Mitigating impacts of COVID-19: Major economic policies taken by the government and Bangladesh Bank

Like elsewhere across the globe, the COVID-19 pandemic has ushered in an economic crisis for Bangladesh. The World Bank has forecasted the country’s GDP growth rate to come down to 2 to 3%. Similarly, the International Monetary Fund (IMF) has projected the growth rate to go down to 2%.^[1]

The government has imposed a nationwide public holiday since March 25. The two major sectors of the economy- the cottage, micro, small, and medium enterprise (CMSME) sector and the Ready Made Garments (RMG) sector have mainly halted operations since then. On the other hand, the agriculture sector, considered the lifeline of the nation, has seen farmers selling products at below market price.

Thus, the shutdown of economic activities risk creating unemployment and poverty in the future. Therefore to offset the economic repercussions occuring now and in the future, both the government of Bangladesh and Bangladesh Bank have embarked on a series of economic policies that are timely and much-needed. 

Undertaking policies that help businesses, banks, and individuals

The COVID-19 crisis has affected all the sectors of the economy. With businesses shut down and individuals having low to zero income, the fiscal and monetary policies taken so far in Bangladesh have been to help businesses and individuals. Since March, the government and Bangladesh Bank have taken the following measures:

Launching stimulus packages and refinance schemes

As of the end of April 2020, there have been seven (7) stimulus packages launched by the government to tackle the impacts of COVID-19. The total amount of the stimulus packages amount to BDT 1 trillion which represents 3.6% of the national GDP.^[2] In addition, the country’s central bank also launched refinance schemes under the seven stimulus packages to ensure bank liquidity.

		Stimulus Packages		Refinance Scheme
Number	Amount (in BDT crores)	Target Beneficiary	Interest Rate to be paid by beneficiary	Amount to be refinanced by BB(in BDT crore)	Interest rate payable to BB
1	5,000	Wage payments for employees in export oriented industry	None (However, banks can charge 2% service charge to borrowers)	5,000	None
2	30,000	Working Capital Loans for large industries and service sectors	9%(4.5% from borrowers and 4.5% subsidized by government)	15,000	4%
3	20,000	Working Capital Loans for Cottage, Micro, Small, and Medium Enterprises (CMSME)	9%(4% from borrowers and 5% subsidized by government)	10,000	4%
4	12,750	Facilitation of raw material imports under back-to-back LCs under EDF	2%	12,750	1%
5	5,000	Pre-shipment credit	7%	5,000	3%
6	5,000	Working capital to agriculture sector(except crop and grain sector)	4%	5,000	1%
7	3,000	Low income professionals, farmers, and marginal or small businesses	9%	3,000	1% for bank and 3.5% for micro-finance institutions

Paying wages of employees in export oriented industries

The BDT 5,000 crore stimulus package for wage payments for employees is applicable for export oriented industries who export 80% or more of their production, B and C type industries of Export Processing Zone (EPZ), Special Economic Zone (SEZ), and Hi-Tech Park. 

Eligible factories will apply for loans to commercial banks who will then disburse the wages of employees. The loans will be used to pay a maximum of three months salary and the salaries will be paid using the mobile financial system (MFS). 

Lending working capital loans to large scale industries and service sector

The working capital for large scale industries and service sector package is a BDT 30,000 crore loan/investment for operation and retention of workforce. Businesses affected by the pandemic crisis will apply for the loan to banks/NBFIs (Non-bank financial institutions). 

Both existing and new borrowers can apply for the loan whose benefit will be for a maximum of one year. Default borrowers and borrowers who have been rescheduled more than three times will not be eligible for the loan. The government will not provide subsidy on the interest that a borrower will fail to pay for within the stipulated time.

Lending for CMSMEs 

For the Cottage, Micro, Small, and Medium Enterprises (CMSME) sector, a stimulus package of BDT 20,000 crore as loan/investment has been formulated. Businesses qualifying under the CMSME sector can apply for the loans from banks/NBFIs to meet their working capital requirements.

Supporting the agriculture sector through stimulus package and rate cuts

Bangladesh Bank formulated two refinance schemes to help banks continue to provide credit to the agriculture sector under the stimulus packages. One of them is for providing working capital loans for farmers and traders working under the horticulture, fisheries, poultry, dairy, and livestock sectors (except crops and grain sectors). The other package is aimed for beneficiaries that includes low income farmers.

Besides, according to a Bangladesh Bank policy, banks have allocated BDT 14,500 crore loan target for the crop and grain sector.^[3] Furthermore, Bangladesh Bank has also cut interest rates for agriculture loans to the crop and grain sector to 4% from 9% effective from April 1, 2020 till June 30, 2021. The central bank will subsidize the rest 5%.^[4]

Aiding low-income professionals

The last announced stimulus package of BDT 3,000 crore is aimed for supporting low-income professionals, low-income generating individuals or enterprises, farmers, ultra-small businesses, and people from deprived communities.

The fund for this stimulus package will be generated by Bangladesh Bank. Bangladesh Bank will then distribute the funds to commercial banks who will then distribute it to micro-finance institutions (MFI). Eligible borrowers will then borrow funds from MFIs. 

