Coronavirus Impact On Economy: Mr. Masud Khan

COVID-19 and BD Economy-theincap
Mr. Masud Khan, Chairman of GSK Bangladesh

About The Author:

Mr. Masud Khan

FCA FCMA

Chief Advisor of the Board

Crown Cement Group

41 years’ work experience in leading multinationals and local company of which 19 years are as a senior director at board level. Well known in the business, professional circles, and highest standard of government and regulators that has led to an appointment as Chairman of GSK Bangladesh and Independent Director of Marico, Berger Paints, Community Bank, and Viyellatex Ltd. A consistently high achiever who has delivered outstanding achievements under challenging circumstances.

Coronavirus Impact on Economy

Coronavirus is wreaking havoc on the world economy. Europe and the USA have gone into lockdown with economies grinding to a halt. The ongoing spread of the new coronavirus has become one of the biggest threats to the global economy and financial markets. Major institutions and banks have cut their forecasts for the global economy, with the organization for Economic Co-operation and Development being one of the latest to do so.

Meanwhile, fears of the coronavirus impact on the global economy have rocked markets worldwide, with stock prices and bond yields plunging. It is feared that major world economies such as the US and most European economies may slide into recession. China will be hard hit as well since it is dependent on trade, and if the major economies slide into recession, there will be fallout on China’s economy as well.

Governments around the world are taking emergency measures to halt the virus and minimize the economic fallout. This includes complete lockdown in travel, quarantine, infuse liquidity in the economy through the financial sector, and financial help to small businesses and marginal households to tide over the ongoing crisis.

Coronavirus will have an adverse impact on the Bangladesh economy, like the way the pandemic has taken its toll on the global markets and the economies. The impact of the virus will be felt on the external economy relating to imports and exports and the domestic economy. The raging outbreak of new virus already disrupted the global supply of goods, eroded global demand, collapsed oil prices, and crashed global stocks. The uncertainty over the Bangladesh economy will increase further since its key growth pillars are under acute pressure.

What could be in Bangladesh?

Even before the coronavirus outbreak, dark clouds had been gathering over the Bangladesh economy owing to various challenges in domestic and externals fronts, and now it has exacerbated with the virus that would directly hurt several industrial, financial, and business sectors. While the exact effect of the coronavirus is unknown, it is clear that the fallout would be catastrophic on the local economy if the pandemic prolongs. The immediate impact of the virus outbreak is being seen on exports and imports, manufacturing activities, labor migration, businesses, aviation, and service sectors.

Panic has also gripped the stock investors with plunging stock prices and turnover at historic lows.

Coronavirus is likely to impact the Bangladesh economy through two important channels:

(i) Transmission of the expected global economic meltdown on Bangladesh economy initially from the supply shock (as the epicenter of the virus was initially located in China which is the largest trading partner of Bangladesh) and subsequently the expected meltdown in export demand in the EU and the US.

(ii) Contraction of domestic demand in the domestic economy if the virus spreads in Bangladesh and through the transmission of external shock to the domestic economy.

The only silver lining on the foreign currency reserve has been the plummeting oil prices to historic lows, with prices dropping below $30 that has not been seen in the last decade.

As European country authorities are declaring lockdowns of significant parts of their territories and putting in place restrictions on cross border movement of people, closing down all non-essential (primarily groceries and pharmacies and hospitals), sales of garment and other exports from Bangladesh will stop until the situation improves in the destination countries.

While the garment sector is slowly coming out of the supply disruption due to China, the massive demand compression in destination countries in Europe and the US is leading to major reduction/cancellation of export orders from these two regions. The EU alone accounts for 62 percent of exports from Bangladesh, and the US is the largest destination country for the country’s exports.

The collapse in demand for exports will be much beyond the garment sector to include other commodities like leather and footwear, jute and jute goods, frozen food, home textiles, light engineering, plastic products, and electronic goods. 

Compounding the first-round adverse impacts, there will be second-round impacts on other sectors from the depressed domestic demand.

There are mainly three reasons that can hinder the economic activities in Bangladesh, such as the direct impact on production, supply chain, and market disruption, as well as the impact on firms and financial markets. The financial sector, specifically the banking sector in Bangladesh, can be the most affected. This is because banks were the heart of all crises, such as the sovereign euro crisis and the global financial crisis. In Bangladesh, the financial sector was already fragile with soaring non-performing loans and decline in deposits and loans. If banks fail, the Small and Medium Enterprises (SMEs) will be more affected.

