Prelude: COVID-19 and its catastrophic impact around the world and Bangladesh
In June 2020, World Bank published the Global Economic Prospects that describes both the immediate and near-term outlook for the impact of the pandemic and the long-term damage it has dealt with prospects for growth. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020, using market exchange rate weights—the deepest global recession in decades, despite the extraordinary efforts of governments to counter the downturn with fiscal and monetary policy support. Over the longer horizon, the deep recessions triggered by the pandemic are expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages.
The pandemic is expected to plunge most countries into recession in 2020, with per capita income contracting in the largest fraction of countries globally since 1870. Advanced economies are projected to shrink 7 percent. That weakness will spill over to the outlook for emerging market and developing economies, which are forecast to contract by 2.5 percent as they cope with their own domestic outbreaks of the virus. This would represent the weakest showing by this group of economies in at least sixty years.
The impact of COVID-19 upon the Bangladesh economy has been no less dramatic in the first two months of lockdown. The economic impact has been felt in three main avenues: first, a drop in domestic economic activity, after the shutdown announced on March 26; the second is a decline in exports of ready-made garments, which represent more than 80 percent of Bangladesh’s exports and have been strongly impacted (overall exports fell by 83 percent year-on-year in April). Finally, there has been a fall in remittances from Bangladeshis living mostly in Middle Eastern countries, affected not just by the pandemic but also by the decline in oil prices.
According to the World Bank, only 15% of the Bangladeshi population earn over $6 a day, and over 90% of the workforce belongs to the informal sector. After the nationwide lockdown commenced on March 26, millions of rickshaw-pullers, day laborers, and factory workers rushed for their villages, leaving the streets of Dhaka with a ghostly look.
The Bangladesh Economic Association (BEA) estimates that nearly 36 million jobs were axed during the 66 days of general holidays announced by the government in a bid to contain the coronavirus. Most of the job losses were in the agriculture, industry, and service sectors. According to Dr. Abul Barkat, current President of the BEA, some 59.5 million Bangladeshi have been relegated into lower/different socio-economic strata during this period. Of these, 25.5 million people are now living in extreme poverty. Bangladesh’s national poverty rate rose to 35 percent in 2020 from 24.3 percent in 2016 due to the adverse impacts of the coronavirus pandemic, according to an analysis of the Centre for Policy Dialogue (CPD). The country’s GDP growth rate is also expected to significantly decline (latest provisional estimate by BBS is 5.6%, although some of the figures are questionable). The CPD also expects income inequality, measured by the Gini coefficient, which might increase to 0.52 in 2020 from 0.48 in 2016.
A large assistance program of four packages totaling some BDT 677.5 billion has been announced by Prime Minister Sheikh Hasina since April 05, 2020. The first package of BDT 300 billion was targeted at the large corporates affected by the crisis with an interest rate of 4.5 percent. Small business enterprises will be able to access a package of BDT 200 billion in credit at an interest rate of 4 percent. The Export Development Fund was expanded by US$1.5 billion at a reduced interest rate of 2 percent. The fourth package includes the Import Refinancing Scheme, which will provide struggling importers with BDT 50 billion at an interest rate of 7 percent. Shortly after, another package worth BDT 50 billion credit has been made available for the agricultural sector at an interest rate of 4 percent. This credit package will be granted and disbursed by commercial banks. This brought the entire assistance program amount to BDT 727.5 billion.
Unfortunately, the stimulus package is yet to get the desired outcome. Prior to COVID-19, the Banking sector was already struggling with high levels of Non-Performing Loans and liquidity issues. Bangladesh Bank has considerably relaxed the repo rate and slashed CRR and SLR rates that have markedly improved the liquidity position of most banks. However, the banks are cagey in lending to borrowers given their past experience and the uncertainty surrounding the future prospects of repayment post-Covid. A similar situation exists regarding the SME sector. Commercial Banks do not have the appetite to lend to such an unorganized sector with little or no collaterals and poor financial reports. It is easier to lend to large corporates who are smaller in number, have collaterals, and can present requisite financials which, unfortunately, in most cases, have to be taken with a pinch of salt. As we speak, Bangladesh bank is working with a Credit Guarantee Scheme for the SME sector that will make it easier for banks to lend. However, no such scheme, which is common across all advanced economies, is being envisaged for the big corporates.
Agriculture employs 40% of the workforce. The government has reduced duties on some agricultural equipment that will encourage mechanization. The above is a good move but will lead to a decline in jobs for farm laborers. No separate subsidy has been announced for this sector. The crying need of the hour for this sector is agricultural marketing since farmers are not getting a fair price for their produce. Digitization and e-commerce have to be encouraged along with auction houses for agricultural produce, as is prevalent in our neighboring country.
