Mitigating Impacts of COVID-19: Major Economic Policies Taken by the Government and Bangladesh Bank

LightCastle Analytics Wing
June 8, 2020
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 risks creating unemployment and poverty in the future. Therefore, to offset the economic repercussions occurring 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. 

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Undertaking Policies That Help Businesses, Banks, and Individuals

The COVID-19 crisis has affected all 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 for mitigating impacts of Covid-19:

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 amounts 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.

Table showing COVID-19 Stimulus packages launched in Bangladesh and refinance schemes under the packages
Table: COVID-19 Stimulus packages launched in Bangladesh and refinance schemes under the packages/ Source: Bangladesh Bank, The Business Standard, Snehashish Mahmud & Co.

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 that 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 packages is a BDT 30,000 crore loan/investment for the operation and retention of the workforce. Businesses affected by the pandemic crisis will apply for loans 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 a subsidy on the interest that a borrower will fail to pay 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 a loan/investment has been formulated. Businesses qualifying under the CMSME sector can apply for loans from banks/NBFIs to meet their working capital requirements.

Supporting the Agriculture Sector Through Stimulus Packages 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 in the horticulture, fisheries, poultry, dairy, and livestock sectors (except the crops and grain sectors). The other package is aimed at beneficiaries that include low-income farmers.

Besides, according to a Bangladesh Bank policy, banks have allocated a 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 at 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 them 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 locally 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:
Figure: Prevalent and extended deadlines for foreign trade transactions by Bangladesh Bank (in days)
Figure: Prevalent and extended deadlines for foreign trade transactions by Bangladesh Bank (in days)/Source: Bangladesh Bank and Snehashish Mahmud & Co.
  • 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 lies mainly with 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 of 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) have 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 Steps Taken Create Problems for the Banks and the Upcoming Budget?

The policies taken by both the government and Bangladesh Bank for mitigating impacts of Covid-19 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 has 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 mandate 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 a minimum rating to still be eligible for loans under the stimulus package for large industries and service sectors and the CMSME sector.[15] Such measures will increase banks’ risks, who might then be forced to increase their interest rates once the pandemic is over.

Escalating Budget Deficit

The government’s stimulus package will undoubtedly create 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]

Figure: Bangladesh’s budget deficit-to-GDP ratio (in percentage) from FY 2011-12 to FY 2018-19
Figure: Bangladesh’s budget deficit-to-GDP ratio (in percentage) from FY 2011-12 to FY 2018-19 / Source: Bangladesh Economic Review 2019, Finance Division

A Ray of Hope: Financing Deficits Through International Assistance

Fortunately, the government has taken the right steps by requesting funds from various international development partners for financing the deficits.

To 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]

Table: Aid expectations from various international development partners by the government
Table: Aid expectations from various international development partners by the government /Source: The Business Standard

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 a prolonged recession and use all its powers to mitigate the effects of such an outcome.

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

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 of the global pandemic. Read all the articles in the series.


WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a data-driven approach to create opportunities for growth and impact. We consult and collaborate with development partners, the public sector, and private organizations to promote inclusive economic growth that positively changes the lives of people at scale. Being a data-driven and transparent organization, we believe in democratizing knowledge and information among the stakeholders of the economy to drive inclusive growth.

For further clarifications, contact here: [email protected]

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