Safeguarding Bangladesh’s economy during the Corona Pandemic

While governments around the world are struggling to contain the Corona Pandemic and the resulting human suffering, the global economy is on a downward spiral moving towards a full-blown recession. According to the UNCTAD (UN Trade Agency), Corona pandemic is likely to slow down the global economy by under two percent, and may cost about $1 trillion. The potential impact of such a global economic crisis along the demand and supply shocks originating in the domestic economy in case of a major outbreak in Bangladesh, require coordinated and decisive policy measures.

Impact due to Global Economic Shock:

Text Box: Data Source: WB

A good way to understand the impact of shock in the global economy on Bangladesh would be to scrutinize the growth path of different economies over time. Time series data over the last eighteen years shows that the growth trajectory of Bangladesh has been closely related with that of the USA and European Union. Also, contrary to popular belief that the financial crisis of 2008 did not have an impact of our economy, the growth rate comparison shows that when USA and EU growth rates tumbled, Bangladesh’s growth also fell by approximately two percentage points from pre-crisis rates (7.06% in 2007) over the next two years (5.05% in 2019). And, while the economic fall-out of Corona pandemic is still uncertain, experts are also comparing it with the great recession of 2008, and early analyses indicate that we may be heading towards another economic crisis.

While the Corona pandemic is endangering the global economy, another crisis is already taking place due to the price war between two major oil producing countries; Saudi Arabia and Russia, jeopardizing the oil dependent economies of the Middle East. Three among the top five remittance sources of Bangladesh, three are from the Middle East, and the other two countries are USA and UK (Source: BB). The combined crisis of Corona pandemic and oil war could also affect the remittance inflow of Bangladesh.

Domestic Economy:

As the global economic shock unfolds, there is another looming crisis originating from the domestic economy as well. Due to the low number of Corona cases, the economic activities in Bangladesh have not seen any major disruption. However, in the event of a major outbreak, businesses will have to suspend operation temporarily resulting in a supply shock. While larger firms may have the resources to pay their workers, many small to medium businesses may not be able to pay their wage bills.  Additionally, either due to the loss of demand in the international market or due to the suspension of operation, many businesses may not be able to pay the bank interest/installments, putting pressure on banks’ liquidity.

There is a demand side problem to the domestic economy as well. The demand side problems can be segregated based on whether the products are price sensitive or relatively price insensitive. During a major crisis, people not only keep up the purchase of these goods but hoard these commodities, which could potentially lead to an artificial shortfall. The resulting price increase will hurt the middle and lower income group of people. On the other hand, people will reduce spending on non-essential commodities, and keep money in their hands. The resulting depressed demand again causes the downfall in economic activities and further impacts the economy.

Need for Preparedness

The above scenarios may not actually play out if Coronavirus does not spread in Bangladesh like China or Italy, or the fiscal and monetary stimulus around the world ward off a full blown economic crisis. However, Bangladesh needs to prepare for the worst, as when the crisis hit us hard, we will be too late to act. 

Bangladesh Bank has unveiled a stimulus package for the businesses hurt by the Corona pandemic including the easing of regulation on foreign exchange rules for foreign trade and loan classification. The country now requires a more coordinated action from various branches of the government and support from the business community. India has made a task force for battling the economic impact Corona, led by the Finance Minister (Source: The Economic Times). The task force will continuously take feedback and suggestions from industry stakeholders, identify most affected sectors and develop policy measures. Similarly, Bangladesh can create a task force represented by various government stakeholders, Industry Associations and Think Tank and researchers.

The government needs to ensure there is sufficient supply of essential commodities, as the panic buying has already begun. Penalizing some wholesalers and retailers will not do much if ordinary buyers keep hoarding these commodities. The government needs to make a quick assessment of the shortfall in the worst case scenario and immediately start to procure the commodities. Besides, an adequate supply may not be enough if the transportation and distribution system is disrupted due to any lock-down.

There are some other immediate measures necessary. Bangladesh Bank needs to ensure there is sufficient liquidity in the financial sector. The United States Government is currently working on a pay-roll tax cut which will put money in the hand of workers. Bangladesh may not afford a large stimulus, but at least consider temporary cuts on import duty and VAT.

Beyond these short term measures, Bangladesh needs to plan for the long term recovery if a recession does take place. A clear starting point will be investment in public health. The Corona pandemic has only crystalized how insufficient the public health infrastructure is. The number of hospitals to the number of ICU beds to the number of doctors and nurses, all of these indicate a critical deficiency in the healthcare system. A major investment on public health infrastructure will not only help towards addressing some of those problems, but also increase the aggregate demand through major government expenditure.

Another major focus should be to address the lack of digitization in the educational institutions and the low digital skills in general. A number of universities in the USA have swiftly moved to online classes as off-campus activities are suspended (Source: CNN). Unfortunately, Bangladeshi educational institutions have not been able to do the same. Anecdotal evidence shows that some service oriented companies, which should be able perform some of its business function by allowing home-office, have not done so due to poor digitization skills from mid-level to senior officials. The government can consider major investment in digitizing educational institutions and enhancing the digital skills of the workforce to bring about long-term productivity gains.

The author of this write up is Md. Rakib Hasan Rabbi, Senior Associate at Inspira Advisory & Consulting.

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