Facilitating trade financing 

The BDT 5,000 crore pre-shipment credit stimulus package is to facilitate exports of local manufactured goods to foreign countries during the COVID-19 crisis. On the other hand, the stimulus package under the Export Development Fund (EDF) is to facilitate raw material imports under back-to-back LCs (letter-of-credit). The size of the fund has been increased to USD 5 billion to facilitate such imports.^[5]

Besides facilitating imports and exports under the above mentioned stimulus packages, Bangladesh Bank has also loosened restrictions on certain trade rules and regulations including:

• Relaxation on foreign trade transaction deadlines: Effective till September 30 of 2020, Bangladesh Bank extended the time for payment for the following foreign trade transactions:

• Granting bullet payments for usance imports: On April 12, the central bank allowed bullet payments (lump sum payment for the whole outstanding loan) for all usance imports permissible under the Guidelines of Foreign Exchange Transactions (GEFT).^[6]

• Settling LCs through nostro accounts: Authorized Dealers (AD) may settle the payments of inland letter-of-credits (LC) through their nostro accounts (a bank account held by the AD with a foreign bank) instead of settling through Bangladesh Bank FC clearing accounts of the concerned ADs.^[7]

Preventing a renewed liquidity crisis threat for commercial banks

The responsibility for distributing loans under the stimulus packages lie mainly with the commercial banks. They have suffered last year due to their liquidity shortage caused by the rise of non-performing loans (NPL). There is a concern for the rise of NPL again due to default by borrowers who will take loans under the stimulus packages. Therefore, Bangladesh Bank has taken steps besides the refinance scheme  to ensure bank liquidity:

• Increase ADR and IDR: The advance-deposit ratio (ADR) for commercial banks has been increased from 85% to 87%. At the same time, the investment-deposit ratio (IDR) for Shariah-based banks has been increased from 90% to 92%.^[8] 

• Lowering the repo rate and CRR: In two phases, Bangladesh Bank reduced the repurchase agreement rate (repo rate) from 6% to 5.25% and the cash reserve requirement (CRR) from 5.50% to 4%.^[9] 

• Buy government securities: The central bank will buy commercial banks’ investments in government bonds that are in excess of the statutory liquidity reserve for cash.^[10]

Enhancing payment facilities and credit for individuals

To allow individuals to have sufficient money and credit during the crisis, Bangladesh Bank took the following responses:

• Classification of loans: Scheduled banks cannot change the classification status of loans as at January 1, 2020 till June 30, 2020.^[11] As a result of this, borrowers will not be classified as defaulters if they do not pay loan installments till June.
• Suspension of interest payments: Banks are ordered to waive penalty charges for credit card customers until June for any late payment.^[12] Interest payments for all types of loans for two months till May are suspended.^[13]
• Increased payment facilities for cashless payments: Monthly transaction limits for Mobile Financial Services (MFS) has been increased from BDT 75,000 to BDT 200,000. Daily transaction limits for contactless debit and credit card transactions have been increased from BDT 3,000 to BDT 5,000.^[14]

Do the responses taken create problems for the banks and the upcoming budget?

The policies taken by both the government and Bangladesh Bank are worthwhile to save the economy. However, the initiatives being carried out can spell problems for the banking sector and the upcoming national budget. Fortunately, it will be the policies and actions taken by the two policymakers that can assuage the two problems.  

Impending rising pressure on banks 

The implementation of the stimulus packages have been mainly shouldered to the banking sector. To avoid experiencing a new liquidity crisis problem, Bangladesh Bank initiated the right moves.

However, the guidelines for the stimulus packages mandates that the entire risk for distributing loans will lie on commercial banks. Moreover, the refinance scheme guidelines separate the banks’ payment under the refinance schemes to the central bank from the borrowers’ payment of loans and interests to the banks. 

In addition, Bangladesh Bank has allowed borrowers who fail to secure minimum rating to still be eligible for loans under the stimulus package for large industries and service sectors and CMSME sector.^[15] Such measures will increase banks’ risks who might then be forced to increased their interest rates once the pandemic is over.

Escalating budget deficit

The government’s stimulus package will undoubtedly create a pressure on the upcoming fiscal year 2020-21 annual budget. It is expected that with the announcement of the stimulus packages, the budget deficit will rise due to increased government expenditures . The World Bank predicts the budget deficit to rise to almost 7.7%.^[16]

A ray of hope: financing deficits through international assistance

Fortunately, the government has taken the right steps by requesting for funds from various international development partners for financing the deficits.Till date, it has got a USD 100 million loan from the World Bank (WB), and a USD 600 million loan from Asian Development Bank (ADB).^[21][22] In total, the government expects USD 2.6 billion in funds from various international development organizations.^[23]

Agency	Amount of aid expected (in USD millions)
World Bank	850
International Monetary Fund (IMF)	750
Asian Development Bank (ADB)	600
Asian Infrastructure Investment Bank (AIIB)	250
Islamic Development Bank (IsDB)	150

The road ahead: Preparing for uncertainty and a possible recession

The policies taken so far may not be the last for both the government and the central bank. Uncertainty lurks for the times ahead as there is no sign for the pandemic to end soon. Even if the situation improves, there is still uncertainty as to whether economic activities will recover or not. As a result, the government of Bangladesh and the central bank need to design policies that will address a wide variety of possible outcomes.

Moreover, the International Monetary Fund (IMF) predicts the world will head into a long recession worse than the 2008-09 recession due to the pandemic.^[24] The government of Bangladesh and Bangladesh Bank will, therefore, need to anticipate such prolonged recession and use all its powers to mitigate the effects of such an outcome.

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