Growth Metrics and Forecasts Revised in the Face of COVID-19: ADB and EIU

As the world at large attempts to flatten the Coronavirus curve through mandated social isolation, governments have opted for stimulus packages to drive fiscal expenditure and/or provide relief to the populace. Multilateral organizations have been crucial in aiding these efforts both through funding and fund-delivery.

Despite best efforts however, it is a sad fact that the Coronavirus pandemic has staggered and disrupted economic growth enough to revise and rethink previously established forecasts and metrics.

Asian Development Bank(ADB) with an Optimistic Outlook

The Asian Development Bank (ADB) has been a significant donor in the relief efforts against COVID-19. It has very recently expanded upon its response package, raising to USD 20 Billion. The package added upon ADB’s $6.5 billion initial response announced on 18 March, supplementing $13.5 billion in resources to help ADB’s developing member countries cope with the pandemic. The $20 billion package also includes about $2.5 billion in concessional and grant resources.^[1]

ADB has also provided a $300,000 emergency grant to bangladesh at the end of March which supported the procurement of health & safety materials including personal protective gears, N95 masks, safety goggles, aprons, thermometers, and biohazard bags.^[2]

The Asian Development Outlook prepared by the ADB, last updated in April 2020, contains forecasts of growth metrics concerning Asian countries in which it operates or partners with. Within this outlook, Bangladesh is stated to hold a high rate of economic growth at 7.8%.^[3]

Preliminary estimates from the ADB stated this figure after accounting for losses in RMG export orders Bangladesh might face as a result of the COVID-19 pandemic. However, on the whole, it is far from a worst-case scenario forecast. It is a fairly low down-turn from the 2019 growth of 8.2%.

These forecasts for FY2020 and FY2021 were stated to rest on several assumptions:

• Political stability is prevalent, helping to maintain consumer and investment confidence;
• Exports and imports will stay subdued due to global economic slowdown, but will improve in FY2021;
• Central bank monetary policy will be expansionary enough to support economic growth yet maintain price stability; 
• The weather will be as per usual. 

The report however states that these forecasts are yet to be updated fully to reflect the full impact of the coronavirus and a large part of downturns in growth will be attributed to the speed with which it is tackled.

At the regional level, the prediction is more grim as growth is estimated at 2.2% in 2020, a downward revision of 3.3 percentage points relative to the 5.5% ADB had forecast in September 2019. Growth is expected to rebound to 6.2% in 2021, assuming that the outbreak ends and activity normalizes.^[3]

ADB has mentioned subsequently that the COVID-19 pandemic could wipe out $3.02 billion off Bangladesh’s $300 billion-plus economy in the worst-case scenario. In such a scenario, 894,930 jobs will be lost.^[4]

The donor states that Bangladesh’s low revenue to GDP ratio may be a problem when it comes to financing their public expenditure in dealing with such a persistent exogenous shock.

The World Bank is now estimating that regional growth will fall to a range between 1.8 and 2.8 percent in 2020, down from 6.3 percent projected six months ago.^[5] There is a clear discrepancy between this figure and the optimistic growth figure presented by the ADB for Bangladesh. While the ADB recognizes the difficulties that come with the rapid progression of the current circumstances, it is yet to scale down its growth figure percentage.

Economist Intelligence Unit (EIU) Predicts Difficult Times

The London-based Economist Intelligence Unit (EIU), has a more depressed figure than the preliminary estimates by the ADB.
It states in its report, which is also from the end of March, that stimulus packages in place at the time would not be sufficient enough to off-set the loss of economic activity caused by the pandemic.

It also makes this forecast based upon the assumption that there will be introduction of new relief packages in most of the South Asian countries, which will include fiscal stimulus and monetary stimulus.

Fiscal Stimulus would include tax relief and support for low‑income households through direct or indirect cash transfers, while monetary stimulus will focus on deferring loan payments and ensuring adequate liquidity in the financial market.

Bangladesh’s current relief package aims to provide a bail-out to SME-s and ensure provision of necessities. In addition to this, lending rates have been slashed as predicted, such as the lending rate for credit under the Tk 50 billion stimulus package for farmers revised down to 4 percent from 5 percent.^[6]

FIGURE : Real GDP growth Forecast, 2020 / Source : EIU

The EIU has thus lowered growth projections for Bangladesh to around 3.5%, much lower than its initial forecast.^[7]

The downturn will be primed upon demand shocks and supply shocks according to the EIU.
The demand shock will be brought on by a depression in private consumption growth caused by quarantine and other preventive measures taken to combat the spread of the virus.
closure of businesses and factories will constitute the supply shock.

As a consequence of the closures, losses in employment will again exacerbate the demand shock.^[8] 

While the two organizations may seem to be in apparent ideological conflict regarding the extent to which COVID-19 may affect the economy, much of the final result will again depend on the response of the community and governments to contain the threat quickly.

Most growth metrics maintain that if the threat subsides, Bangladesh will see a jump in growth in the coming year. For example, the International Monetary Fund (IMF) predicts a record 9.5% growth in the coming year.^[9] However there is valid skepticism regarding this.

The rationalization of the development budget in the face of the pandemic is a clear indication that growth will be lower than targets.

Given the low regional growth that is forecasted by both ADB and EIU, policy makers would do well to go forward with prudence in mind. Given the already significant losses incurred by RMG, the rampant job losses due to mandated closures, and the yet-to-be fully mobilized stimulus package, the priority must go towards immediate containment through strict monitoring and regulation of possible violations.

It will also be crucial for the government to formalize the details of the stimulus package through publicly available documentation in order to allow businesses to easily avail and benefit from it.

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