries in the future.

Moving Forward: Making the Best Use of Catch-Up Growth

Winners of the 2019 Nobel Prize in Economics–Dr. Abhijit Banerjee and Dr. Esther Duflo, have suggested that a case of catch-up growth may be enjoyed by countries that suffer from the pandemic, similar to how economies can quickly rebound after wars and such crises. ^[9]

In the case of Bangladesh, if the virus threat was to subside, factories would aim to come back to full capacity very quickly and employment rates would shoot up. However, it is not a universally occurring phenomenon, and countries far from the social equilibrium, such as those with high inequality, may not be beneficiaries of this type of growth. Foreign Direct Investment in Bangladesh may also not be so quick to return unless the Public Health in the country is stable.

A model that Bangladesh can follow on the road to recovery would include–

• Supporting the Healthcare Sector in every way possible until the threat is manageable: This may be achieved through continual investment in testing kits, ensuring that capacity of healthcare institutions can be enhanced even through makeshift short-term methods, provision of proper medical equipment, and financially aiding research to combat the crisis.
  
• Testing for possible cases in as great a number as possible continuing into after the curve is flattened: This would be to better assess the rate of infection and take according policy measures.
  
• Introducing and sustaining holistic financial assistance for citizens: Perhaps in the form of cash transfers or other safety net schemes, until spare capacity in key industries is lowered and employment begins to return to normal.

Sartaz Zahir, Content Writer at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]