The Informal sector employs more than 5 crore people and is 90% of the total workforce in Bangladesh. This sector embraces manual labor, mechanics, construction workers, rickshaw pullers, cart pullers, taxi, auto cab, truck drivers, street vendors, restaurant employees, personal service employees. During the lockdown, other than kitchen markets and superstores selling food items, all other sectors have seen a drastic decline. With fewer people traveling on the roads, there was a sharp decline in the income of rickshaw puller and auto drivers. Almost 6 million people are involved in this occupation. Shopping malls, restaurants, hotels, holiday resorts, long-distance buses, airlines, etc. took a massive hit. Most of the employment in Bangladesh are contractual workers in towns and villages.
The government has announced 50 lac families for vulnerable sector of 2.5k each. Each family has been considered as four members, which means 2 crore population will be covered through cash subsidy. This is woefully inadequate, considering that the poverty level has gone up to 35% from the earlier levels of 20%.
The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations, and set the stage for a lasting recovery. For emerging markets such as Bangladesh, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.
The Economy Going Forward
Bangladesh is a resilient country that has always hogged world news for natural disasters or humanitarian crises. Since independence in 1971, the fledgling nation has experienced and successfully overcome many natural calamities, including floods and cyclones, as well as economic crises such as the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008. The South Asian riverine nation is on the frontline of the adversities of climate change and is home to one of the World’s largest refugee camps, housing more than 1 million Rohingya victims of genocide in Myanmar. However, the COVID-19 pandemic presents an unforeseen challenge in terms of intensity and enormity.
Despite a global recession which is shaping up to be historic in scale, Bangladesh might be one of only two ASEAN and South Asian economies – the other being Vietnam – to register a positive growth in 2020. A low ratio of public debt to the gross domestic product, which is 33-34 percent, leaves Bangladesh with a fiscal headroom to borrow low-cost funds from the global financial market. The US dollar-Taka exchange rate is very stable, and foreign exchange reserves have climbed to an all-time high of $37 billion.
Remittances have seen an all-time record in the month of July. However, this may be a blip since a large number of migrant workers are returning to Bangladesh with the oil price crash and general meltdown in economies of those countries they were employed.
Another encouraging sign has been in the export of readymade garments, which are seeing signs of recovery with orders coming in from export destinations, although the numbers are not at the earlier normal levels. Part of this could be attributed to the replenishment of depleted stocks during the lockdown, with most of the in-store stocks being damaged due to lockdown. However, there are troubling signs in this sector with competition heating up; Vietnam has just taken over the second spot from Bangladesh and seems to be surging ahead buoyed by duty-free access to US and EU markets.
With the easing of lockdown, Bangladesh’s domestic economic scenario is changing rapidly. The initial fear of the virus seems to be ebbing despite the fact that it shows no signs of withdrawing with the no of positive cases compared to the tests still above 20% compared to the neighboring countries having around 10%. The number of people in the streets and the bazaars seems to be back to the pre-Covid levels. Shopping malls have opened with most corporate houses reporting very strong levels of sales during the Eid month. As a result, the hawkers, daily laborers, and small shop keepers are back to their trade, albeit at lower levels. However, the presence in restaurants and people traveling for leisure, attending the gym, going to salons, or any other place of public gathering is still thin. But the situation is changing rapidly, and we can expect normalcy in the next two to three months.
COVID-19 and the ensuing lockdown has brought to the forefront some radical changes in the business scenario in Bangladesh. When the lockdown was imposed, people were forced to think of alternatives to grocery shopping from kitchen markets and brick and mortar stores. The current crisis has been regarded as the biggest opportunity for online grocers. Super shops in urban areas saw a 50 percent spike in sales since March after the first confirmed case.
With the onset of COVID-19, some studies claimed that paper money could carry more germs than a household toilet and hence the risk of being infected by using banknotes and coins in financial transactions. Besides, in Bangladesh, the banks also have limited reach in rural areas of our country. This has created a unique opportunity for the growing MFS sector to lead the way for a financially inclusive future. The Prime Minister announced BDT 2,500 cash incentive to 5 million poor families as part of measures taken to keep the economy stable will be paid out using MFS services directly to the families to ensure transparency. Since April, around 1.92 million MFS accounts have been created to provide the workers of Ready Made Garments sectors using the stimulus package announced by the government.
The hitherto unexplored telemedicine sector also saw a resurgence during the lockdown with people consulting doctors online on Covid or other health-related issues.
