Bangladesh Economy at the Confluence of the Global Pandemic

As a nation, we’re at a critical juncture, and the coming days will spell out the direction we would take in our fight against the Covid-19 pandemic. The crisis has an economic dimension, as major sectors, both export-driven and domestic market focused, would be impacted by the fallout of the global pandemic. The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long-term ramifications for the Bangladesh economy amidst the global pandemic. Read all the articles in the series.

The Corona Virus pandemic has been a ‘black swan’ event, particularly due to the extent and breadth of its impact. Starting in Wuhan, China, almost three months back, the virus has rapidly spread across the world in 180 plus countries infecting 351,198 and causing 13,361 deaths (as of 23^rd March).

The contagion effect of the Covid-19 epidemic might not only bring about a health crisis, but will cause a full-blown global economic crisis.

Bangladesh, till date, has remained immune from the onslaught of the Covid-19 epidemic. But reported cases are increasing steadily (three deaths), mostly infected by inbound migrants. In the upcoming weeks, community-level transmission might lead to a manifold increase in the number of infected people. The government is trying to curtain the movement of people across the country, fearing that the pandemic might spread to remote regions with inadequate health facilities.

As an export-driven economy, spearheaded by apparel export and remittances, the country has already started feeling the heat. The domestic demand is stuttering, and local companies are experiencing supply chain disruptions, as most industries are dependent on Chinese raw materials. ADB has predicted Bangladesh to lose 1.1% of its GDP (USD 3 billion) in 2020 due to the fallout of the coronavirus.

• The RMG sector has been suffering for the last couple of months due to supply chain disruptions. This, coupled with the spread of the Covid-19 pandemic in Europe and the US, two major apparel markets contributing to 65% of Bangladesh’s apparel export, has further compounded the problem. The BGMEA President has claimed that global brands have already canceled USD 1.1bn worth of orders, till date, and the association is fearing that this trend might proliferate in the coming days. In the event of large-scale order cancellation, a significant number of apparel workers might become redundant, while apparel companies might fail to pay back bank loans. In the worst-case scenario, the value of canceled orders might quadruple to USD 4 billion.
• The majority of the migrant workers in the Middle East and Europe are engaged in the informal sector and usually fall under the unskilled category. Many of these workers might experience a prolonged period of loss in wages, while some might even lose their jobs. This would result in a steep decline in incoming remittances in 2020 and beyond. Declining oil prices might also dampen the economies of the GCC countries, where more than 70% of Bangladeshi migrant workers are currently employed. Global recession, coupled with the tussle between Saudi Arabia and Russia on oil production, might further depress oil prices and lower future remittances.
• A partial lockdown of the country and declining exports might result in job losses in the formal and informal sectors. According to BBS statistics, almost 80% of the working population is engaged in the informal sector. Many can’t afford to stay at home due to inadequate financial cushions. There might be large-scale redundancies in the manufacturing and service sectors in the coming days, especially in the apparel, leather, and jute sectors, which are mostly export dependent.
• The financial system might suffer a major jolt due to the impending financial crisis. Many companies would fail to repay their loans, which would result in higher NPLs and would contribute to a liquidity crisis. SMEs would be the hardest hit as they would be suffering from declining sales and cash flow mismatch. It would be imperative to maintain the credit line for SMEs, which would help preserve jobs across the economy.

The government’s primary goal would be to ensure the survival of the low-income population while propping up major export earners like the apparel and leather sectors. Given the already heavy budget deficit (close to 5% of GDP) and revenue shortfalls, the government might be unable to undertake a massive spending spree.

However, policymakers need to take into cognizance the enormity of the upcoming challenge by instituting direct or indirect cash transfer schemes for the low-income population. Alongside, GoB would have to engage in government-to-government dialogues with apparel exporting countries, in an effort to protect the interest of the apparel sector.

In the medium term, policymakers have to undertake a stimulus package by increasing fiscal spending and undertaking expansionary monetary policies. Policymakers should also consider depreciating the domestic currency to help regain some lost cost competitiveness for the exporters.

Author: Zahedul Amin, Co-founder and Director, LightCastle Partners