However, the impact on the domestic economy from demand compression due to restricted mobility and fear factors is being felt across the board in restaurants, hotels, vacation resorts, travel (domestic and international).

Other than kitchen markets and superstores selling food items, all other sectors have seen a drastic decline. Shopping malls, restaurants, hotels, holiday resorts, long-distance buses, airlines, etc. have taken a massive hit. With fewer people traveling on the roads, there is a sharp decline in the income of rickshaw puller and auto drivers. Almost 6 million people are involved in this occupation. Most of the employments in Bangladesh are contractual workers in towns and villages. Day laborers, street hawkers, cart pushers, are now passing days with little or no income. As a result, the impact on the economy is likely to be devastating since the economic cycle has slowed down. 

The impact of slower Pahela Baishakh and Eid demands and domestic job losses in wide-ranging sectors will be massive.

The Bangladesh economy has never seen such a multi-pronged pressure leading potentially to massive compression of domestic demand.

The Asian Development Bank (ADB) (2020) predicts that in the hypothetical worst-case scenario (no tourism receipts and a sharp decline in domestic demand in China for six months plus the outbreak in other Asian economies lasting three months), Bangladesh will lose approximately $3 billion in its GDP (1.10 percent decline) and there will be job cuts for around 9 million people.

Specifically, in the sectorial scenarios, the highest GDP loss and job cuts will be in business sector including the financial sector, trade and public services by $ 1.14 billion and 201,106 people respectively followed by agriculture ($637 million, 458,000 people), tourism ($510 million, 50,000 people), construction and utilities ($ 400 million, 1.18 million people) and transport service ($334 million, 67,000 people). 

What actions should be taken?

In order to surmount this panic and disruption in the economy, the government and policy-makers of the country and the Bangladesh Bank have to come forward to minimize the economic losses and panic by considering both the short-run and long-run.

The government and policymakers should be very careful to send a message of cohesion, accountability, and leadership to prevent fear and panic. In this regard, the government can learn from Singapore’s effective handling of the issue since the Chinese New Year. Though the government has fixed the price of necessary hygiene-related items, including hand sanitizer and face masks, proper enforcement of this decision is a must. The same goes for prices of essentials that are now soaring since panic has gripped the population who are stocking essentials much beyond their needs.

The World Health Organization (WHO) already declared the virus as a pandemic. The government has already shut down educational institutions and banned large-scale social interactions like meetings, conferences, seminars, symposiums, and religious gatherings. More needs to be done in this front by stopping inter-district travel. All villages must be isolated and only travel for medical reasons, or transporting cargo should be allowed. 

Bangladesh Government and the Central Bank must make sure that interrupted economies continue to function amid the virus outbreak. Bangladesh Bank has already instructed the financial and non-financial institutions to prepare contingency plans, including cloud-based work at home facilities, so that they can continue their smooth operation during such occurrences. At the same time, educational institutions, and all government and non-government institutions should follow a similar work plan.

Bangladesh bank needs to come forward to infuse liquidity into the economy immediately. This includes reducing the central bank policy rate (repo rate) so that banks can borrow at lower rates. Also, the central bank should start buying back treasury bills from banks.

The increased government spending should be increasingly directed to the health sector for supporting all essential expenditure on prevention, containment and mitigation of the virus, including higher overtime pay and better working environment conditions (especially the health care personnel who are involved in taking care of those infected), as well as research.  

The sharp drop in oil prices should be passed to businesses and consumers in the short term to alleviate their suffering and also bring down the prices of commodities, including energy cost. On the flip side, remittance has seen a staggering decline of 22% in the previous month as fallout of the economic crisis in the Middle East and other countries.

Supporting vulnerable households and firms is essential as containment measures, and the fear of infection has drastically slowed down economic activity. There is, therefore, an urgent need for boosting public expenditure to keep the economy rolling. Low-income groups and poor people should also be supported through expanded social safety nets. Unless this is done, there could be severe deterioration in law and order situation when people who survive on a day to day occupation to sustain their livelihood and daily spend suddenly find no income sources. In places like the Philippines, people have attacked hotels and rich homes to get food.

The increasing liquidity buffers to firms in affected sectors are also necessary to avoid debt default. In addition, reducing fixed charges and taxes and credit forbearance would also help to ease the pressure on firms facing an abrupt falloff in demand.

Finally, the government, oppositions, the NGOs, the other social organizations, the business people, the financial and non-financial institutions, and the people of Bangladesh should come forward and work together to handle this pandemic to minimize both the economic and non-economic losses. Coordinated and well-thought planning and execution is the need of the hour.

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