The lockdown has also seen a resurgence of the IT sector. Since the 2008 recession to early 2020, there has been a meteoric rise led by the FANG stocks (Initially Facebook, Amazon, Netflix, and Google, now including Microsoft and Apple). Even after the COVID-19 outbreak, the stocks of Big Tech companies like Amazon kept soaring. Social distancing and lockdown measures have pushed most white-collar workers around the world to ‘Work-from-home’. This has presented the Video Conferencing Market with a unique opportunity to grow. The industry is forecasted to grow at a CAGR of 9.2 percent during the forecast period of 2020 to 2026. Among them, Zoom has become a household name in the first quarter of 2020. Its daily user count has gone up to 300 Million in April 2020 from only 10 Million in December 2019. In Bangladesh too, some of the big IT companies have seen an upsurge in orders both locally and globally.
In fact, the world in the future will see more of this “work from home” syndrome. Most of the big companies globally have announced that they will continue this practice even after the pandemic has abated. The benefits are enormous for both corporates as well as employees. There will be major cost savings due to the descaling of expensive offices, the travel cost of employees, lesser rentals, and better quality of work with work-life balance. Talents can be sourced from any corner of the world by the FANG companies without the need for visas and physical travel.
Online education that was hitherto unexplored, suddenly saw a spurt during the lockdown both globally and locally. However, online education in Bangladesh has its limitations in terms of internet availability in remote areas and the consequent cost.
Home entertainment providers are witnessing boom days with half the world’s population put under lockdown. People lapped up video streaming and gaming platforms with sports events canceled/postponed around the world. Streaming has surged dramatically around the world, with all countries under lockdown. The end of 2019 marked the beginning of streaming wars as Disney and Apple launched their own streaming services, respectively. Regardless of that, Netflix reigns supreme. Bangladeshi tech firms have been trying to capitalize on this opportunity as well. Recently, Red Dot Digital, a subsidiary of Robi Axiata Limited, launched ‘Binge’. ‘Binge’ is being promoted as a mix of Internet Protocol TV and online streaming platform. ‘Binge’ joins Hoichoi, iflix, Bioscope, ZEE5, and others in the growing streaming platform market of Bangladesh.
COVID-19 has exposed the glaring weakness of corporates of not having robust supply chains and reliance on a single source such as China. In future, the world and indeed Bangladesh will see greater reliance on domestic sources to ensure uninterrupted supplies of inputs meaning that the era of free trade could again be facing roadblocks.
To summarise, Bangladesh economy is expected to bounce back this year with the 8% growth. It is too early to predict, but an encouraging sign has been the revival of the moribund stock market buoyed with the change in BSEC management that have taken some strong steps to bring the erring stock market manipulators to book, the sharp drop in the deposit rates of banks and the government’s tax incentive to whiten black money in the stock market. However, a lot will depend upon how the financial sector evolves and the steps taken by the Bangladesh bank to bring governance back to the fold.
Once money starts flowing to the households and aggregate demand picks up, the economy will revive again backed by the 17 crores odd population. It is, however, important at this stage to support the vulnerable group, such as people below poverty levels, the informal sector, and the SME who provide the backbone of the economy. The sooner these sectors are incentivized, the quicker the economy will quickly start.
The changes described above in the business world order will surely make their presence felt in Bangladesh with the new generation who are already used to the pleasure of home entertainment and IT. It is also expected that businesses will awake to the new normal and embrace the opportunities unlocked by COVID-19 in terms of e-commerce and work from home that will allow them to cut costs. Online business will continue to flourish as well as IT that will open new avenues for employment and may open new fronts in terms of online agricultural marketing which has now begun on a limited scale but is yet to see its full potential.
About The Author
Mr. Masud Khan is the Chairman of GSK Bangladesh (to be reconstituted shortly as Unilever Consumer Care Ltd) and currently working as the Chief Advisor of the Board of Crown Cement Group Bangladesh. He is a seasoned professional with 40 years’ work experience in leading multinational and local companies in Bangladesh. Prior to joining Crown Cement Group, he worked in LafargeHolcim Bangladesh Limited as Chief Financial Officer for 18 years. Earlier, he worked for British American Tobacco in finance and related fields for 20 years both at home and abroad.
He is also an independent director of Marico Bangladesh, Berger Paints Bangladesh Limited, Singer Bangladesh, Community Bank, and Viyellatex Ltd. His articles on professional and industry issues regularly feature in newspapers and international and local magazines. He regularly features on electronic media on talk shows and interviews and is often in the news for comments on industry and professional issues. He also does public speaking on professional issues in educational institutions and all the Professional Institutes such as Institute of Chartered Accountants of Bangladesh, ACCA, and ICMA Bangladesh. He is also a lecturer in the Institute of Chartered Accountants of Bangladesh for the past 40 years.
He did his Bachelor of Commerce with Honours from St. Xavier’s College under the University of Kolkata. Thereafter, he qualified with distinction both as a Chartered as well as a Cost and Management Accountant from the Indian Institutes being a silver medalist at all India level in the Chartered Accountancy Examination in the year 1977.